Oct. 13, 2020

Independent Valuation Firms: Tips for Overseeing the Process and Resolving Disputes Over Conflicting Valuations (Part Three of Three)

Use of independent valuation firms by PE funds for transactions or financial reporting is rising, but liability for third-party valuations remains with the sponsor. It behooves the sponsor, then, to not only select the independent valuation firm with care, but to oversee its efforts to reach a value range suitable for both parties. Some fund managers wait, however, until the last stage of the valuation process (i.e., when the manager has the valuation firm’s final numbers in hand) to exert oversight. If opinions differ, a robust discussion about process and inputs may yield the most efficient result. If the parties cannot reach an agreement, the fund manager may need to look to the engagement letter, as well as its fund documents, for obligations and requirements about both resolving and disclosing the conflict. This third article in a three-part series explores the typical process of working with a valuation firm, including how managers can oversee and resolve disagreements over valuations. The first article considered why scrutiny of valuations by investors, auditors, GPs and regulatory agencies has increased with time, resulting in increased retentions of valuation firms. The second article delved into the slow rise of independent valuation firms, different scopes of work and ways managers can choose the right firm to conduct valuations. See “Fund Managers Must Supervise Third-Party Service Providers or Risk Regulatory Action” (Nov. 16, 2017).

A Comparison Between Two Liquidity Solution Tools: Preferred Equity and NAV Facilities

Investment fund liquidity solutions can take many forms, but two of the most flexible financing options are asset-based net asset value (NAV) facilities and structured preferred equity. The two options have key differences, particularly given that a NAV facility is a debt solution while preferred equity is a quasi-equity solution. There are, however, many similarities between the two, including their shared trajectory from being niche alternatives just a few years ago to mainstream liquidity tools today – particularly during the coronavirus pandemic and the associated market dislocation. In a guest article, Kirkland & Ellis partners Robert Emerson, Susannah Amini and Jacqueline Eaves review certain scenarios under which a sponsor may wish to compare and contrast the benefits and limitations of NAV facilities and preferred equity at the fund level to select the most appropriate structure. In particular, the article evaluates both options as flexible and tactical liquidity tools for sponsors to actively manage their portfolios. See our two-part series on liquidity options for PE funds: “Potential Capital Sources, GP‑Led Restructurings and Alternative Paths Available to Sponsors” (Sep. 15, 2020); and “Preferred Equity Lines, Top‑Up Funds and NAV Credit Facilities” (Sep. 22, 2020).

Alternative Private Credit Structures: Using REITs to Address Foreign Investor Tax Challenges (Part One of Two)

Fund managers in the private credit space typically select from a range of familiar options when it comes to structuring their respective funds, including leveraged blockers, “season and sell” structures and the treaty-based approach. Depending on the nature of the underlying assets, however, certain comparatively rare structures can still provide meaningful tax benefits to investors – particularly foreign investors wary of effectively connected income. K&L Gates recently hosted a webinar focused on the topic, which highlighted two vehicles in particular: real estate investment trusts (REITs) and insurance dedicated funds (IDFs). Moderated by K&L Gates partner Edward Dartley, the webinar included fellow partner Adam J. Tejeda, along with Alison Kurth, in-house tax counsel at Principal Financial Group. This first article in a two-part series analyzes various issues and considerations with using REITs, and the second article will evaluate the merits of IDFs. For additional commentary from K&L Gates partners, see our two-part series on global fundraising for fund managers: “The E.U. and the Middle East” (Jun. 7, 2018); and “The Asia-Pacific Region” (Jun. 28, 2018).

Preserving Privilege in Audits and Internal Investigations

The attorney-client privilege generally applies to communications between an attorney and a client for the purpose of seeking or rendering legal advice. Unfortunately, no approach to preserving privilege in an audit or internal investigation will be “bulletproof,” cautioned Michael B. Hayes, partner at Montgomery McCracken, at a recent Strafford CLE Webinars program. Hayes and Kenneth E. McKay, shareholder at Baker Donelson, took a deep dive into how and when privilege and attorney work product protections apply in connection with internal investigations and audits, as well as the critical issues that arise in claiming those protections. This article presents the key takeaways from their presentation. See “How Fund Managers Can Maintain Work Product Protection During Investigations After the Herrera Decision” (Feb. 22, 2018).

How to Facilitate a Privacy Compliant Return to Work: Policies and Protocols (Part Two of Three)

Balancing health and safety concerns with privacy considerations after the coronavirus pandemic can be overwhelming for a fund manager when bringing its workforce back into the office. This second article in our three-part series outlines how to facilitate a privacy compliant return to work, and it provides practical advice from various in-house and outside privacy counsel on protocols for identifying and responding to symptomatic or sick employees. The article also includes six considerations to assist fund managers with developing a privacy compliant policy. The first article examined the relevant laws and guidance; ways fund managers can balance competing interests of safety and privacy; and anticipated U.S. regulatory considerations. The third article will focus on contact tracing and considerations for deciding if, and in what form, it is appropriate for a fund manager. See “Are You Prepared for OCIE’s Sweep of Business Continuity Plans and Coronavirus Actions?” (Jun. 2, 2020).

Former State Street Managing Counsel Joins K&L Gates’ Boston Office

Kasey L. Lekander has joined K&L Gates as a partner in the firm’s asset management and investment funds practice in its Boston office. Her practice focuses on private funds and fund formation; establishment of asset managers; fund formations and reorganizations; and regulatory matters. She also counsels clients on sales and acquisitions of investment advisers and fund families, including hedge funds and PE funds. For commentary from other K&L Gates partners, see our three-part series on the Institutional Limited Partners Association model limited partnership agreement: “Seeks to Empower LPACs and Increase GP Accountability for Fiduciary Duties” (Dec. 10, 2019); “Attempts to Redistribute Economic Risk From LPs to GPs” (Dec. 17, 2019); and “Faces Sizable GP Skepticism En Route to Becoming a Fixture in PE Fund LPA Negotiations” (Jan. 7, 2020).