Nov. 12, 2019

Correcting Alpha: Fundamental Flaws of IRR and How Sponsors Can Avoid Distorted Calculations (Part One of Two)

Although it is the primary comparative performance metric used in the PE industry, the formula for calculating a fund’s internal rate of return (IRR) has several inherent and material flaws. When coupled with some of the natural fund management techniques and efforts of sponsors, those flaws can produce IRR distortions that draw unwanted attention from prospective investors and, potentially, the SEC. To help sponsors mitigate these risks, this first article in a two-part series describes some of the flaws of the IRR formula and prescribes specific measures general counsels and chief compliance officers of managers can undertake to ensure the accuracy of their IRR calculations. The second article will suggest ways prospective investors can perform their own diligence of IRR figures during the fundraising process to acquire the most accurate picture possible of a sponsor’s investment acumen and performance record. See our three-part series on ways IRR calculations can be distorted: “How Omitted Inputs and Deferred Carry Can Inflate IRR Calculations” (Sep. 10, 2019); “How Fund Management Practices Affect IRR Figures” (Sep. 17, 2019); and “How Curated Past Performance Results Can Produce Misleading IRRs” (Sep. 24, 2019).

Rise of PPM‑Less Funds: Appropriate Contexts to Forgo a PPM, and Responses of Investors and Regulators (Part Two of Two)

In pursuit of more efficient fund launches, some managers have explored the nontraditional approach of forgoing the preparation and negotiation of private placement memoranda (PPMs). Although eliminating a PPM can produce real time- and cost-saving benefits, it is hardly a panacea. Any fund manager considering this approach needs to carefully evaluate whether its asset class, strategy and structure are conducive to eliminating the PPM, as well as how its investors and local regulators will respond. To explore these issues, the Private Equity Law Report interviewed Fried Frank partners Mark Mifsud and Gregg Beechey about the tenets of PPM‑less funds and trends around their adoption. This second article in a two-part series identifies scenarios in which managers can consider launching a fund without a PPM, the role investor preferences play in this decision and trends in the approach. The first article detailed the actual steps involved in launching a PPM‑less fund, as well as the pros and cons for managers to consider before pursuing that approach. For more on relevant provisions to include in PPMs in traditional PE fund launches, see “How Fund Managers Can Use Non‑Reliance Clauses to Protect Themselves From Investor Claims of Misrepresentation” (Sep. 24, 2019); and “Contractual Provisions That Matter in Litigation Between a Fund Manager and an Investor” (Oct. 2, 2014).

How Fund Managers Should Prepare for the Cayman Islands Data Protection Law

The Cayman Islands Data Protection Law, 2017 (DPL) came into force on September 30, 2019, and will regulate the future processing of all personal data in the Cayman Islands. Drafted around a set of internationally recognized privacy principles, the new law provides a framework of rights and duties designed to give individuals greater control over their personal data. Managers of Cayman funds must ensure that they understand their funds’ obligations under the new law, including enacting policies and procedures to ensure the proper protection of all personal data under their control. Managers must also create an effective governance regime for approving, overseeing, implementing and reviewing those data-protection policies. Cayman funds must get it right – reputations and criminal liability are at stake. In a guest article, Appleby partners Sailaja Alla and David Lee, along with counsel Peter Colegate, review the key provisions of the DPL and how Cayman funds can achieve compliance with it. For more on data protection in the E.U., see “How the GDPR Will Affect Private Funds’ Use of Alternative Data” (Jun. 14, 2018).

A Checklist for Advisers to Comply With New York’s Anti‑Sexual Harassment Training Requirements

In 2018, New York State (NYS) and New York City (NYC) both enacted new laws imposing anti-sexual harassment requirements on private employers based in New York. The NYS and NYC laws have several common requirements, including that employers train their employees on preventing sexual harassment. NYS previously released final versions of model sexual harassment prevention materials that employers may adapt and use to comply with the new training requirements. See “New York State Releases Final Anti-Sexual Harassment Model Policy and Training Materials” (Nov. 15, 2018). More recently, on the date the NYC anti-sexual harassment training requirements took effect, the NYC Commission on Human Rights issued updated frequently asked questions and an online training video. This article outlines the basic requirements of both the NYS and NYC sexual harassment laws; explains the training requirements under each law; and provides a checklist that investment advisers based in New York can use to ensure that their anti-sexual harassment training complies with both NYS and NYC requirements. For more information on the NYS and NYC sexual harassment requirements, see “What Fund Managers Need to Know About Recent Developments to the New Anti-Sexual Harassment Policy and Training Requirements in New York City and New York State” (Sep. 13, 2018); and our two-part series: “Key Elements of New York’s New Anti-Sexual Harassment Policy and Training Requirements” (Jun. 14, 2018); and “Ways Fund Managers Can Comply With New York’s New Anti-Sexual Harassment Policy and Training Requirements” (Jun. 21, 2018).

PE Investments in Renewable Energy Projects: Unique Trends, Advantages and Considerations (Part One of Two)

Renewable energy is a growing industry that offers a range of opportunities for PE managers and investors. Because of the special tax and project-development traits associated with investing in renewable energy, there are myriad unique factors for managers to consider before investing in this area. These topics were addressed in a recent webinar sponsored by Strafford CLE Webinars featuring Troutman Sanders partner Hayden S. Baker. This first article in a two-part series describes certain risk management and allocation trends based on the point in the development phase at which an investment is made, as well as unique considerations for managers. The second article will outline several federal tax credits that may enhance returns from investing in renewable energy, as well as investment structures managers can adopt to maximize the benefits thereof. See also “PELR Program Explores Current Issues and Trends in Impact Investing” (Jul. 16, 2019). For more on trending fund strategies, see “Annual Walkers Fundamentals Seminar Explores Fund Launches, Asset Flows, Strategies, Duration, Fees Governance and Hot Topics (Part One of Two)” (Dec. 20, 2018).

Linklaters Adds Two New Partners to Its Investment Funds Group in New York

Jason Behrens and David C. Miller have joined Linklaters’ New York office as partners in its investment funds group. They have extensive experience representing private fund sponsors and institutional investors in connection with fund formations; portfolio acquisitions and dispositions; co‑investments; and secondary market transactions. For additional insights from Linklaters attorneys, see “How Luxembourg Is Affected by Regulatory Developments and the E.U. Retail Distribution Environment (Part Two of Two)” (Jan. 31, 2019); and “How Fund Managers Can Navigate Establishing Parallel and Debt Funds in Luxembourg in the Shadow of Brexit and Proposed E.U. Delegation Rules” (Jun. 14, 2018).