Rule 206(4)‑5 of the Investment Advisers Act of 1940 - known as the pay to play rule – comes into focus in major election years. That is particularly true in the current election cycle in light of Kamala Harris’ selection of Minnesota Governor Tim Walz as her running mate, as contributions to her campaign by employees of investment advisers could be limited by the pay to play rule. With political activity gaining momentum heading into the upcoming election, the Private Equity Law Report interviewed Skadden partner Ki P. Hong to help fund managers identify and avoid pay to play compliance risks and other potential legal pitfalls. This article outlines relevant federal, state and local pay to play rules; examines key differences between those regimes; summarizes SEC enforcement activity targeting political contributions; and prescribes steps fund managers can take to ensure compliance.

For additional commentary from Hong, see our two-part series: “Federal Pay to Play Rules” (Feb. 14, 2019); and “State and Local Pay to Play Rules; Traps for the Unwary; and Compliance” (Feb. 21, 2019).

Parameters of the Pay to Play Rules

PELR:  What types of individuals are covered by the federal pay to play rules?

Hong:  Covered donors include certain company employees, and covered recipients include any candidate or incumbent of any state or local office that has authority to influence the selection of an investor, or even has the authority to appoint someone with that power. For example, every governor is covered in each state because they appoint members to various governing boards within their state.

A political contribution by a covered donor to a covered recipient automatically triggers a two-year ban on an investment adviser’s ability to accept compensation for any advisory services provided to any of the affected government investors (e.g., state pension funds). “Compensation” can be very broad, however. In the PE context, it extends beyond management fees to cover carried interest, which can result in very significant penalties – into the tens of millions of dollars – if a ban is triggered.

It is worth clarifying, however, that a contribution itself does not violate the pay to play rules. It’s only an issue when an adviser receives compensation from a government entity within the aforementioned two-year period. That acceptance of compensation constitutes the violation.

PELR:  What is the liability standard for violating the federal pay to play rules?

Hong:  There is strict liability for violations of pay to play rules. The problem is that strict liability means even inadvertent contributions by employees automatically trigger the ban.

Companies spend a lot of time and effort trying to ensure that problematic contributions do not occur. The problem, however, is if someone goes to a coffee event or a fundraiser, for example, not knowing that the admission fee is really a contribution to a candidate, then the company is not really making a deliberate choice – it’s just a mistake. And that mistake, no matter how benign, results in an automatic ban.

PELR:  Are any waivers or exceptions available to the strict liability standard?

Hong:  If you discover a contribution, you can request a one-off waiver from the SEC. The SEC will look at a variety of equitable considerations, such as whether the contribution had anything to do with the business and whether there is a good compliance program in place. The waiver process takes time, however, and investment advisers must put their fees into escrow while it is being resolved.

An advisers’ willingness to avail themselves of the waiver process depends on which ban is triggered. Advisers look at whether they have, or are concerned with, investors in a particular state. For example, if they do not take public pension fund money in certain states, then they are more likely to accept a ban in those states. If a ban is triggered in a state where they have significant government investors, either currently or in the future, then they will pursue a waiver.

Although it can be used as a one-off fix, the waiver process is not really something that can be used regularly for inadvertent violations. In fact, I’m not aware of anyone seeking a waiver more than once – all the waivers out there are for different companies. The lack of multiple requests shows how carefully advisers ensure there are no further violations or bans after they obtain a waiver. I also think it’s an open question as to how the SEC would approach a second request.

Also, it is worth noting that the overwhelming majority of cases are handled by the advisers themselves, meaning they either decide to stand down (i.e., forego compensation from compromised investors) or they pursue a waiver. The rule has an inherent self-enforcement mechanism and that’s why advisers spend so many resources trying to comply.

[See “What the Outcome of BlackRock’s Petition Could Portend for the SEC’s Stance on Pay to Play” (Nov. 2, 2017).]

PELR:  How do state law prohibitions differ from the federal pay to play rules?

Hong:  They differ quite significantly, although they share a common core. Under state laws, a covered contribution by a covered donor to a covered recipient or a committee triggers an automatic ban on business. That idea is common to the federal, state and local pay to play laws. In fact, Connecticut issued the earliest state rules in 2005 and they were essentially copied from the federal pay to play rules.

A significant difference, however, is that state laws tend to cover any kind of government contract, so not only investment advisers are covered, but widget manufacturers are too. State laws also cover those who are leasing government buildings and even those who are seeking grants and incentives from the government, so the scope tends to be much broader.

The other major difference is that the covered donors are different. Almost all state laws cover one or more of either senior officers or those who are soliciting the government for contracts, which is the same as the federal pay to play rules. State laws go further, however, by also covering outside directors, spouses and dependent children. So, for example, if my child is in college and cuts a check to the Republican Party in Connecticut, that triggers a ban for my firm.

Therefore, advisers must go beyond the parameters of the federal pay to play rules and set up a system to monitor the extended group of individuals that could constitute covered donors under state laws. As to outside directors, that is usually addressed through a notice sent to directors during director meetings. Advisers may also need to preclear contributions from spouses and dependent children, at least in the jurisdictions that cover them.

Ongoing and Anticipated SEC Enforcement Activity

PELR:  What are some risks that are unique to this election cycle?

Hong:  If a presidential candidate selects a covered state official (e.g., a governor) as their running mate, then a contribution to that campaign triggers the ban under the SEC rule. In prior election cycles, presidential candidates such as John Kasich in 2016 triggered bans for clients in Ohio because people donated to Kasich without considering he was also the governor of Ohio. After Donald Trump was nominated in 2016, the pay to play rules also covered contributions to him because Mike Pence was the sitting governor of Indiana at the time.

Donald Trump’s selection of Senator J.D. Vance as his running mate for the 2024 election means that contributions to that campaign are not covered under the pay to play rules. However, with Vice President Kamala Harris selecting Minnesota Governor Tim Walz as her running mate, contributions to her campaign will now trigger a ban as to Minnesota state government investors. With that said, it is worth noting that individuals may give up to $350 per election without triggering the rule under the de minimis exception because everyone in the U.S. is entitled to vote in the presidential election.

Along that vein, I should add that some candidates for other federal offices are covered officials, such as Jim Justice in West Virginia, who is running for U.S. Senate but is also the governor of West Virginia. A handful of senatorial and house candidates are covered officials, which creates an additional issue in any even-numbered year.

PELR:  Are there any incidental forms of political contributions that people should be wary of in the context of pay to play risks?

Hong:  Beyond donations to individual candidates, there is also a risk when it comes to the joint-fundraising committees (JFCs) maintained by presidential candidates. JFCs raise funds not only for presidential campaigns and national party committees, but also numerous state party committees. A covered donor raising funds for a JFC would directly violate the SEC pay to play rule’s ban on soliciting donations to state party committees. Also, a covered donor giving to a state party committee could indirectly trigger the rule’s ban. Both campaigns have established alternative JFCs that do not contain state parties to comply with the rule. However, as the Harris campaign is now covered under the rule following her selection of Walz as her running mate, covered donors are no longer allowed to either give to, or solicit for, any of her JFCs.

In addition, people tend to overlook that the pay to play rules cover contributions to inaugural committees and transition committees. For example, if a governor or a mayor wins office and has an inaugural ball, then purchasing a ticket to that ball triggers a ban in the same way as cutting a check directly to that governor’s campaign.

PELR:  What amount and types of SEC enforcement activity is anticipated on this issue in the current election cycle?

Hong:  There is more political activity in election years and SEC scrutiny is likely to increase. Major presidential election years are usually followed by a larger number of pay to play cases because there are more political contributions.

The SEC will do sweeps and is more than willing to take on cases as they arise. Two presidential cycles ago, the SEC was more active with its pay to play sweeps, possibly because the SEC wanted to be credible and show that it took the rule seriously. In fact, in 2017, the SEC settled about ten enforcement actions within a couple of weeks.

[See “Campaign Contributions As Small As $500 Could Draw SEC Enforcement Action for Pay to Play Violations” (Jan. 26, 2017).]

With that said, I don’t expect SEC enforcement activity to return to former levels. In fact, I don’t think pay to play is in the top two rules that the SEC is prioritizing and actively enforcing.

PELR:  The SEC recently announced an enforcement action against an investment adviser, Wayzata Investment Partners, for pay to play violations. What stands out to you from Wayzata, and to what extent is it emblematic of the type of scrutiny that fund managers may face this election cycle?

Hong:  There is nothing unique about Wayzata, and the fact pattern is relatively simple and direct. According to the settlement, Wayzata just involved a direct contribution to a candidate on the investment board.

That said, Wayzata does raise an interesting question. The penalty in Wayzata was $60,000, and the compensation the adviser would have otherwise received was likely a lot more than that, so the question is: Why not just take the violation, see if the SEC enforces it and pay the penalty? There are two major reasons not to do that. One, there is a censure in addition to the penalty, which is a big deal because it significantly affects your ability to take investments and that’s a bigger hit than the $60,000 penalty.

In addition, none of the cases we’ve seen involve what I would call an egregious violation. For example, if the adviser knew about the ban and continued to do business anyway, it would not lead to a $60,000 penalty – it would be much more significant. The SEC could ban you from exercising your registered investment advisory license. That would be a lot more significant.

The other reason Wayzata is interesting is because it shows some dissension within the SEC that is playing out publicly. Commissioner Hester Peirce issued a dissenting opinion in Wayzata essentially saying that there is something broken about the rule having strict liability. That echoes some of the concerns she raised in a dissenting opinion on enforcement actions that came out in 2022.

