• August 31, 2017

    Best Practices for Private Equity Managers Entering into Joint Ventures with Investors (Part Two of Three)

    Large institutional investors with designated in-house teams tasked with evaluating investment opportunities and overseeing allocations have begun partnering with private equity managers to form joint ventures, vehicles into which they can channel their deep resources and experience to take on an even more active role in deploying significant assets. Joint ventures can be beneficial for both large institutional investors and private equity managers because the permanent agreement to purchase, manage and sell assets can result in quicker execution time and reduced investment costs. As with any business relationship, private equity managers must scrupulously attend to the joint venture relationship, and perhaps the key to its long-term success is the agreement governing it. A well-crafted joint venture agreement clearly describes the nature of the parties’ partnership and parameters of the joint venture, and delineates each party’s obligations and rights with respect to the venture. At the same time, an effective joint venture agreement is flexible enough to allow for changes in the market, the assets to be acquired, business plans or other factors that could arise. This article, the second in a three-part series on joint ventures, provides an overview of the legal structures commonly employed in joint venture agreements, reviews applicable regulatory obligations and assesses frequently negotiated and important terms that can help facilitate a smooth relationship in furtherance of the partnership’s investment goals. Part One of this series explored the reasons underlying the increase in private equity managers’ and institutional investors’ use of joint ventures to partner on investments in certain assets and the benefits of the vehicles to both; types of joint ventures; and best practices for managers to avoid conflicts of interest between a joint venture and other funds managed. The third article will examine exit provisions. Read More »

  • August 31, 2017

    Preserving a Private Equity Manager’s Business and Legacy: The Keys to a Robust Succession Plan

    Developing a thriving private equity business, as distinguished from a traditional corporation, involves fostering a network of interpersonal connections because investors often allocate to one manager over another at least in part based on the strength of a relationship. In fact, in some cases, a manager’s reputation attracts investors as much as the potential returns its portfolio investments can produce. Despite this relationship-centered model, investors are increasingly requiring managers, especially smaller firms, to show that they have a sustainable business model, or succession plan, in place that will outlast the founder or key man with whom they have a personal connection to ensure that those who remain at the firm will maintain and grow its business and performance uninterrupted. In addition to mollifying investors, a succession plan can help a private equity fund manager strategize about the future of a firm in order to preserve the manager’s legacy and the value of the business. This article explains a succession plan’s purpose and applicable regulatory expectations; provides guidelines on how private equity fund managers should craft a succession plan; reviews key elements of the plan, such as the executives it should cover, preparing employees to take over key roles and documenting the plan’s contingencies; and explores what investors look for when they evaluate private equity fund managers’ succession plans. Read More »

  • August 4, 2017

    A Roadmap and Recommendations for Private Equity Managers Facing an SEC Examination (Part Two of Two)

    Examination by the Securities and Exchange Commission is a fact of life for registered investment advisers, including private equity funds. In recent years, however, what was already a nerve-wracking process has become grueling, according to some experts, because the SEC has ramped up its examination efforts—in quantity and scope—shortened its deadlines and become more aggressive, all while the specter of enforcement action looms over firms. Preparation is key for managers today, who should at all times be prepared for the inevitable inspection and have an action plan at the ready for implementation the moment they’re notified about an impending exam. This article, the second in a two-part series, continues exploring specific steps managers should take leading up to the SEC’s onsite visit, including reviewing prior examination results, designating an examination point person and preparing an introductory presentation on the firm to the SEC staff. The first article in this series explained the types of examinations the SEC conducts on private equity fund managers, events that trigger exams and pre-exam preparations such as conducting a risk assessment and recordkeeping reviews. Read More »

Legal Proceedings & Laws

  • August 31, 2017

    SEC Caps Off Summer With Another Enforcement Action Pointing Up Primacy of PE Managers’ Transparency to Investors

    On August 14, 2017, the Securities and Exchange Commission entered into a settlement agreement with a registered investment adviser and its chief executive officer and manager in connection with their alleged failure to adequately disclose the firm’s methodology for calculating management fees and expenses related to the advisory services it provided to four private oil and gas funds, and for failing to disclose or obtain investor consent to a conflicted transaction. The enforcement action is just the latest in a spate of orders the SEC has issued this summer impressing upon private fund managers that unmitigated transparency is material and integral to any advisory activities that impact investor interests. (For more on the SEC’s recent transparency-related enforcement actions, see Private Equity Fund Manager Faces Sanctions for Borrowing From Funds Without Express Investor Disclosures, Though Funds Were Repaid and SEC Rules Real Estate Transaction Between PE Manager’s Funds Resulted in Breach of Fiduciary Duty, Though Price Arguably Reasonable) This article summarizes the SEC’s allegations. Read More »

