Sep. 15, 2020

Chasing Waterfalls: Analysis and Market Response to ILPA’s Deal‑by‑Deal Waterfall Model LPA (Part One of Two)

With a tighter fundraising environment giving investors more leverage in negotiations, LPs and GPs may find the terms of the model limited partnership agreement (Model LPA) released by the Institutional Limited Partners Association (ILPA) helpful for understanding ideal LP positions. ILPA issued a deal-by-deal waterfall version of its Model LPA in July, as well as an update to the whole-of-fund waterfall version it originally issued in 2019. A task force of attorneys from law firms, investors and asset managers drafted the two documents, which are identical except for the distribution provisions. GP‑side counsel acknowledged that the individual terms of the Model LPA did not stray far from market terms but that both versions are too far tilted toward LPs in their totality for GPs to consider wholesale adoption. This first article in a two-part series analyzes ILPA’s reasons for releasing a deal-by-deal waterfall, specifics of the waterfall economics and GP counsel reactions. The second article will discuss changes to noneconomic provisions of the Model LPA reflected in both versions and ways the Model LPA has affected the PE market so far. See our three-part series on ILPA’s 2019 Model LPA: “Seeks to Empower LPACs and Increase GP Accountability for Fiduciary Duties” (Dec. 10, 2019); “Attempts to Redistribute Economic Risk From LPs to GPs” (Dec. 17, 2019); and “Faces Sizable GP Skepticism En Route to Becoming a Fixture in PE Fund LPA Negotiations” (Jan. 7, 2020).

Breakdown of Final CFIUS Regulations; Key Exemptions and Process Issues; and Important Considerations Specific to PE Sponsors

Since 1988, the U.S. government has conducted national security reviews of cross-border acquisitions of U.S. businesses through the Committee on Foreign Investment in the U.S. (CFIUS). Historically, CFIUS focused on investments that could result in control of a U.S. business, and the CFIUS process was almost exclusively voluntary – parties sought CFIUS clearance in exchange for a promise the U.S. government would not conduct post-closing reviews of their transactions. A number of important reforms were introduced, however, by the August 2018 enactment of the Foreign Investment Risk Review Modernization Act of 2018 and its implementing regulations. Those include the scope of transactions and technologies falling under CFIUS jurisdiction; the filing process and fees associated with CFIUS reviews; and the range of exemptions from CFIUS jurisdiction that exist. In a guest article, Jonathan Gafni, senior counsel at Linklaters and former deputy national intelligence officer for CFIUS support at the Office of the Director of National Intelligence, outlines the recent CFIUS reforms, with a particular focus on their implications for PE funds during the fund formation process, when investing in portfolio businesses with U.S. operations and when divesting interests in those businesses. See our two-part series on CFIUS: “Understanding the CFIUS Review Process and How to Structure Investments to Minimize Regulatory Risk” (Apr. 2, 2019); and “FIRRMA Expands the Scope of Transactions Subject to CFIUS and Lengthens the Target Acquisition Timeline” (Apr. 9, 2019).

Liquidity Options for PE Funds: Potential Capital Sources, GP‑Led Restructurings and Alternative Paths Available to Sponsors (Part One of Two)

The PE industry was riding a tidal wave of momentum in 2019 after sponsors raised $315 billion, which was the highest single-year fundraise in recent years. In addition, $5 trillion was invested in PE products or represented unfunded commitments yet to be called as of September 2019. That came to a screeching halt, however, with the spread of the coronavirus pandemic. The drastic reduction in fundraisings and M&A activity has created a real need in the market for new capital, particularly as PE sponsors seek to aid cash-strapped portfolio companies and take advantage of favorable investment opportunities. Strafford CLE Webinars recently hosted a webinar on liquidity options for PE funds featuring Willkie Farr & Gallagher attorneys Arash Farhadieh, Brian I. Greene, Mark Proctor and Raphaël Bloch. This first article in a two-part series provides an overview of potential capital providers and other stakeholders in liquidity solutions, and examines GP‑led restructurings and other alternative liquidity options (e.g., expanding or accessing existing credit facilities). The second article will evaluate the advantages, limitations and key considerations from generating liquidity from preferred equity lines, top-up funds and net asset value (NAV) facilities. For additional commentary from Proctor, see “Merits of the Pledge Fund Model and Attendant Fund Formation Issues to Consider (Part One of Two)” (Jun. 16, 2020); and “Primer on Deal‑by‑Deal Funds: Structural Overview and Investor Perceptions Affecting Adoption (Part One of Three)” (Feb. 18, 2020).

Survey Gauges Global Trends in Impact Investing, Anticipates Continued Growth Despite Pandemic

The Global Impact Investing Network (GIIN) first surveyed impact investors in 2010, when only 24 members responded. Ten years later, impact investing has grown significantly, and nearly 300 impact investors participated in GIIN’s most recent annual survey about their 2019 efforts and 2020 plans. That growth in the impact investing sector alone evidences the importance of tracking trends in methods and motivations. GIIN set out survey data and findings in a report (Report) highlighting the prominent and critical role asset managers play in the impact investing market. The Report also explores tools market participants use to inform their investing; examines investment performance and portfolio risks; and analyzes two topics of particular interest in the current market: climate investing and catalytic capital. In addition, participants expressed a range of views about the likely effects of the coronavirus pandemic. This article summarizes the key takeaways from the Report. See our two-part series on environmental, social or governance factors in fund investing: “Past, Present and Future” (Nov. 10, 2016); and “Designing an ESG Investing Policy” (Nov. 17, 2016).

Majority of In‑House Counsel Satisfied With Compensation, but Gender Gap Remains, Survey Finds

Executive search firm BarkerGilmore recently conducted a study of the compensation received by more than 1,900 in-house counsel in 2019. Among BarkerGilmore’s notable findings are that year-over-year total compensation grew modestly, the majority of in-house attorneys are satisfied with their compensation and a significant gender pay gap still exists, especially at the GC level. This article reviews the survey’s key findings, with emphasis on findings relevant to the financial services industry, and provides additional insights from BarkerGilmore. For more from the firm, see “BarkerGilmore Survey Benchmarks Compliance Personnel Compensation by Company Type, Revenue, Gender, Education and Industry” (Dec. 17, 2019). For additional surveys on private fund personnel compensation, see our coverage of the Greenwich Associates/Johnson Associates annual compensation studies: 2014 Compensation Study; and 2013 Compensation Study. See also our two-part coverage of a panel discussion on internal compensation arrangements for investment professionals: “Carried Interest and Deferred Compensation” (Mar. 15, 2018); and “Private Fund Compensation and Non-Competes” (Mar. 22, 2018).