[See “SEC Pay to Play Settlements Prompt Strong Dissent From Commissioner Peirce” (Dec. 15, 2022).]

PE‑Specific Considerations and Insights

PELR:  What other specific considerations should PE firms or the private funds industry be thinking about?

Hong:  One aspect that is often overlooked is the need to overlay state and local pay to play laws on top of the federal rules. For example, federal pay to play rules allow contributions of up to $150 per election year to a candidate, which increases to $350 if you’re entitled to vote for the candidate. Many states do not have that de minimis exemption, however, so even a $1 contribution would trigger a ban in those states.

We sometimes see a company apply only the federal pay to play rule and allow employees to give up to $150 without preclearance, but then the company is unable to certify compliance under the state law. You want to ensure you’re looking through both filters and that you’re complying with local, state and federal pay to play rules.

PELR:  Do managers use compliance consultants or specialty software to formulate and/or enforce their policies, or do they tend to manage that in‑house?

Hong:  Sponsors use both law firms and compliance consultants to draft their policies. It is important to have procedures behind the policies, which some companies may not be thinking about as carefully. Advisers need written procedures on how to preclear an employee’s contribution, including such items as:

• Who will conduct the preclearing?
• What standards will be used?
• Will the adviser look at each official to see if he or she is covered, or will it treat all state and local officials the same?

[See “Use a Preclearance Checklist to Avoid Violating the Pay to Play Rule” (Nov. 1, 2022).]

Most investment advisers hire third-party vendors to search public websites for political contributions as a way to monitor whether employees may have made contributions without preclearance. It is strongly recommended that advisers retain those kinds of vendors because the SEC expects monitoring mechanisms to be in place and the SEC itself searches public records. I can’t tell you how many examinations I’ve seen where the SEC comes to the adviser and says, “I noticed John Smith made a contribution, but I don’t see that in your records.”

The challenge is that each state has its own database, so there’s no single place you can search nationally on state and local contributions. Advisers typically either retain third-party vendors or conduct searches themselves. They do not sign on to all 50 state databases, however, but may rotate some of the states. For example, if an adviser does a lot of business in three states, then it would look at those three states and maybe rotate the fourth and fifth state with the remaining 47 states. That approach works well if advisers want to perform the search in‑house.

PELR:  Can that function be performed competently in‑house?

Hong:  I don’t think there’s any concern about proficiency because state election laws generally require candidates to disclose donors by employer. Databases are populated by the reports that the campaigns file on the contributions they receive. They are required to disclose the name of the donor and usually their employer, so you can search the database for an employer’s name and it will produce every employee from that company that contributed.

That said, the majority – at least of large advisers – hire a third party because there are more monitoring firms than existed six or seven years ago, and they are providing a better service now.

PELR:  To date, have fund managers been appropriately attentive to pay to play issues?

Hong:  Generally, the amount of resources that fund managers dedicate to pay to play compliance has been very robust because that compliance must be certified in most requests for proposals and the rules are self-enforcing in nature. In addition, there are not many remedial steps available, so it is important to ensure a contribution is not made in the first place. Those factors typically cause fund managers to invest proportionally larger amounts toward complying with the pay to play rules than for some of the other rules out there.

PELR:  What are some common deficiencies in how investment advisers monitor and mitigate potential pay to play violations?

Hong:  It is important for an effective policy to clearly give marching orders to employees that they cannot make a political contribution without preclearing it, and to clearly state that their employment could be terminated for violating the policy. I think you need to make it very black and white to employees.

The other challenge is educating employees on simple elements of the rule, such as what constitutes a political contribution. For example, I can’t tell you how many times we’ve seen employees have no idea they were making a political contribution by going to a coffee event or legislative update meeting where the admission fee was a contribution.

Especially in years like 2024, it is important to remind employees who the federal candidates are that could be covered. Many advisers have already sent out reminders to their employees that federal candidates can be covered and contributions need to be precleared, with some examples of covered candidates. That kind of reminder is now standard fare every four years.

[See “Pay to Play Rules and Risks for Compliance Departments to Monitor in Advance of the Upcoming U.S. Elections” (Oct. 20, 2020).]

PELR:  Is there anything else on the pay to play rules and compliance that you think would be useful to highlight for fund managers?

Hong:  We talked about the strict liability pay to play rules, but they can’t be viewed in isolation as some other laws can apply. One is the honest services fraud provision in the wire fraud statute, which has become the prosecutor’s choice of law when it comes to corruption cases. Instead of using the bribery statute, prosecutors will go after honest services fraud because it’s much easier to prove a violation under that provision compared to the bribery statute. For example, there was a case in Ohio involving a $500 contribution where there was evidence that the donor was thinking about a particular government decision.

I would also advise PE firms to ensure they know the circumstances around any contribution, gift or favor being provided to public officials. If, for example, there’s an email saying, “I’m going to make this contribution and there’s a contract coming up next week so I should make it before then,” that political contribution is now a felony under the honest services fraud provision. Advisers should be looking at the totality of the circumstances and the applicable laws that can come into play when dealing with contributions.

PELR:  Are people generally attuned to the honest services fraud component?

Hong:  It is something the private funds industry generally could be more vigilant about. I think as an industry, considerations such as honest service fraud would come into the process when someone makes a $1‑million donation to a charity, but not when someone is cutting a small check. However, those small checks can still be violative of that law in certain circumstances. I think the industry should be weaving that into its procedures in a more fulsome way.

[See our two-part series on marketing to public pension plans: “Municipal Advisors; Pay to Play Laws; and Gift and Entertainment Rules” (May 28, 2019); and “Honest Services Fraud, Use of Placement Agents and Lobbyist Registration Issues” (Jun. 4, 2019).]

As non-bank lenders continue to serve as an alternative to traditional lenders, and private credit investments remain attractive to institutional LPs, fund managers may wish to consider evergreen fund structures to reduce the costs of raising new funds and to grow LP capital invested in private credit strategies.

To achieve that goal, the two most common evergreen structures adopted by fund managers are rolling vintage funds and liquidating account funds. Although both types of structures are evergreen, they offer a range of different considerations for fund managers to weigh at the fund formation stage.

This article describes alternatives for customizing the fundraising, equalization, investor liquidity and recycling terms in both types of evergreen private credit fund structures, as well as considerations when using subscription or net asset value (NAV) financing facilities with either approach.

See “Trends in Management Fee Base Calculations, Evergreen Structures and Tax Issues for Private Credit Funds (Part One of Two)” (Jan. 26, 2023).

Two Types of Evergreen Structures

The first type of evergreen private credit fund structure has consecutive fundraising periods and investment periods within a single fund (Rolling Vintage Fund). Each fundraising period in a Rolling Vintage Fund – and the corresponding investment period and harvest period – are considered to be a “vintage.”

A Rolling Vintage Fund shares many structural traits of a typical PE fund, including:

• commitments are accepted during a fundraising period;
• capital calls are issued so that investments are made during the investment period; and
• following a harvest period, proceeds are returned to LPs at the end of the term through a distribution waterfall.

Unlike a typical PE fund, however, a Rolling Vintage Fund provides for consecutive vintages. That feature is structured such that LPs’ capital commitments in a new vintage are increased by the LPs’ receipt of distributions from prior vintages until the LPs are eventually released from their commitment to the fund.

The second common evergreen private credit fund structure uses liquidating accounts to segregate the interests of withdrawing LPs from the remaining fund interests (Liquidating Account Funds). In a Liquidating Account Fund, the pro rata slice of portfolio investments attributable to a withdrawing investor is segregated into a liquidating account until the investments are realized in the normal course. That permits a fund manager to exit portfolio investments in the ordinary course, when it is in the best interest of the fund, rather than forcing an exit at an inopportune time to meet a withdrawal request.

See this three-part series on permanent capital vehicles: “Why Sponsors Look to Unlisted Registered Funds to Achieve ‘Functional’ Permanence Beyond Typical Private Funds” (Dec. 8, 2020); “Confronting Certain Challenges of Operating Unlisted Registered Funds, and the Appeal of Private BDCs” (Dec. 15, 2020); and “Weighing the Merits of Pursuing Permanence Through Unlisted Closed‑End Funds of PE Funds and Interval Funds” (Jan. 12, 2021).

Fundraising

A key evergreen fund structuring consideration is how often the fund will accept new capital, whether that is in the form of commitments from new LPs or additional capital from existing LPs.

Rolling Vintage Funds typically have consecutive defined fundraising periods that correspond to defined investment periods. A fundraising period begins (and new capital is accepted) when the previous investment period has ended, which is often the earlier of a period of years or the date that a minimum threshold of the unfunded commitments is invested.

There may be some exceptions, however, when Rolling Vintage Funds can accept new capital. One instance is when new capital is accepted outside of a fundraising period to replace the unfunded commitments of LPs that have been released. Another is the GP being able to accept new capital outside of a fundraising period if it would benefit the fund because of a market opportunity or other portfolio management consideration. If the GP is afforded that discretion, it may be contingent on approval by the LPs or the LP advisory committee.

By comparison, Liquidating Account Funds offer much greater flexibility when structuring fundraising terms. For example, some Liquidating Account Funds may accept new capital monthly, while others give the GP discretion to determine when to accept new capital.

Both Rolling Vintage Funds and Liquidating Account Funds may allow LPs to submit irrevocable commitments with the understanding that the commitments will only be accepted in the GP’s discretion or upon the occurrence of a specified event. A benefit is that the GP can quickly deploy capital without additional fundraising in the context of an investment opportunity or to replace LP capital that has left the fund (e.g., due to released commitments or withdrawals). Further, LPs may see these arrangements as a quasi-capacity right for future investment opportunities.