  • August 4, 2017

    SEC Rules Real Estate Transaction Between PE Manager’s Funds Resulted in Breach of Fiduciary Duty, Though Price Arguably Reasonable

    Recently, a New York-based private equity fund adviser settled the Securities and Exchange Commission’s negligence-based fraud charges against it stemming from the manager’s failure to cause one of the funds it advised to reimburse a second fund it advised for certain development expenses the second fund incurred prior to its sale of a real estate investment to the first fund. The omission resulted in a breach of the firm’s fiduciary duties to the first fund, though the price the second fund paid to the first was based on the highest of the independent appraisals of the property’s value. This article summarizes the SEC’s allegations. Read More »

  • July 21, 2017

    Private Equity Fund Manager Faces Sanctions for Borrowing From Funds Without Express Investor Disclosures, Though Funds Were Repaid

    On June 29, 2017, the Securities and Exchange Commission sanctioned a registered investment adviser and its chief executive officer for improperly borrowing money from the RIA’s three private equity funds and causing the funds’ general partners to not make timely capital contributions. All told, the SEC determined that the firm misappropriated nearly $10 million during a three-year time period until a new chief financial officer and chief compliance officer ascertained the borrowings were not authorized by the funds’ governing documents, and the firm repaid their borrowings. Notwithstanding their redress, the SEC sanctioned them. This article summarizes the SEC’s allegations. Read More »

Conferences & Seminars

  • August 4, 2017

    Business Continuity Plans: Keys Aspects and Regulatory Expectations for Private Equity Managers

    Developing a business continuity plan is already required of registered investment advisers, but the Securities and Exchange Commission is elevating its scrutiny of firms’ resilience and recovery strategies following the regulator’s June 2016 proposal of a new rule explicitly requiring that registered investment advisers adopt and implement written business continuity plans amid heightened risks of terrorist and cybersecurity attacks and severe weather globally, and more quotidian internal technological glitches. Regulators, and also investors, want managers to demonstrate that they can effectively and reliably manage investors’ assets regardless of the contingency—internal or external—that threatens operations. Eze Castle Integration recently hosted a webinar that highlighted top considerations and best practices for private equity fund managers developing a robust business continuity plan. This article summarizes the webinar’s key points. Read More »

  • July 21, 2017

    Enhancements to Reps and Warranties Insurance Programs Drive Increased Adoption By Private Equity Firms in M&A Transactions

    Mergers and acquisitions are fraught with risks—from buyers being outbid to the deal falling apart before closing to issues that went undiscovered during due diligence rearing their heads after close. As markets continue to evolve, solutions to help PE managers mitigate these risks evolve as well. Representations and warranties insurance is one such solution. Although customarily considered beneficial to sellers, purchasing RWI also can be advantageous for acquirers. According to the panelists of a recent webinar hosted by Alex Kasdan, senior managing director at DelMorgan & Co., as a result of a confluence of market factors, the use of RWI by PE firms has grown substantially over the past three to four years. This article highlights the key points of the webinar, including what circumstances are driving the growth in PE firms’ use of RWI, how to establish an RWI policy, the due diligence process and which contingencies policies typically cover. Read More »

  • July 21, 2017

    Setting up Shop in Dubai: Fund Structures, Distribution and Regulations

    Private equity is a truly global business, with PE managers looking pole to pole for investment opportunities and investors. One geographical region that offers scores of at least the latter, and potentially the former, depending on a firm’s investment strategy, is the Middle East. A host of factors, such as low asset management penetration, a large number of wealthy prospects and a regulatory regime that encourages both investors and investment managers to confidently participate in the market, converge in the region to create a unique investment proposition, and as the economic and financial center of the Middle East, Dubai is the ideal locale to access these opportunities. The Dubai International Financial Centre—a special economic zone created in 2004—working in conjunction with the Dubai Financial Services Authority, has sought to modernize its regulatory regime to create a more conducive ecosystem for Middle Eastern capital to remain in the Middle East via funds located in the DIFC. As those efforts have begun to bear fruit, resulting in a near doubling of the number of registered funds in the economic zone over the past 12 months, K&L Gates recently hosted a seminar entitled, “Funds & Structures in the Dubai International Financial Centre,” to discuss the regulatory environment and demographics that make the center an appealing option for managers looking to grow their AUM and what they can expect from setting up a fund in the DIFC. This article summarizes the highlights from that seminar most relevant to PE fund managers. Read More »


