Mar. 24, 2020

Withstanding the Coronavirus Pandemic: Form ADV Filing Relief, Investor Communications and Liquidity Risks (Part One of Three)

The global outbreak of coronavirus (i.e., COVID‑19) has caused massive disruptions across the U.S. as businesses deal with full or partial office shutdowns; limited travel; potential service disruptions; and volatility in the financial markets. Amid uncertainty of when society will return to normal, PE sponsors need to take extra care to prepare for the effect the coronavirus will have on their operations and investments. To assist in those efforts, the Private Equity Law Report interviewed a number of legal professionals about considerations and best practices for PE sponsors to mitigate risks from the coronavirus pandemic. This first article in a three-part series examines the SEC’s recent order offering relief from Form ADV and Form PF filings; considerations for GPs to effectively communicate with LPs during the pandemic; and tips for managing liquidity risks if LPs struggle to meet capital calls. The second article will detail other private fund-specific matters implicated by the coronavirus, including key person provisions and ongoing fundraising efforts. The third article will address certain general operational risks that fund managers need to mitigate. See “Can Emerging Fund Managers Use Technology to Satisfy Business Continuity Requirements and Mitigate Third-Party Risk?” (Sep. 3, 2015); and “How Should Fund Managers Approach Formulating Risk Assessment Plans and What Regulatory Risks Should Be on Their Radar?” (Feb. 14, 2013).

Advice for Allocating Legal Tasks Between In‑House Attorneys, Outside Counsel, Consultants and Other Vendors (Part Three of Three)

Fund managers rely on outside counsel for a surprisingly broad swath of legal needs, ranging from basic fund-formation work to navigating the ever-changing information privacy landscape. Although GCs of fund managers could theoretically have all work performed by a single law firm, that is rarely the most cost-efficient approach. Instead, GCs need to retain a stable of legal experts and allocate work among them to achieve the best cross-section of expertise and cost effectiveness. To aid GCs in their efforts, the Private Equity Law Report surveyed the best practices of several attorneys with experience working at law firms, fund managers and portfolio companies. This final article in a three-part series identifies situations in which a fund manager should pay a premium for legal services, along with others where lower-cost alternatives (e.g., compliance consultants) can be used. The second article detailed criteria for selecting outside counsel, and the first article explored ways to reduce legal costs and outside counsel fees. For more on structuring a firm’s internal legal and compliance efforts, see our two-part series: “Benefits of Having a Dual-Hatted GC/CCO, and Alternative Solutions for Fund Managers” (Apr. 30, 2019); and “Challenges and Recommendations for Simultaneously Serving as GC and CCO of a Fund Manager” (May 7, 2019).

What Legal, Regulatory and Operational Challenges Do Single‑Asset Funds Present for Managers?

Single-asset funds pool capital from multiple investors to invest in a single security, transaction or acquisition. As managers continue to explore offerings beyond traditional strategies and fund structures, they frequently pursue opportunities through vehicles designed to acquire a single asset. Distinguished from funds that invest in many assets and transactions, single-asset funds involve unique legal, regulatory and operational challenges. In a guest article, Lowenstein Sandler partner Eileen Overbaugh examines those challenges, including in the context of structure; fees and expenses; term and liquidity; and follow-on investments and restructurings. See “Operational and Tax Challenges of Hybrid Funds” (Nov. 5, 2019); and “Fund Managers Turn to Hybrid Fund Structures to Reconcile Fund Liquidity Terms and the Duration of Assets” (Feb. 4, 2009).

Five Obstacles When Negotiating NAV Facilities and Potential Ways to Overcome Them (Part Two of Two)

Net asset value (NAV) facilities have become more appealing to sponsors in recent years as a way to leverage their existing portfolios. Although that access to affordable cash is appealing, it can mask some of the wrinkles and difficulties of putting a NAV facility in place. From navigating tripartite negotiations to the ongoing valuation requirements, it is important for each sponsor to have an accurate sense of what NAV facilities entail before putting one in place. The benefits and difficulties of NAV facilities were explored by an expert panel at the Practising Law Institute’s Fund Finance 2019 Program. Moderated by Dechert partner Matthew K. Kerfoot, the panel featured Thad Bzomowski, vice president and counsel at Société Générale; Jocelyn A. Hirsch, partner at Kirkland & Ellis; and Joel Kress, chief operating officer at Pomona Capital. This second article in a two-part series describes different issues that can arise when putting NAV facilities in place and how competition among lenders for those facilities has netted more favorable terms for sponsors. The first article summarized how NAV facilities are being used by secondary funds, the collateral pledged in support of those loans and considerations with issuing those facilities to funds of hedge funds. For additional insights on NAV facilities from Hirsch, see “Characteristics and Benefits of NAV Facilities for Secondary Funds” (Sep. 10, 2019). See also “Annual Walkers Fundamentals Seminar Explores PE Trends, Fees, Other Key Terms and Financing Facilities” (Jan. 28, 2020).

Best Practices for Fund Managers to Investigate and Document Employee Discipline (Part Two of Three)

Before an adviser can discipline an employee for misconduct, it must first determine whether, and to what extent, discipline is warranted. During any investigation, special attention must be paid to gathering evidence to support an eventual disciplinary action for wrongdoing uncovered during the investigation, and the disciplinary process must be rooted in legitimate fact finding. In fairness to the target, there must be an actual investigation, and any discipline imposed must be based on facts rather than hearsay. This second article in our three-part series on employee discipline addresses techniques advisers can use to gather evidence to effectively support a disciplinary action, including the thorny issue of protecting privilege while building a record. The first article discussed the value of setting expectations for discipline in advance and ways advisers can impose discipline consistently in the face of inconsistent local employment laws. The third article will identify steps an adviser can take to promote institutional due process when disciplining an employee. See “How Fund Managers Can Maintain Work Product Protection During Investigations After the Herrera Decision” (Feb. 22, 2018).