For more on funds with similar features, see this three-part series on contingent dislocation funds and market disruptions: “Appeal, Application and Adoption Before Adverse Events” (Mar. 15, 2022); “Unique Mechanisms That Position Them to Pounce” (Mar. 22, 2022); and “Suitable Fund Participants and Potential Downsides to Avoid” (Mar. 29, 2022).

Reconciling New and Existing Capital

Equalization

Another key structuring consideration is whether new capital will “equalize” with the fund’s portfolio (i.e., participate in existing portfolio investments). Rolling Vintage Funds are often structured with true-ups during each fundraising period, so that new capital accepted after a vintage has begun making investments can participate in that vintage’s existing investments based on their cost or NAV. A true-up may be unnecessary for a fund with liquid investments, however, if the GP has the ability to use the new capital to purchase liquid investments that are identical to the fund’s existing liquid investments.

Alternatively, equalization may be achieved at the investment level rather than across the entire portfolio. Assigning a participation percentage on a deal-by-deal basis would be appropriate when LPs participate in the same investments across investment periods. Although that approach gives GPs flexibility to negotiate different investment periods with different LPs, it can be more burdensome to administer than applying a single participation percentage to all portfolio investments in which new capital will participate.

Side Pockets

Side pockets can also be used to exclude new capital from existing investments. For example, the GP may have discretion to side pocket investments that are impaired, so that those investments do not harm ongoing fundraising efforts. When an investment is moved to a side pocket, participation ownership percentages are frozen as to the side pocketed investment, and new capital cannot participate in profits and losses from the investment. Unlike a liquidating account, side pockets typically only relate to a single investment rather than a withdrawing investor’s interests in all investments.

Series Vehicles

Participation in, or exclusion from, existing investments can also be facilitated by establishing a series that only holds some of the fund’s investments. A fund manager can decide when a particular series – which may relate to terms LPs receive or a group of investments – is no longer accepting new capital.

For a fund that is a Delaware limited partnership, protected series or registered series can be used to give each series limited liability, which allows each series to function like a separate legal entity. If protected series or registered series are not established, then the fund's limited partnership agreement (LPA) can still establish “contractual series” to provide that the performance of different series will not be netted, along with conferring rights to specific investments, related expenses, profits and losses.

See this two-part series: “Using Delaware Statutory Series LLCs to Offer Customization to Investors” (Apr. 20, 2021); and “Uncertainty Surrounding Liability Shields and Cost Savings of Series LLCs” (Apr. 27, 2021).

Investor Liquidity

Evergreen funds use a range of terms to manage liquidity. Although the mechanics differ, Rolling Vintage Funds and Liquidating Account Funds both typically require LPs to agree to “lock up” or commit capital for a specified period. GPs may achieve that objective by offering more favorable fee rates to LPs that agree to remain invested for a longer period.

Rolling Vintage Fund

A Rolling Vintage Fund is typically structured so that LPs can request to be released from their commitment after the specified commitment period is complete. Investment proceeds attributable to any investments held by the fund at the time of the release will be distributed to the LP through the distribution waterfall as the investments are realized.

GPs can ease the strain caused by releases from a Rolling Vintage Fund by building certain buffers into the fund documents. One option is to create additional runway before LPs are released by establishing a notice period. Another is to incorporate carve-outs from the release, which resemble carve-outs that would apply after an investment period ends in a typical PE fund – e.g., requiring funding of in-process investments, expenses, borrowings and guarantees, as well as follow-on investments. GPs may also have the ability to treat a request from the LP to be partially released from their commitment as a request to be fully released, if the remaining commitment is below an established minimum amount.

As with other terms in a Rolling Vintage Fund, GPs can establish consecutive windows to submit requests to be released from commitments so that an LP cannot request to be released from their commitment after a new investment period has begun.

Liquidating Account Fund

In a Liquidating Account Fund, lock-ups and other limitations on withdrawals may apply. For example, a fund manager may impose a fund-wide limit on the amount of withdrawals that can be processed on any withdrawal date, with the excess carrying forward to the next withdrawal date, known as a fund-level gate. Another option is to establish investor-level gates by setting limits on the amount of withdrawals permitted by each specific withdrawing LP, with any excess amount typically carried forward to a future withdrawal date.

Mechanically, liquidity under an investor-level gate is achieved by the GP moving the LP’s share of the portfolio investments into a liquidating account on the withdrawal date and simultaneously exchanging the LP’s fund interests for interests in the liquidating account. The LP’s liquidating account interests will remain subject to fees, expenses and performance of the underling investments until the investments are realized. The liquidating account interests will generally not participate in fund investments that are not held in the liquidating account. In some cases, the GP may have the ability to cause the fund to purchase the liquidating interests from the withdrawing LP if doing so would be in the best interest of the fund.

It is worth noting that separate withdrawal terms may apply to current income, which generally can be paid to withdrawing LPs without impairing the value of any underlying investments.

Recycling

Providing the GP with the ability to reinvest investment proceeds can be mutually beneficial to all parties. Reinvesting proceeds may be appealing to any LP that invests in an evergreen product with the objective of remaining exposed to the fund’s strategy with limited interruptions

As for GPs, reinvesting provisions offer two obvious benefits. First, reinvested proceeds will continue to be subject to management fees in some manner. If management fees are calculated based on invested capital, then reinvesting proceeds will cause the amount of invested capital to increase. When management fees are charged on unfunded commitments, investment proceeds that are distributed (or deemed distributed) will increase unfunded commitments. Second, the ability to reinvest provides GPs with dry powder to capitalize on opportunities and fund more deals.

See “Latest on Private Credit Funds’ Recycling Provisions, Subsequent Close Models and Use of Levered Parallel Funds (Part Two of Two)” (Feb. 9, 2023).

Reinvesting provisions can be customized several ways, including by placing limits on the amount or type of reinvested proceeds. For example, proceeds eligible to be reinvested may be limited to the LPs’ initial commitment to the fund (i.e., prohibiting reinvestment of profits in excess of the return of capital to LPs). Alternatively, the limit imposed may be a percentage of the initial commitment or a multiple thereof. When there is no limit on reinvesting proceeds, or the limit is a multiple of the initial commitment, LPs often negotiate to prevent the GP from charging a management fee on distributions of investment proceeds in excess of their initial commitments.

Further, current income may be included or excluded from the investment proceeds that are eligible to be reinvested. One variation of that approach is to permit LPs to make an election at the time of their commitment – or, alternatively, at any time after their commitment has been accepted – to receive distributions of current income as it is received by the fund.

Borrowing

As evergreen funds are a relatively new entrant to the private fund space, the fund finance market is still developing financing products for these vehicles. The nature of the credit facility provided to these funds will be highly dependent on how they are structured.

The classic fund finance product – i.e., a subscription facility secured by LPs’ uncalled capital commitments – was developed for closed-end PE funds. An essential prerequisite of subscription facilities is that each LP’s commitment to fund capital contributions is fixed and will not decrease, terminate or increase over time. That feature may be less certain for evergreen funds, leading to complications when pursuing subscription lines for those funds.

See “Forming Private Credit Funds: Key Differences in Fund Lifecycle and the Use of Subscription Facilities Versus PE Funds (Part One of Two)” (May 12, 2020).

Subscription Lines for Rolling Vintage Funds

When LP commitments can be released or terminated, as is the case in a Rolling Vintage Fund, a subscription line lender may be unwilling to lend against those commitments. If LPs are permitted to unilaterally walk away from their commitments without penalty, then the lender’s collateral (i.e., LPs’ uncalled capital commitments) could evaporate without warning.

To address that issue, many LPAs for Rolling Vintage Funds only permit LPs to cancel their respective commitments to a subsequent vintage during a window that precedes the investment period applicable to such vintage. In that scenario, a lender may be comfortable lending to a vintage (whether structured as a series of a limited partnership or otherwise) as long as those evergreen commitments are only included in the borrowing base after the deadline has passed for the LPs to elect to terminate their commitment to the vintage. That solution would likely only work for a lender if the assets and liabilities of the applicable vintage were fully separated from the assets and liabilities of any other vintage, which could be accomplished by establishing protected series or registered series.

Along that vein, subscription lenders may be unwilling to lend to Rolling Vintage Funds in situations when LPs’ capital commitments in a new vintage are increased by the LPs’ receipt of distributions from a prior vintage. That reluctance is rooted in some lenders’ belief that the changeable amount of the commitment makes it less reliable collateral. Nonetheless, a lender may get comfortable with a subscription line for an evergreen fund when the LPs’ commitments are known at the outset of each new vintage and cannot be released until after a defined period.

Another potential issue to be addressed is how the borrowing base of a subscription facility is calculated when investor commitments increase as a result of distributions made in connection with a prior vintage. Lenders could likely mitigate the issue by requiring notice before GPs make any distribution that increases the LPs’ commitment and by providing that the borrowing base will be increased to reflect the increase, which is a similar approach to how some subscription facilities handle the issuance of recallable distributions to LPs in traditional PE funds.

Finally, fund managers need to ensure fairness across the vintages when putting a subscription facility in place for a Rolling Vintage Fund. It could be problematic, for example, for the fund to borrow money based on commitments from the LPs of a certain vintage and then to use the proceeds of that borrowing to make investments that will benefit another vintage in which some members of the original vintage of LPs may not be participating.

See “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).