  • August 31, 2017

    OCIE Risk Alert Stresses the Importance of Ongoing Cybersecurity Preparedness

    Cybersecurity preparedness remains among business leaders’ chief concerns today. Alongside IT departments, legal and compliance teams bear the brunt of the pressure on organizations to prevent and/or mitigate the legal, regulatory, financial and reputational consequences of a cyber breach. In fact, a recent survey of registered investment advisers confirmed that cybersecurity dominates mindshare and is still the “hottest” topic among compliance officers. Cybersecurity, or setting cybersecurity requirements and expectations, is still a dynamic issue for regulators as well. In 2014, the Office of Compliance Inspections released the results of its first cybersecurity examination initiative, Cybersecurity 1 Initiative, a review and rating of registrants’ governance, risk assessment and threat detection capabilities. On August 7, OCIE released a Risk Alert detailing the results of Cybersecurity 2 Initiative, its second cybersecurity exam initiative assessing industry practices, and validation and testing of controls surrounding cybersecurity preparedness. This article summarizes the alert and OCIE’s most up-to-date cybersecurity observations on areas of improvement for compliance teams at registered investment advisers. Read More »

  • August 31, 2017

    Private Equity Briefing: More Fees and Expense Disclosures Made But More Required; Alternative Managers Show Uneven Attitudes Toward Compliance; Fundraising and Deals Still Up; ILPA Issues Best Practices for Using Subscription Lines of Credit

    The private equity industry is flourishing in 2017—dry powder keeps accumulating by the hundreds of billions—but some headwinds just won’t abate and require attention from private equity managers. Investors continue to seek greater transparency into private equity investment operations and financials, particularly related to fees like management fees, carried interest and other expenses paid to general partners. A new report by Maples Financial Services discusses private equity fees and expenses charged at over 120 funds and advises managers on disclosure and best practices for enhancing transparency and mitigating operational risks. Private equity managers also face ongoing scrutiny by both investors and regulators about their compliance programs, and, according to the fourth annual “C-Suite Survey” by Cipperman Compliance Services, 43% of alternative managers, such as hedge or private equity funds, do not believe their compliance programs would adequately survive the scrutiny of a regulatory exam. There is, however, a heap of good news. Despite the mountains of dry powder, at the beginning of 2017, private fund managers, including private equity fund managers, said they had experienced and expected additional obstacles to raising capital on the horizon. EY’s Private Equity Capital Briefing for July found, though, that fundraising activity has been higher than expected and remains strong. EY also found an increase in acquisitions correlated with the unanticipated increase in fundraising activity—PE firms announced 672 deals valued at $147.6 billion so far this year. In completing these acquisitions, private equity firms may use subscription lines of credit, or capital call facilities—borrowing arrangements at the fund level usually created to ease administration when managers issue capital calls from investors. The Institutional Limited Partners Association released guidance regarding the use of subscription lines of credit facilities by private equity funds and outlined their risks and potential impact on limited partners. This article summarizes the relevant aspects of each of these items. Read More »

  • August 4, 2017

    Survey Finds Advisers Continue to Take Cybersecurity Seriously; Custody Concerns Loom Larger

    The Investment Adviser Association, ACA Compliance Group and OMAM recently released the results of their 12th annual survey of the top concerns of compliance officers working at registered investment advisers. While cybersecurity continued to dominate mindshare as the “hottest” compliance topic, custody—a common compliance deficiency among registered investment advisers, according to a memo released earlier this year by the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations—surpassed anti-money laundering/anti-bribery and corruption as the second-most consternated topic. The survey also found that a majority of advisers are not just unprepared for MiFID II, they are unsure what their obligations are to the new regulatory regime. (For more on custody, see “Custody Rule Compliance: Key Issues and Best Practices for Private Equity Managers:” Part One and Part Two) This article extracts the key takeaways most relevant to private equity fund managers from the survey. Read More »

People Moves