Mar. 7, 2024

What Does It Take to Get Across the Finish Line in the Current Fundraising Environment?

Fundraising for many GPs has gone from being a relatively straightforward exercise to a real challenge. Over-allocated investors, sub-optimal distributed to paid-in capital in prior funds, and increased focus by investors on fund strategies and terms have all contributed to lengthier and more challenging fundraisings. Although some GPs – mostly large cap, well-established sponsors – have continued to raise capital seemingly without much issue at all, a bifurcation exists among GPs in the market as the majority are finding fundraising particularly arduous. In a guest article, Proskauer special funds counsel Lucie Rose explores changes in the way investors are approaching fund investments and how GPs have been adapting to meet new investor demands to get their respective fundraisings over the finish line. Some of the topics addressed in the article include ways to communicate with investors, the value of flexibility in the fundraising process, how to efficiently proffer amended fund terms relative to prior funds and potential structures for co‑investment opportunities. See “Current Challenges and Constraints in Accessing Capital for PE Funds and Investments” (May 4, 2023); and “PE in a Recession: Tips for Tailoring Fundraising Efforts, Anticipating Demand for Secondaries and Managing Co‑Investments (Part One of Three)” (Sep. 20, 2022).

SEC Enforcement Action Targets Non‑Violative Use of MNPI Through Policy and Procedure Failures

In recent years, the SEC has shown an increased appetite for enforcement actions around inadequate compliance policies and procedures, even when the underlying conduct is otherwise non-violative. Taking that approach, the SEC can effectively penalize conduct that it is unable to regulate directly. A recent SEC enforcement action continues that trend and escalates the stakes with a $4‑million fine, despite the offending firm taking steps to ensure material, nonpublic information would remain confidential before it was conveyed to recipients and in the absence of any allegations of insider trading. This article summarizes the SEC’s settlement order, along with key takeaways and insights from industry experts. 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).

Four Distinct Ways to Structure Minority Stake Investments

Minority stake investments continue to be used by a range of alternative investment managers for various reasons. The different characteristics and objectives of sellers call for different types of transactions to meet their needs – e.g., PE sponsors and other managers with long-term capital streams are best suited to minority stake investors. In other instances, the nature of the investing entity can dictate a preferred approach – e.g., sovereign wealth funds and insurance companies are well-suited to participate in seed-and-stake transactions. To discuss the four primary transaction types for minority stake investments, Morgan Lewis recently hosted a program featuring partner Robert D. Goldbaum and of counsel Joanna Maria El Khoury. The panel also addressed specific considerations investors should weigh in each type of transaction; liquidity and other rights typically afforded to investors; and specific issues and considerations for minority stake transactions in the Middle East. This article summarizes the panelists’ insights and key takeaways. For insights from other Morgan Lewis attorneys, see “Trends in Private Fund Terms and GP–LP Fundraising Perspectives in the Current Market Environment” (Jul. 27, 2023); and “Prevalence of ESG Strategies Among Shari’a‑Compliant Funds and Attendant Issues” (Nov. 1, 2022).

Cybersecurity Practices for PE Sponsors and Their Portfolio Companies: Due Diligence and Post‑Acquisition Efforts (Part Two of Two)

The relative importance of a prospective portfolio company’s cybersecurity practices evolves over the course of the deal process. At the outset, with limited time and knowledge, the quality of a company’s cybersecurity program is largely a binary issue for PE sponsors: is it adequate enough to move forward, or is it a deal breaker? That changes markedly post-acquisition, however, as sponsors learn more about the company and consider ways to not only future-proof its cyber practices, but also to create more value in advance of an eventual exit. SS&C Intralinks (SS&C) sponsored a panel on cyber and data protection considerations in the PE industry that was moderated by SS&C principal solutions consultant Paul Loefstedt. It featured Thomas Baasnes, a cybersecurity director at Verdane; Julia Dudenko, the chief information security officer (CISO) at Haniel; Nigel Diesveld, the CFO and chief risk officer at HPE Growth; and Paul Harragan, the global cybersecurity lead (portfolio CISO) at KKR. This second article in a two-part series distilling insights from the program offers suggestions for addressing cybersecurity during the deal process and post-acquisition, as well as tips on changing perspectives and insurance. The first article identified key cybersecurity measures and incident response efforts that can help firms secure fund data and stay ahead of emerging cyber threats. For coverage of another SS&C panel, see “Amount of Value Outsourced Fund Administrators Confer to PE Sponsors and Criteria for Selecting Them” (Jan. 25, 2022).

Managing Conflicts and Developing Effective Compliance Policies and Procedures

Rule 206(4)‑7 under the Investment Advisers Act of 1940, known as the Compliance Rule, establishes the fundamental parameters for an investment adviser’s regulatory compliance program, including adopting appropriate policies and procedures; conducting an annual compliance review; and appointing a qualified CCO. A recent installment of the “Building a Gold Standard Compliance Program” series hosted by ACA Group (ACA) focused on identification and mitigation of conflicts of interest; minimum compliance program requirements; compliance manuals; compliance policies and procedures; desk procedures; and recent SEC compliance-related examination and enforcement activity. The program featured Jaqueline Hummel, ACA director of thought leadership; and Myles Blechner, ACA director – investment advisory consulting. This article synthesizes their insights. 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).

Investment Management Partner Rejoins Akin in New York

Akin has enhanced its investment management practice by welcoming back Ira P. Kustin as a partner in its New York office. He focuses his practice on the formation and operation of a wide spectrum of private investment fund vehicles and accounts (including hedge, PE and credit funds), as well as on advising global asset managers, mid-size asset managers and emerging managers. For commentary from Kustin, see “PE Sponsors Must Avoid Including Mischaracterized Investments in Track Records or Face SEC Ire” (Jun. 2, 2020); and “How Fund Managers Can Address End-of-Life Issues in Closed-End Funds” (Mar. 19, 2019).