Subscription Lines for Liquidating Account Funds

Rather than using a drawdown feature, many Liquidating Account Funds are structured similar to hedge funds in that investors fund their capital contributions up front when they are admitted to the fund. Unfortunately, a subscription facility is not an option for a Liquidating Account Fund structured that way, and that fund would instead need to pursue a NAV facility.

A subscription facility is still available for a Liquidating Account Fund that has a drawdown feature, but certain complications and considerations still exist. For example, if, upon an LP’s election, that LP’s assets are moved to a liquidating account and the LP no longer has any obligation to fund capital contributions for future investments, a lender would not likely be willing to lend against that LP’s capital commitment in the fund. The lender’s concern would be that the LP’s commitment could be released in connection with the movement of its share of the assets to a liquidating account.

One potential solution could be an LPA provision requiring that, notwithstanding the LP’s election to be released from their commitment to the fund, the LP will still be obligated to fund capital contributions that are used to pay off borrowings used to make investments before the date the LP’s commitment was released. In that scenario, the investor would be included in the borrowing base for purposes of calculating availability under the subscription line until it opts to be released from its commitment to the fund. After the election, the LP’s uncalled capital commitment would be excluded from the calculation of availability for future borrowings but would not trigger a mandatory prepayment under the credit facility.

Some (and perhaps most) lenders may not be able to get comfortable with the aforementioned construct, but that approach offers a path for a subscription facility to be put in place based on LPs’ capital commitments to a Liquidating Account Fund notwithstanding those LPs’ ability to terminate their commitments to the fund.

NAV Financing

If a subscription line is unavailable to a Rolling Vintage Fund or a Liquidating Account Fund, then a NAV financing facility, which is based on the NAV of the fund’s investments, could be an option. One drawback of a NAV facility is that lenders often charge a premium because the valuation of fund assets is less certain than the valuation of capital commitments (which are much closer to cash), and fund assets are more difficult to liquidate.

Another complication of entering into a NAV facility is that, by definition, LPs in both types of evergreen fund structures may not be equally participating in all investments. In that scenario, it could be problematic to use assets attributable to one group of LPs as collateral for borrowings that will benefit another group of LPs. A solution could be to only use borrowings attributable to one vintage or group of LPs to support investments attributable to that vintage/group. That approach may defeat the utility of the entire NAV facility, however, if the pool of investments and investors is sliced and diced narrowly in that way.

See “The State of NAV Loan Facilities in the PE Industry and Current Obstacles to Widespread Adoption” (Feb. 9, 2023).

Conclusion

Evergreen private credit funds may be useful to meet the objectives of both fund managers and LPs, particularly because a number of fund mechanics – including fundraising, equalization, investor liquidity and recycling terms – can be customized based on the degree of flexibility a fund manager needs and the terms LPs are willing to accept. Fund managers that intend to use leverage in their evergreen funds will also want to consult finance counsel when drafting their fund documents to adequately consider the concerns that a lender may raise.

 

Jeffrey Berman is a partner in the New York office of Seward & Kissel. He specializes in corporate finance, including fund finance and asset securitization. He regularly represents both funds and financial institutions in subscription loan facilities, NAV loan facilities, management company loans, hybrid loans, GP loans, portfolio-level financings, back leverage transactions and all other fund finance transactions. He also advises investment funds and managers in connection with transactions, financings and general corporate matters, and has extensive experience representing participants in various equity and debt issuances and securitizations, including less traditional asset classes.

Kevin Cassidy is a partner in the New York office of Seward & Kissel. He primarily represents institutional, emerging and first-time managers of private investment funds – including hedge funds, PE funds, credit funds, venture capital funds and real estate funds – as to formation, fundraising, regulatory compliance, and other day-to-day legal and operational issues. He also represents wealth and investment advisers and advises on a wide range of business combinations in the asset management industry.

Despite continuing headwinds, a “slow but improving fundraising market” is one of the primary trends reflected in Paul Weiss’ recent survey of fund documents (or offering materials) for more than 50 recently raised PE funds (Surveyed Funds). The Surveyed Funds – mostly based in the U.S. – all had a minimum target fundraising size of $2.5 billion, and 70% were raised by the top 100 firms based on PE assets under management.

“Notwithstanding the many challenges, there is sustained and growing demand for PE by LPs and, with an improving deal environment, a rebound in fundraising is likely in late 2024,” opined Paul Weiss partner Marco V. Masotti. This article summarizes the key takeaways from the survey results presented in Paul Weiss’ report, entitled “Private Equity Fundraising: Key Trends and Market Survey” (Report), as well as further insights provided in an interview with Masotti.

For coverage of the previous year’s survey by Paul Weiss, see “How Key PE Fund Terms Are Being Shaped by Current Fundraising Challenges, Liquidity Needs and Distinct Shifts in the Market” (Feb. 9, 2023).

Economic Terms

Management Fees

Most PE funds charge an annual management fee to cover the manager’s ongoing operating expenses. Excessive management fees could result in a misalignment of GP and LP interests, however, and increasing fund sizes may impact the total amount of management fees paid. As a result, management fee rates are a prominent part of evolving negotiation dynamics between GPs and LPs.

Pre‑Step Down Rate

The management fee rate and the base on which it is calculated vary among funds and between different periods in a fund’s life. The management fee is usually calculated as a percentage of commitments during the commitment period.

The survey results indicate that the most common headline rate is 1.5% (45% of Surveyed Funds), followed by 1.75% (29% of Surveyed Funds) and 2% (24% of Surveyed Funds). The Report notes that some funds offer multiple classes of LP interests where an LP can elect which class to participate in – e.g., Class A with a 2% management fee and 20% carried interest, or Class B with a 1% management fee and 30% carried interest.

Post‑Step Down Rate

Typically, PE management fees are calculated as a percentage of invested capital (often reduced by write-downs or write-offs) after the commitment period has ended or when the firm starts accruing a management fee on a successor fund.

Many PE funds decreased their management fee rate after the commitment period, but the Report notes that the amount of the reduction varied. The most common post-step down rate was 1.5% (40% of Surveyed Funds). Post-step down rates of 1.25% and 1.75% were each used by 21% of Surveyed Funds.

Early Bird Discounts

LPs that come in at the first closing or early in a fund’s offering may receive a discount on management fees. Those discounts are often limited to management fees paid during the commitment period, but sometimes apply to both pre- and post-step down rates.

Although early bird discounts are still not the norm, more GPs are offering them to investors. In 2023, 38% of Surveyed Funds offered early bird discounts, compared to 18% in 2022, Masotti said.

Size‑Based Discounts

PE funds may also discount their management fees based on the size of an LP’s capital commitment, although 60% of Surveyed Funds did not offer size-based discounts. The Report notes, however, that the percentage of PE funds providing size-based discounts on management fees is probably higher than was reported in the survey because breaks in economic terms are frequently contained in side letters rather than the express terms of fund documents (which were relied on for the survey).

The Surveyed Funds that provided size-based discounts offered tiered management fee structures based on the size of an LP’s capital commitment. Generally, discounts were offered to LPs committing at least $100 million. The threshold for a “large” investment is different in the current market, Masotti observed. “The average minimum LP commitment necessary to receive size-based discounts on management fees dropped to $166.75 million in 2023, down from $237.5 million in 2022,” he noted. “In addition, platform-wide fee discounts are increasingly being requested in fund offerings.”

Transaction Fee Offset

Sponsors typically receive transaction fees in connection with investments in portfolio companies (e.g., monitoring fees and director’s fees). The Report notes that, in recent years, LPs have pushed managers to apply 100% (rather than the 50‑80% used historically) of the allocated share of those fees to offset the management fees paid by the PE fund. All the Surveyed Funds had a 100% transaction-fee offset.

See “SEC Fines PE Sponsor $4.5 million for Inconsistent Management-Fee Offset Provisions and Calculations” (Jan. 18, 2022).

The Report explains that it has also become more common for the management fee to be offset by just the portion of the transaction fees that are allocable to:

• the investment by the fund (rather than the portion allocable to co‑investors); and
• the management-fee bearing partners (instead of the portion allocable to the GP and any of its affiliates).

Management Fee Waiver Programs

The Report notes that some PE funds have “management profits interest” programs that allow, at the manager’s election, a portion of LP contributions to be used by the fund as part of an incentive program for the benefit of the manager’s investment professionals. The relevant contributions are invested in fund investments in an amount equaling what the manager would have received if it had invested the same amount as the contributions. The management fees that would have been payable are then reduced by the amounts invested, which permits the manager to be allocated a share of capital gains from the underlying investments.

Just over half (53%) of the Surveyed Funds provide a management fee waiver program, although the Report notes that some GPs may not take advantage of the waiver despite having the flexibility available in their fund documents.

See “Tax Developments and Fund Manager Compensation: Management Fee Waivers (Part One of Two)” (Aug. 24, 2021).

Organizational Expenses Cap

Typically, organizational expenses are capped at a percentage of the aggregate size of the fund or a specified dollar amount. Organizational expenses above the cap are normally offset against the management fees payable by LPs.

The majority (53%) of Surveyed Funds cap organizational expenses borne by the fund at 0.10% or less of the fund’s aggregate commitments. “Organizational expenses are trending upward, with 47% of funds capping organizational expenses borne by the fund at 0.11% or more of aggregate commitments in 2023, compared to 39% of funds over the past two years,” Masotti said. “The average organizational expense cap increased to 0.12%, up from 0.10% in 2021.”

Pass‑Through Personnel Expenses

The Report notes that PE sponsors sometimes allocate to the fund a portion of their in‑house legal and/or accounting expenses that relate to fund operations. The survey found that 42% of Surveyed Funds charged in‑house expenses to the fund.

