May 26, 2020

Notable Trends in the Structures, Fee Arrangements, Adoption and Growth of Deal‑by‑Deal Structures Used by Independent Sponsors

Although its foundation is built on the blind pool, committed funds that are ubiquitous in the sector, the future of the PE industry will arguably include wider adoption of alternative fund types and approaches. Hints of that evolution are evident in the rise of deal-by-deal structures among independent sponsors, which use many of the same concepts – i.e., economics, governance, etc. – of traditional PE funds but are only for one investment at a time. As a burgeoning genre of PE investing, deal-by-deal structures have their own fee, structure, governance and financing trends. To obtain insights into developments in this area, the Private Equity Law Report recently interviewed McGuireWoods partner Jon W. Finger on the growth of the deal-by-deal sector and notable trends. This article examines the scope of the sector, traits of the various central participants, the size of deals typically consummated, common ranges of fee arrangements, the growth of hybrid versions of the vehicle and the future of deal-by-deal structures. See our three-part primer on deal-by-deal funds: “Structural Overview and Investor Perceptions Affecting Adoption” (Feb. 18, 2020); “Key Fundraising and Structural Considerations” (Feb. 25, 2020); and “Balancing Deal Uncertainty Against Attractive Carry Opportunities” (Mar. 3, 2020).

Six Ways Fund Managers Can Prepare for the SEC’s Focus on Cybersecurity and Resiliency

The SEC has been particularly committed to the regular communication of known threats and expectations for firms. In January 2020, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2020 examination priorities focusing on (1) governance and risk management; (2) access controls; (3) data loss prevention; (4) vendor management; (5) training; and (6) incident response and resiliency. See “2020 OCIE Exam Priorities Include New Emphasis on Compliance Programs; Retail Investors Remain Top Focus” (Feb. 25, 2020). OCIE also issued a report (OCIE Report) that functionally delineates industry best practices for mitigating cybersecurity risks, while also promoting the maintenance and enhancement of operational resiliency among firms. A substantial portion of the OCIE Report is devoted to incident response and resiliency, which encourages the adoption of routine and comprehensive network testing and monitoring by firms to validate the effectiveness of the implemented cybersecurity policies and procedures. The OCIE publications, taken together, effectively detail what the examiners will be focusing on when reviewing a fund manager’s cybersecurity program. This article provides six important steps for fund managers to take in light of those two documents. See “Keys for Fund Managers to Implement a Comprehensive Cybersecurity Program” (Jun. 18, 2015).

Impact of Economic Uncertainty on PE Fundraising and Fund Formation Efforts (Part Two of Two)

Aside from pursuing outsized returns, institutional investors have steadily increased their allocations to the alternative investment industry because of its ability to generate returns during an economic downturn. The current environment is no different, and investors remain interested in committing to new PE fund launches. The rules of the game have changed, however, as the fundraising process has been upended by a lack of in-person meetings; an increased dependence on existing relationships; and difficult questions from investors about sponsors’ plans going forward. Those and other ramifications of the coronavirus pandemic on the PE industry were addressed in a recent program featuring Proskauer partner Monica Arora and Monument Group partner John McCormick. This second article in a two-part series details the new PE fundraising landscape, what sponsors can anticipate and ways they can adjust their practices accordingly. The first article prescribed several approaches to portfolio valuations, liquidity and LP communications that PE sponsors should adopt to successfully navigate the current environment. For further commentary from Monument Group, see our two-part series: “Roundtable Explores PE Trends Related to Emerging Managers and Real Estate Investing” (May 21, 2019); and “Roundtable Discusses Rapid PE Growth in Asia, Along With Recent ODD and Secondary Market Trends” (May 28, 2019).

A Checklist for Investment Advisers to Streamline and Organize Their Annual Compliance Program Reviews (Part Two of Two)

Registered investment advisers are required by Rule 206(4)‑7 under the Investment Advisers Act of 1940 to conduct annual reviews of the adequacy of their compliance policies and procedures, as well as the effectiveness of the compliance program’s implementation. The SEC has focused on the annual compliance program review requirement in its examinations and enforcement actions. See “Lax Annual Compliance Review Procedures May Draw SEC Enforcement Action” (Nov. 17, 2016). Advisers often perform that review in conjunction with other year-end review processes. Thus, this two-part series is designed to function as a checklist that investment advisers can use to streamline and organize their annual reviews. This second article provides a non-exhaustive list of questions to be answered for each substantive area covered during an adviser’s annual compliance program review. The first article analyzed Rule 206(4)‑7 and sources of guidance on complying with the rule; spelled out who should be involved in conducting an investment adviser’s annual compliance program review, what information should be gathered for review and what areas should be covered; and noted the questions that SEC examiners are likely to ask about an adviser’s annual review during an examination. For more on annual compliance reviews, see “Survey Reveals Compliance Weaknesses of Fund Managers Relative to Other Financial Services Firms, Including CCO Qualifications and Frequency of Annual Compliance Reviews” (Sep. 15, 2016).

Fund Formation Lawyer Michael Newell Joins Cadwalader in London

Cadwalader announced that Michael Newell has joined the firm’s London office as a partner in its financial services group. Newell focuses on the formation of hedge, PE, real estate, credit and venture capital funds, and he has extensive experience advising the asset management industry, particularly on the establishment and reorganization of onshore and offshore collective investment vehicles. For additional insights from Cadwalader partners, see “Emerging Managers Need Appropriate Infrastructure – Not Only Solid Performance – To Attract Investors” (Feb. 25, 2020); and “Trends in the Use of Subscription Credit Facilities: Structuring Considerations Negotiated With Lenders and Important LPA and Side Letter Provisions (Part Two of Two)” (Feb. 7, 2019).