In addition, PE firms sometimes establish a dedicated group of professionals to provide operational expertise and related services to portfolio companies. Nearly half (47%) of the Surveyed Funds had a dedicated group of operating partners. Of those funds, approximately 56% include certain employees of the firm in the group. Most (88%) Surveyed Funds with a dedicated group of operating partners have the flexibility to charge related expenses to the fund, although some may not do so in practice.

See “SEC Fines PE Sponsor for Passing Operating Partner Expenses Through to Investors Without Adequate Disclosure” (Jun. 9, 2020).

Distribution Waterfalls

Under a European or “all capital back” waterfall, proceeds attributable to an investment are distributed to the LPs until they have recovered all capital that they contributed to the fund to date, including for investments, management fees and expenses. The preferred return and carried interest are then paid to the GP.

In a deal-by-deal waterfall, proceeds attributable to an investment are distributed to the LPs until they recover their capital invested in that investment and in any other deals that have been disposed of at a loss or that were significantly written down, together with an allocable portion of management fees and expenses. The preferred return and carried interest are then paid to the GP. Most (88%) Surveyed Funds use a deal-by-deal waterfall.

Expenses in Deal‑By‑Deal Waterfalls

As proposed in the Private Equity Principles authored by the Institutional Limited Partners Association (ILPA), LPs increasingly ask for a “modified deal-by-deal” waterfall, where all expenses paid to date – rather than an allocable portion – are returned. However, the traditional model of returning only allocable expenses before paying the preferred return and carry remains common practice, with 66% of Surveyed Funds taking that approach.

See our two-part series on ILPA’s Principles 3.0: “PE Economics and Related Fund Provisions” (Jul. 30, 2019); and “Fund Governance and Disclosures” (Aug. 6, 2019).

Preferred Return

Preferred returns are designed to align GP and LP interests by preventing the GP from taking its carried interest unless the PE fund outperforms a specified minimum return. Historically, the preferred return or hurdle rate has been 8%, and the strong majority (79%) of Surveyed Funds continue to use that rate. However, a growing number (10% of Surveyed Funds) use a preferred return of less than 8%. In addition, 10% of Surveyed Funds used fair market value or a similar test instead of a preferred return.

GP Catch‑Up

Most PE funds allow the GP to catch up on the preferred return distributions made to LPs so that the GP ultimately receives 20% of all fund profits. The GP will achieve 20% of fund profits at different breakpoints, depending on the rate of the catch-up. Nearly two-thirds (63%) of Surveyed Funds had a 100% GP catch‑up and about a quarter (27%) had an 80% catch‑up.

Carried Interest

The traditional carried interest percentage paid to GPs is 20% of realized profits, although a GP with a strong track record may receive as much as 25-30%. Some GPs offer a class of interest with a lower management fee and higher carried interest. Some funds calculate the carried interest based on a multiple of returns (e.g., 20% carried interest until a 2.5x return, 25% from a 2.5‑3x return and 30% if a 3x return).

A 20% carried interest remains prevalent, with 89% of Surveyed Funds using that rate. Very few (2%) of Surveyed Funds set carried interest at 15%, slightly more (4%) had carried interest rates between 25% and 30%. The remaining 5% of Surveyed Funds implemented multiple classes of carried interest.

See “How Different Waterfalls Affect GP Receipt of Carried Interest (Part One of Two)” (Jun. 4, 2019).

GP Clawbacks

In deal-by-deal waterfalls, GPs may receive carried interest on profitable investments, but other investments are subsequently sold at a loss. In a European waterfall, the GP may receive a carried interest distribution before all capital contributions are made, and then later investments are sold at a loss. The Report explains that, in both of those scenarios, the cumulative profits of the fund may be reduced such that the amount of carried interest paid to the GP exceeds the agreed portion of the profits.

To address that issue, PE funds typically provide for a GP clawback to recapture carried interest payments that the GP has received that exceed its contractual entitlement. Generally, the GP agrees to return previously distributed amounts of carried interest to LPs to the extent they exceed the carried interest due to the GP on a cumulative basis.

The Report also notes that GP clawbacks are usually capped at the after-tax amount of all carried interest received, but LPs sometimes request the return of pretax amounts, or at least a share in any tax benefits that the carry recipients realize from paying the clawback.

See “How Carried Interest Clawbacks Preserve Investor Returns and Affect Taxation (Part Two of Two)” (Jun. 11, 2019).

Escrow and Segregated Reserve Accounts

PE funds may set aside all or part of the carried interest paid to GPs in a third-party escrow or segregated reserve account as security for any clawback obligation that may arise. The minority (28%) of Surveyed Funds provide for escrow or segregated reserve accounts, and it was most common for 100% of carry to be set aside (10% of Surveyed Funds), followed by 10% or 20% of carry (6% each of Surveyed Funds).

Interim Clawbacks

Historically, GP clawbacks were calculated at the end of a fund’s life. LPs are increasingly concerned, however, that the GP (or the ultimate recipients of the carry) will be unable to satisfy the clawback obligations upon liquidation of the fund or may hold any distributions for years after it becomes apparent that a clawback will be required. To address that, nearly two-thirds (64%) of Surveyed Funds provide for periodic interim clawbacks (e.g., at the end of the commitment period, every two years or annually).

GP Capital Commitment

For historical tax reasons, the amount of a GP’s commitment to be invested pro rata in all investments with LPs is typically at least 1% of the aggregate commitments to a fund. LPs may seek a more meaningful commitment, however, to ensure the GP and its affiliates are aligned in sharing the risks associated with the fund.

The majority (53%) of Surveyed Funds provide for a GP commitment of 3‑5% of aggregate commitments to the fund. Nearly a third (30%) of Surveyed Funds require a 1‑2% GP commitment, and 13% have GP commitments in the 6‑10% range.

Capital commitments by GPs and their affiliates are trending downward, Masotti observed. The average GP commitment declined to 3.84% in 2023, down from 5.24% in 2021. Although smaller GP commitments seem counterintuitive in an LP‑favorable market, GPs – like LPs – are also getting fewer distributions and that is making it more difficult for them to write large checks, he explained.

See our two-part series on GP commitments: “LP Flexibility on Investment Size and Source of Funding Rests on Alignment” (Feb. 8, 2022); and “Employee Participation Introduces Complexity, LP Disclosure Issues and Structural Considerations” (Feb. 15, 2022).

Governance and Other Terms

The noneconomic terms of PE funds are intended to balance the duties and responsibilities of the GP with adequate protections for LPs, given their passive role in the fund.

Relevant Time Periods

Fund Term

Nearly three-quarters (72%) of Surveyed Funds had terms of 10 years, with a minority stretching to 11 years (11% of surveyed funds) or 12 years (13%). Only 4% of Surveyed Funds had terms of 13 years or more.

Offering Period

PE funds usually admit additional LPs at one or more subsequent closings within a set period from the initial closing. One of the reasons for limiting the time frame for bringing in new investors is to ensure the GP focuses on making and managing investments as soon as possible.

The traditional offering period of 12 months remains most prevalent (73% of Surveyed Funds), but Masotti noted that offering periods are generally getting longer as 27% of Surveyed Funds provided contractual offering periods of more than 12 months in 2023 compared to 11% in 2022.

Commitment Period

Nearly all the Surveyed Funds had commitment periods of five years (28%) or six years (68%). The Report also notes, however, that the commencement date of the commitment period varies considerably among funds – e.g., the initial closing date, the final closing date, the initial management fee drawn down date or the date of first investment.

Key Person Trigger

Typically, LPs can reconsider their decision to continue investing when there are any significant changes in the investment team. Key person provisions incorporate various factors, including requirements around devotion of time and attention, processes to resolve a trigger and whether a trigger results in suspension of the commitment period).

Further, there are a range of approaches in the industry as to who firms consider to be a “key person.” The majority (57%) of Surveyed Funds did not include founders in the key person trigger. One-fifth of Surveyed Funds considered founders and the team to be key persons, 10% included only founders in their key person trigger, and the remaining 13% included founders, the team or a combination.

No‑Fault Termination of Commitment Period

Just over three-quarters (77%) of Surveyed Funds grant the right to terminate the commitment period with consent of a supermajority of LPs. The Surveyed Funds most commonly require a 75% supermajority (59% of Surveyed Funds), followed by an 80% supermajority (10% of Surveyed Funds).

The termination right is sometimes exercisable after an initial period following the closing (e.g., two years). Although LPs rarely invoke no‑fault termination rights, they can be used as leverage when a PE fund encounters organizational instability, investment losses or other problems.

Recycling

PE funds are usually permitted to retain or recall the invested capital portion of the proceeds from any realized investment that occurs within a specified period. All the Surveyed Funds allow recycling, with 32% permitting it when capital is returned within 18 months of investment.

Fewer PE funds are specifying a time period in which investments must be disposed of to qualify for recycling, with 53% of Surveyed Funds limiting recycling based on a time period, compared to 73% over the past two years, Masotti said.

Recycling was most often permitted during the commitment period and the amount subject to recycling was capped at the capital portion of proceeds received (38% of Surveyed Funds). Caps set on recycling ranged between 110% and 130%, with 125% being the most popular (used by 20% of Surveyed Funds).

“More PE funds are limiting the cumulative amount of capital that may be invested (including as a result of recycling), with 60% of funds limiting the cumulative amount that may be invested, compared to 49% over the past two years,” Masotti explained.

GPs and LPs are working together to ensure PE sponsors have the tools they need to deal with any problems in their portfolio, Masotti observed. “The more you can keep dollars in the system and reuse those dollars in the system, then everyone benefits.”

See “LP Concerns and Common Misconceptions About the Rise of ‘Synthetic’ Distributions (Part One of Two)” (Jul. 11, 2024).

GP Removal

Although GP removal provisions are often limited to situations when the GP and/or the investment professionals act in a way that constitutes “cause,” the Report notes that LPs are increasingly requesting the right to remove a GP without cause.

For Cause

Nearly all (90%) of Surveyed Funds provide for the removal of the GP “for cause” when a majority or supermajority of LPs consent. Generally, “for cause” conduct must meet a high threshold (e.g., fraud, gross negligence or material violations of securities laws).

Upon removal of a GP for cause, most (82%) of the Surveyed Funds require a discount on future carried interest that is distributable to the removed GP on fund investments existing at the time of removal. Half of the Surveyed Funds set the carry haircut at 25%, which was notably more common than any other discount rate.

Without Cause

A minority (40%) of Surveyed Funds permit removal of the GP without cause. When a GP can be removed without cause, it was most common to require a supermajority vote of 75% (20% of Surveyed Funds) or 80% (10% of Surveyed Funds).

See “Latest Trends in GP Removal Provisions, Investment Limitations and Other PE Fund Terms (Part One of Two)” (Jul. 26, 2022).

Single Investment Concentration Limit

Investment limitations are used to promote portfolio diversification and to restrict activities that are outside the scope of the GP’s investment strategy. Such limits can often be waived by the LP advisory committee. All the Surveyed Funds had a single investment concentration limit, with 75% setting the concentration limit at 20% of commitments and the remainder setting it at 15% of commitments.

Fund‑Level Borrowings

PE funds may borrow money for investments or guarantee their portfolio companies’ debt. Subject to any tax undertakings, PE funds may have a limit on borrowings and guarantees that is calculated as a percentage of the aggregate size of the fund.

Nearly two-thirds (62%) of Surveyed Funds limit borrowings and guarantees that have recourse to the fund to 25‑30% of the fund’s commitments. The permitted duration of such borrowings was most often 12 months (43% of Surveyed Funds), although the next most common practice was to have no limit on how long borrowing could remain outstanding (29% of Surveyed Funds).

In addition, some PE funds allow the fund to enter into net asset value (NAV) loans, which are secured by the consolidated equity value of the fund’s portfolio. Almost all (91%) of Surveyed Funds use NAV facilities, with 48% including those facilities in the borrowing cap in the fund agreement and 17% excluding them (35% have no express provision on that point).

See “The State of NAV Loan Facilities in the PE Industry and Current Obstacles to Widespread Adoption” (Feb. 9, 2023).

Indemnification

PE funds indemnify the GP and its affiliates for liabilities arising from the fund’s activities, except when they result from specified conduct. All the Surveyed Funds carved out gross negligence from GP indemnification. Just over a third (35%) of Surveyed Funds include a separate carve‑out for a breach of a GP’s fiduciary duties.

In addition, PE funds often provide that indemnification will not be provided to the GP and its affiliates for a breach of the fund agreement, although that is usually qualified by materiality, intentionality or both. The strong majority (61%) of Surveyed Funds exclude material breaches from indemnification, 29% exclude intentional breaches and 6% exclude both.

Co‑Investments

Most PE sponsors offer co‑investments on a discretionary basis, but the Report notes that some PE managers are establishing formal co‑investment vehicles or programs concurrently with the main fund’s fundraising. That is not yet common practice, however, as only 4% of Surveyed Funds include a dedicated co‑investment vehicle or program as part of the fund offering.

“Managers continue to offer co‑investments because it’s something that LPs are interested in and sometimes a way to get deals done in a tough market,” Masotti observed. However, co‑invest activity has been a little slower over the last year, which has correlated with diminished GP fundraising efforts, he added.

See “PE in a Recession: Tips for Tailoring Fundraising Efforts, Anticipating Demand for Secondaries and Managing Co‑Investments (Part One of Three)” (Sep. 20, 2022).

Looking Ahead

The successful legal challenge to the SEC’s private fund adviser rules (PFAR) in the U.S. Court of Appeals for the Fifth Circuit has eased some of the pressures PE sponsors were facing to comply with PFAR’s original requirements, which is a “massive sigh of relief for managers,” Masotti noted.

See “Fallout From the Fifth Circuit’s Bombshell Ruling Vacating the Private Fund Adviser Rules” (Jun. 27, 2024).

The SEC may still push for some of the PFAR’s original requirements through audits, enforcement efforts and other alternative routes, and the regulator will no doubt remain very active, Masotti continued. As to GP‑LP negotiations, however, the PFAR may move the needle slightly on issues such as indemnification and disclosure, but is unlikely to change the parties’ positions on key points like simple negligence and clawbacks, he opined.

The current market favors LPs, but that is improving, Masotti stated. “LPs are biting in a way that they haven’t been recently – you had to get their attention just a few months ago, but now they are reaching out. It just feels like they are engaging a little bit more.”

The pendulum of negotiating leverage is constantly swinging and, as of now, is squarely with LPs amidst the difficult fundraising environment. That advantage goes beyond traditional PE funds to other arrangements, including co‑investment opportunities and pledge fund vehicles offered by GPs. Thus, it behooves fund managers to pursue every advantage in the book – how they structure access rights, draft fund documents and negotiate individual fund terms – to excel during co‑investment and pledge fund offering processes. To assist with those goals, Strafford CLE Webinars recently hosted a program analyzing all facets of co‑investments and pledge funds, which featured Schulte Roth partner Phyllis A. Schwartz and former DLA Piper partner Nathaniel M. Marrs.

This second article in a two-part series describes the importance of access rights and preparing fund documents when offering co‑investments and pledge funds; details key terms to negotiate in the fund documents; and highlights regulatory considerations for GPs to keep in mind. The first article summarized why co‑investment opportunities are appealing to GPs and LPs; some of the unique fund structures that can be used to facilitate co‑investments; and alternative ways to achieve the common objectives of those structures.

See “What Does It Take to Get Across the Finish Line in the Current Fundraising Environment?” (Mar. 7, 2024); and “Latest on Co‑Investments Amidst the Impending Recession and on Regulatory Efforts Targeting ESG (Part Two of Two)” (Jan. 12, 2023).

Offering Considerations

Access Rights

Co‑investments may be offered to existing LPs and/or other investors, and can be a way for sponsors to bring in large investors that are considering investing in the sponsor’s discretionary funds going forward, Marrs noted. Ideally, the sponsor would be able to bring whomever they choose into co‑investments, but there are sometimes more specific requirements. “Pro rata versus priority is a key decision in terms of how a co‑investment is offered and that can be driven by what LPs require in the way of more specific terms,” he said.

In the past, there was a question as to whether a GP has a fiduciary duty to offer co‑investment opportunities to all LPs if any LP was receiving a co‑investment opportunity, Schwartz noted. Although there is probably no fiduciary duty, fund documents generally make that clear, and side letter provisions have evolved from acknowledging that LPs in PE funds have an interest in participating in co‑investments to granting priority rights, she explained.

The process is slightly easier with pledge funds because investment opportunities are offered to all investors based on their “notional commitment,” Schartz continued. When an investor becomes a member of a pledge fund, the investors’ comparative notional capital commitment amount drives the size of the investment opportunity it receives. If an investor declines to participate, then the next question is whether another investor will get a second bite. Generally, those issues are negotiated in side letters, as well as the pledge fund’s limited partnership agreement (LPA), she noted.

See out two-part series on negotiating co‑investments: “Relevant Provisions in Main Fund Documents and LP Side Letters” (Sep. 14, 2021); and “Unique Features and Considerations in Co‑Investment Vehicle Documents” (Sep. 21, 2021).

It is very common for co‑investment access rights to be addressed in side letters, Marrs agreed. Sponsors prefer a requirement to notify an LP about an opportunity and then the ability to allow the LP to participate on open-ended terms, but many LPs want more specific terms, he said. Also, side letters sometimes provide that if an LP turns down their co‑investment right – or, in a pledge fund, if the investor does not take up the investment opportunity – then the GP or an affiliate may pick up that portion, Schwartz added.

Fund Documents

The provisions in the main PE fund’s LPA and private placement memorandum (PPM) typically set the parameters for co‑investors to participate in deals alongside the fund, with various provisions stripped out, Marrs stated. One issue is whether sponsors should use a subscription agreement or a bring-down agreement, which would bring down the representations and warranties from the main PE fund’s documents. Practices differ, but it is probably more common to use a subscription agreement that is in a very similar form to that of the main PE fund, he observed. “The process can take as long as a full fundraise and be just as expensive.”

Conversely, separate offering materials are used for pledge funds because investors need to know what kind of deals the manager will be presenting to them, Schwartz said. An LPA tracks which investors are participating in which deals, and a subscription agreement is used to ensure there are valid securities law representations. As with co‑investments, the process to raise a pledge fund is not necessarily quicker than for a committed fund, she added.

Co‑Investment Fund Terms

Management Fees and Carried Interest

Management fees and carried interest vary between industries and from deal to deal for both co‑investments and pledge funds, Marrs said. In PE, it is more common for co‑investments to have either very low management fees or none at all, and to charge either no carry or half carry.

Alternatively, pledge funds typically charge management fees on invested capital and often charge an upfront “club deal” fee for investors to have an opportunity to see a deal, Schwartz explained. Surprisingly, carried interest in a pledge fund is more likely to be closer to the traditional 20 percent for a classic PE fund. “Although investors are opting into deals, the GPs of pledge funds are typically required to pay clawbacks that are calculated on an investor-by-investor basis by netting losses against gains of a particular investor’s portfolio,” she said.

Most pledge fund waterfalls are back-ended, with each investor receiving 100 percent of its capital contributions for the deals that it has participated in before the GP can start catching up, Schwartz noted. As a result, the GP may be in carry for one investor, but not all of them. Recently, single investor pledge funds have been used in the context of litigation finance, which makes it easier to track all the variables, she added.

Expenses

Non-deal-related expenses may be included or excluded from an investor’s capital commitments, Marrs noted. For co‑investments, it is common for expenses that are not directly attributable to an investment to still be covered within an investor’s capital commitment. However, those expenses are more commonly capped or budgeted than occurs in a main PE fund, he said.

Pledge funds are similar and look at the notional commitment to track the investors that are participating in an investment and that are required to cover non-deal-related expenses, Schwartz added.

See “SEC Sanctions Adviser for Inequitable Allocation of Deal Expenses Between Its Fund and Co‑Investors” (Jul. 26, 2022).

Broken Deal Expenses

In recent years, the SEC has been concerned about primary fund investors having to pay broken deal expenses when sponsors attempt to consummate a deal involving a co‑investment that does not ultimately close, Marrs said. Historically, fund documents have not typically been specific about the types of expenses that would be allocated to the main fund, and sponsors tended to charge broken deal expenses to them. Following several SEC enforcement actions on the issue, sponsors are now far more diligent about ensuring they disclose details of how broken deal expenses will be treated, he noted.

See out two-part series “Breaking Up Is Hard to Do: A Guide to Types of Litigation and Associated Risks That Frequently Follow Broken Deals”: Part One (May 11, 2021); and Part Two (May 18, 2021).

For pledge funds, there is often a two-step process for investors to opt in, Schwartz said. If an investor does not show any interest in a deal at the first stage, it is not expected to pay any broken deal expenses. Only investors that elect to proceed with a deal will share in broken deal expenses. If a manager presents a deal that no investors wish to participate in, the manager will need to absorb the expenses that have been incurred. “It can be difficult to manage expenses in a way that ensures managers are not stuck with unexpectedly large expenses,” she noted.

Follow‑On Investments

Additional capital may be needed for an underlying portfolio company after co‑investors or pledge fund members have closed on a deal, Schwartz said. Fund documents for co‑investment vehicles and pledge fund vehicles typically provide that investors will be given the opportunity to put up more money. Reserves for follow‑ons are sometimes included in an initial commitment, but that is not necessarily common, she added.

When additional capital is needed, not all co‑investors and/or pledge fund investors involved in the initial round may wish to participate, Schwartz continued. It is important for sponsors to disclose that when follow‑on investments do not have full pro rata participation, the actual returns from the underlying investment will vary between investors that are participating in each round, she explained.

Even when there are reserves for additional follow‑on investments, they may not be sufficient, Marrs cautioned. When additional capital is required, there is a question as to whether to bring in new investors, and it may very well be on a non-pro rata basis. There are always issues about the form the investment will take and the valuation at the time of the follow‑on investment, as well as the potential dilution of earlier investors, the fund and prior co‑investors. “It is important to provide disclosure and to be clear about the risks to existing investors,” he emphasized.

Governance

Removal of a GP or termination of a co‑investment is typically either not permitted at all in the fund document or requires a higher percentage of LP agreement, Marrs said. Those terms are often linked to the main PE fund – e.g., removal of the GP in the main fund may trigger the same response in the co‑investment vehicle. A co‑investment vehicle does not usually have an LP advisory committee (LPAC) of its own and the main fund’s LPAC may be involved in certain matters relating to co‑investment vehicles, he clarified.

Key person rights and veto rights are also less common in co‑investment vehicles, Marrs continued. For example, it would not make sense for a single investment co‑investment fund to have a “lock up” on the formation of a successor fund because it is only formed for one investment. Similar to the main PE fund, affiliate transactions are usually subject to LP approval or approval from the main PE fund’s LPAC, he added.

Exits

Co‑investment vehicles often have side letter provisions addressing specific rights related to exits, which are coordinated with similar provisions in the main PE fund, Marrs observed. Large investors often want preemptive rights as to future issuances of securities by the underlying portfolio company in which the main fund and co‑investment vehicle are invested, he pointed out, so they can address any potential dilution of their existing investment.

In the pledge fund context, multiple single investor pledge funds may each be participating in an investment in the same issuer, Schwartz noted. In that scenario, there may be provisions to ensure the pledge funds exit on the same terms and conditions to ensure that an investor in one pledge fund is not adversely affected by other pledge funds, she explained.

Regulatory Considerations

Allocation of Investment Opportunities

There should be clear disclosure about how expenses will be allocated and the potential for dilution if additional investors participate at a later date, Marrs suggested. It is also important to ensure compliance with the existing LPAs and side letters of the main fund and other existing vehicles, he elaborated.

Investors should be “accredited investors” under the Securities Act of 1933, and are often “qualified purchasers” under the Investment Company Act of 1940 or “qualified clients” under the Investment Advisers Act of 1940, Marrs continued. That status is helpful where the main PE fund is relying on the Section 3(c)(1) exemption because investors coming in through a co‑investment vehicle may be integrated with the main fund and exceed the 100‑investor limit, he explained.

See “Potential Conflicts of Interest From Entering, Holding and Exiting Co‑Investments (Part Two of Two)” (Apr. 26, 2022).

PPM

There is no strict requirement for a co‑investment fund or pledge fund to have a PPM. If a placement agent or affiliated broker-dealer is involved with the offering, however, then it may be easier to address FINRA considerations in a PPM, Marrs said. Similarly, it may be simpler to provide specific disclosures that are required under Cayman Islands law or other foreign jurisdictions in a PPM.

Preferential Treatment

Before it was invalidated by the U.S. Court of Appeals for the Fifth Circuit, the preferential treatment rule in the SEC’s private fund adviser rules (PFAR) had prohibited investors from being granted any preferential information rights that would have a material negative effect on existing investors, according to Marrs.

Despite the PFAR being vacated, it will be interesting to see if the SEC chooses to focus on that issue in upcoming examinations and enforcement actions. The issue is particularly noteworthy in the co‑investment context because investors entering a co‑investment with additional exposure to a certain portfolio company have traditionally been provided with more specific information about that company than the other main fund investors, Marrs remarked.

See “Fallout From the Fifth Circuit’s Bombshell Ruling Vacating the Private Fund Adviser Rules” (Jun. 27, 2024); and “Final Private Fund Reforms: Issues to Monitor in Preferential Treatment, Adviser‑Led Transactions and Annual Audit Rules (Part Three of Three)” (Oct. 19, 2023).

In that context, key threshold issues are whether a co‑investment vehicle is viewed as investing in a similar pool of assets as the main fund and whether providing preferential information would be reasonably likely to have a material negative effect on the main fund’s investors, Marrs said. Co‑investment vehicles that make multiple investments alongside a main fund are more likely to have substantially similar investment objectives to those of the main fund and expose investors to similar risks. Accordingly, those vehicles are more likely to be seen as having a similar pool of assets compared to a single investment co‑investment vehicle, he elaborated.

In addition, it is less likely that delivery of additional information will be deemed to have a material negative effect on main fund investors if the co‑investment vehicles do not share significantly overlapping objectives, Marrs continued. “For example, information being delivered to investors in a single investment co‑investment vehicle may not negatively affect main fund investors because they are not exposed to the same risk.”

Once an adviser has established a compliance program with appropriate policies and procedures, it must implement that program effectively. An ACA Group presentation that is part of its ongoing “Building a Gold Standard Compliance Program” focused on two important elements of program implementation: compliance calendars and compliance testing. The program, which featured ACA Group’s Cari Hopfensperger, director, and Jaqueline Hummel, director of thought leadership, explored the importance of creating a compliance calendar; assigning responsibility for compliance; identifying common test areas; using available information for testing; incorporating testing into the annual compliance review; and embedding compliance throughout an organization. This article summarizes the relevant takeaways for closed-end fund managers.

See our three-part series on tailoring a compliance program: “Why Fund Managers Should Customize” (Aug. 24, 2021); “What Fund Managers Should Consider” (Aug. 31, 2021); and “When Fund Managers Should Review and Update” (Sep. 14, 2021).

Creating a Compliance Calendar

A compliance calendar serves as a guide for periodic testing, Hummel said. It can show that a test was performed and indicate where the relevant testing documentation is located.

There are many tools available for creating a compliance calendar, Hopfensperger noted. The simplest is an Excel spreadsheet. More sophisticated systems can help to calendar and track tests and configure testing workflows. For example, a system may facilitate:

• assigning tests to specific teams or team members;
• monitoring test status;
• documenting findings;
• issuing acknowledgements to others within the firm; and
• reporting and analyzing test results.

See “Designing a State-of-the-Art Private Fund Compliance Department: Leveraging Cutting-Edge Technology” (Sep. 21, 2023).

The process of building a compliance calendar starts with identification of regulatory requirements that impose specific duties, such as code of ethics compliance or Form ADV annual updates, and policies and procedures contained in the compliance manual that require compliance reviews and testing, Hopfensperger explained. The SEC’s website includes information on regulatory filing deadlines. Additionally, ACA Group publishes a regulatory filings calendar that covers SEC and CFTC filings relevant to investment advisers and fund managers.

Once an adviser determines what items should be reviewed, it should determine how often to conduct each review, continued Hopfensperger. For example, if an adviser’s compliance manual covers use of soft dollars but the firm has no soft dollar arrangements, an annual review to confirm that it has not entered into any soft dollar arrangements might be sufficient. On the other hand, if the firm uses soft dollar arrangements, then a quarterly review might be more appropriate. In that event, the compliance calendar could have four separate lines corresponding to testing for each quarter.

A compliance calendar should also include:

• recurring routine compliance activities, including email and marketing reviews; annual compliance training; conflicts questionnaires; and committee meetings; and
• a section for on‑demand tests, which could cover matters such as employee onboarding, principal trades and investor complaints.

A compliance calendar created on a spreadsheet might include columns for testing frequency, the subject matter of the test, the person responsible for the test, a reference or link to where supporting records are located, notes about the test and the date the test was completed, Hopfensperger added.

Assigning Responsibility for Compliance Matters

When setting up a compliance program, many advisers tend to assign all responsibilities to the CCO, Hummel observed. That is not realistic. “The CCO is not supposed to supervise every policy and procedure in the compliance manual,” she stressed. Supervisors across the firm should be responsible for ensuring that compliance-related tasks within their purview are performed correctly. Moreover, a robust supervisory structure can help to shield supervisors from being charged personally in SEC administrative proceedings.

CCOs may rely on supervisors to do their jobs but should conduct periodic testing to confirm that policies and procedures are being followed and working as expected, Hummel observed. Of course, some responsibilities should belong to the compliance team, which has expertise in handling sensitive information, acting impartially and navigating SEC regulations and guidance. Those duties include, for example, code of ethics monitoring; email review; marketing and client communications review; state notice filings; investment adviser representative licensing; investor complaints; Form ADV drafting; and Custody Rule compliance.

Other firm personnel should have supervisory responsibility for other matters, with monitoring by the compliance team to ensure the responsibilities are being carried out, continued Hummel. The CCO should not be responsible for supervision of those areas, however. In some instances, the CCO may share certain duties with other functions. For example, compliance could sit on a valuation or best execution committee but should not have a determinative role.

It is not always clear who should be responsible for certain tasks, Hummel admitted. In those cases, the firm should determine the best source of information and who is in the best position to accomplish the task. Those areas may include, for example, preparation and filing of Form PF or Form 13F.

It makes sense to leverage third-party audits in compliance testing, Hummel added. For example, a CCO should be able to rely on a financial statement auditor’s testing of certain matters, including advisory fees. Assuming an adviser chose a reputable and competent auditor, the auditor’s testing is likely to be superior to testing by compliance staff.

See “SEC Action and Commissioner Peirce’s Statement Shed Light on CCO Liability” (Oct. 4, 2022); and “Managing Compliance Scope Creep” (Feb. 8, 2022).

Identifying Common Areas for Compliance Testing

The compliance testing that an adviser should conduct depends on its practices, policies and procedures and what it has disclosed, Hopfensperger said. In addition, the SEC routinely asks about the following matters on exams:

• fees;
• sub-adviser due diligence;
• account setup processes;
• investment recommendations;
• document retention;
• advisory agreements;
• delivery of audited financial statements;
• Employee Retirement Income Security Act of 1974 disclosures; and
• valuation committee minutes.

An adviser should test and document all items that are applicable to the firm, Hummel advised. It should also consider testing with regard to new processes implemented in response to an SEC exam deficiency or compliance with an SEC exemptive order.

Advisers may be required to document testing with respect to matters that do not apply to them, Hummel noted. For example, if a firm indicates that it does not engage in cross-trading, compliance should still test whether cross-trades have occurred. Additionally, a regulation may require an adviser to test even when that regulation does not apply to the firm. For example, even though most fund advisers do not have accounts that are “covered accounts” under Regulation S‑ID, they must still determine periodically whether they offer or maintain covered accounts.

See “Overview of the SEC’s Standards for Resilient and Effective Compliance Programs and Fiduciary Practices (Part Two of Two)” (Oct. 4, 2022).

Leveraging Data for Testing

Client Databases

“You can’t test if you don’t have the data,” Hummel observed. Simple changes to an existing system or process can make compliance testing easier. For example, many advisers’ client databases capture the types of information routinely requested by the SEC, including account name, number and balance; account custodian; and broker-dealers. An adviser could add a field for client strategy that can be completed during onboarding. This will make it easier to test whether the adviser is adhering to the strategy.

Similarly, the SEC looks for trading in accounts with owners that are related to the adviser, continued Hummel. An adviser could add a field for indicating whether an account is related to the adviser.

Financial Statements

An adviser’s financial statements are another good source of existing information that can be used for testing, Hummel said. The general ledger could show things such as unclear sources of revenue; unreported charitable donations; or unexplained or mischaracterized large payments or receipts, which could prompt further review.

“Live” Tests

The coronavirus pandemic offered a “live” test of business continuity plans, Hummel noted. An adviser could document what worked and did not work to show that it tested the effectiveness of its plan. Similarly, an SEC exam functions as a live test of books and records processes.

See “How Compliance Departments Have Responded to the Coronavirus Pandemic” (Oct. 27, 2020); and “Are You Prepared for the SEC’s Sweep of Business Continuity Plans and Coronavirus Actions?” (Jun. 2, 2020).

Incorporating Testing Into the Annual Review

According to Hummel, an annual review should include:

• a brief description of the firm and its business;
• an overview of the review process;
• discussion of the principal risks addressed by compliance policies and procedures;
• discussion of developments in the prior year, including changes to the firm’s business or operations and the impact of any regulatory changes and/or SEC risk alerts or guidance; and
• most importantly, an evaluation of the adequacy and effectiveness of the firm’s compliance policies and procedures.

Using a compliance calendar throughout the year can facilitate the annual compliance review, commented Hopfensperger. The calendar will show who performed each test, when it was performed, whether there were any adverse findings and, if so, provide some information about the findings, with links to supporting documents. For management-level reporting, an adviser can also create a testing summary that shows the compliance area tested (instead of listing each individual test), the compliance review procedures that were completed, a summary of the findings and any action items.

At the beginning of each year, compliance should review the results of last year’s tests, Hopfensperger advised. Those results inform the annual compliance review and the current year’s risk assessment. If the testing identifies gaps or errors, compliance should summarize them in the annual review. It should also refresh the firm’s risk assessment to note whether the controls in that area are functioning effectively. Compliance may also recommend enhancements for testing.

See “Risk Alert on Compliance: Inadequate Annual Reviews, Poorly Implemented Policies and Other Key Takeaways (Part Two of Two)” (Feb. 2, 2021); “Use a Risk Assessment Template to Take a Thoughtful Approach to Compliance” (Jun. 30, 2020); as well as our two-part series “A Checklist for Investment Advisers to Streamline and Organize Their Annual Compliance Program Reviews”: Part One (May 12, 2020); and Part Two (May 26, 2020).

Embedding Compliance Throughout a Firm

“Compliance is a journey. It is not a destination. It is an ongoing process that takes time,” Hummel said. For a compliance program to become embedded in the fabric of an organization, there must be management buy‑in and accountability. If there are no consequences for failing to follow policies and procedures, people will ignore them. A CCO can also help to ensure that compliance becomes part of the firm’s fabric by:

• making it easy for everyone to obtain policies and procedures;
• being available and encouraging questions;
• ensuring policies are applied equally to all personnel;
• conducting small, focused trainings, which are more effective than a single broad training;
• engaging with supervisors before training to get their input and incorporating any messages they wish to send;
• keeping things simple; and
• trying to be a partner to the business rather than someone who always says “no.”

No one reads the compliance manual, pointed out Hummel. Consequently, a CCO should employ more frequent, focused training; send email reminders; and ensure managers understand the manual and work with compliance to develop relevant procedures.

See our two-part series on compliance training: “SEC Expectations and Substantive Traps to Avoid” (Mar. 15, 2022); and “Who Conducts the Training and Five Traps to Avoid When Providing Training” (Mar. 22, 2022).

CCOs must earn respect by providing concise, useful advice, continued Hummel. Employees do not want a citation to a rule. They want to know what they are supposed to do and how. CCOs should aim to provide specific advice and discuss the risks of each possible approach. When something is unclear or involves a significant risk, they should seek outside counsel or another expert for assistance.

See our two-part series on why fund managers must adequately support CCOs and compliance programs: “Recent Failures Lead to SEC Enforcement Actions” (Jul. 30, 2019); and “Six Valuable Lessons From Recent Enforcement Actions” (Aug. 13, 2019).

Christopher P. Healey has joined Davis Polk’s investment management practice as a partner in the firm’s Washington, D.C., office. His practice focuses on the development, formation and ongoing operation of funds registered under the Investment Company Act of 1940 (Investment Company Act).

See “Quest for Permanent Capital: Why Sponsors Look to Unlisted Registered Funds to Achieve ‘Functional’ Permanence Beyond Typical Private Funds (Part One of Three)” (Dec. 8, 2020).

Healey advises clients – ranging from first-time sponsors to large, established fund managers – on SEC exemptive applications and a wide array of registered fund products, including business development companies, closed-end funds and interval funds. He also has extensive experience working on complex asset management M&A transactions and innovative Investment Company Act regulatory matters.

See our two-part series on interval funds: “Rising Popularity and How Fund Managers Manage Attendant Regulatory Requirements” (Mar. 21, 2024); and “Attaining Fundraising Benefits While Overcoming Operational Challenges” (Apr. 4, 2024).

Prior to joining Davis Polk, Healey was a partner in the registered funds practice at Simpson Thacher.