• May 12, 2017

    How Private Equity Managers Can Conduct a Meaningful Risk Assessment

    Risk is a fundamental attribute of every private equity manager’s business; but not all risk is equal. Private equity managers are expert at gauging and accounting for the risks inherent in their investment decisions, but the operational risks appurtenant to running the business—conflicts of interest, legal risks and marketing risks associated with reporting performance, among others—must be carefully identified, evaluated, weighted, and ultimately, mitigated. Indeed, a firm cannot properly tailor its compliance policies and procedures and annually review their adequacy—as mandated by Advisers Act Rule 206(4)-7, known as the Compliance Rule—without first performing a rigorous assessment of business and operational risks. Moreover, the consequences of failing to quantify, qualify and plan for risks can be considerable and range from missed investment allocation opportunities to regulatory enforcement or investor redemptions. (For more on conducting an annual compliance review, see “Best Practices For Conducting an Effective Annual Compliance Review:” Part One and Part Two) This article addresses managers’ top questions about conducting a thorough risk assessment—the who, what, when, how and why—and offers best practices for ranking, and then modulating, the likelihood and potential impact of the risks specific to each firm. Read More »

  • May 12, 2017

    PE Firms Increasingly Turn to Administrators as Regulatory and Investor Pressure Mount (Part One of Two)

    The strong growth in private equity has been fueled by an influx of institutional investors, including pension plans, funds-of-funds, insurance companies, family offices, endowments and foundations that view PE as a means of generating significant long-term returns compared with other asset classes. The good news: institutional investors generally view PE performance favorably, and plan for continued investment in the asset class. The bad news is that such strong and sustained growth does not come without challenges. Much larger investors are more cautious and demanding than ever, while fund managers and general partners—already struggling to manage often strained operations—are again compelled to rethink what it takes to run a resilient business. Against this backdrop, PE fund managers have turned to third-party administrators to meet more rigorous regulatory requirements while keeping up with a growing and increasingly sophisticated client base. In 2015, BNY Mellon estimated that in the hedge fund sector some 90% of fund administration was outsourced compared with only 20-30% of PE fund administration managed by a third party. But that statistic is changing, as PE firms are increasingly embracing independent fund administration services. This article, the first in a two-part series, explains why private equity managers are transitioning certain functions to TPAs, the scope of TPAs’ services and the benefits of and challenges posed by outsourcing fund administration. The second article in the series will cover the selection process for engaging a third-party fund administrator, including due diligence considerations, contract terms and points of negotiation, as well as legal and compliance issues that can arise when hiring a TPA. Read More »

  • May 12, 2017

    Industry Spotlight: A Q&A With Willkie Attorneys Cody Carper and Michael De Voe Piazza On The Current State of the Oil and Gas Industry

    Private equity as an industry is frequently discussed in broad strokes, as if the industry is a monolith, but firms actually operate within a broad spectrum of industries, from healthcare to technology, oil and gas to retail, each industry replete with its own economics, trends and regulatory challenges. Legal and compliance personnel at private equity firms, therefore, must juggle two sets of regulatory and legal regimes—those dictated by the Securities and Exchange Commission for the advisory side of their business, and others dictated by the regulators governing the specific industries in which the private equity firm operates. In an effort to address the latter, the Private Equity LCD is introducing a multi-part series covering various industries in which PE firms invest, and discussing with experts their insights on the current marketplace for deal-flow and deal terms, the regulatory environment and fundraising, among other topics. The first article in this series addresses those topics as they pertain to the oil and gas industry and interviews Willkie Farr & Gallagher partners Cody Carper and Michael De Voe Piazza. Read More »

Legal Proceedings & Laws

  • May 12, 2017

    SEC Rules Firm Can’t Cherry-Pick Application of Attorney-Client Privilege Protection

    Private equity managers rely on outside counsel to advise on myriad legal matters, from fund formation to issues that arise in day-to-day operations. A recent Securities and Exchange Commission enforcement proceeding counsels, however, that the attorney-client privilege is not inviolate, especially if managers attempt to use it as a sword and a shield. This article reviews the SEC’s allegations against the firm, its president and founder, and its chief executive officer, and the administrative judge’s ruling. Read More »

  • April 27, 2017

    Enforcement Action Highlights Fair Value Concerns and Risks of Inflated Fees Resulting from Improperly Priced Assets

    The Securities and Exchange Commission remains focused on auditing the accuracy of fund managers’ valuation practices, both compared to Generally Accepted Accounting Principles and managers’ own policies and procedures, according to a recent enforcement action. The firm’s use of estimated values from a pricing service to measure the fair value of municipal bond assets held by five of the eight private funds the firm advises, instead of using more observable Level 1 or Level 2 inputs, ultimately resulted in excessive management fee charges to the relevant funds and incorrect redemption calculations. This article summarizes the SEC’s allegations, and the lessons fund managers can glean from them. Read More »

  • April 13, 2017

    Failure to Tailor Compliance Policies to a Firm’s Business, Remediate Deficiencies Results in SEC Enforcement Action

    The Securities and Exchange Commission recently agreed to settle charges that a registered broker-dealer expanding its business to include a hedge fund failed to adequately enforce written policies and procedures (i) to prevent the misuse of material nonpublic information, and (ii) tailored to the unique flow of information between the firm’s tripartite broker-dealer, investment banking and hedge fund operations, and the CEO who controlled each, even after OCIE’s first warning. While the firm's specific scenario is unique, the enforcement action is instructive because it shows the potential ramifications for firms that fail to fully remediate deficiencies identified after an examination. Indeed, just last month, at the Investment Adviser Association’s 2017 Investment Adviser Compliance Conference, OCIE Chief Counsel Daniel S. Kahl warned, “If the exam team comes in and finds a deficiency, and you say you’re going to correct it, and you don’t, almost certainly there’s going to be enforcement. Resources are an issue [at the Commission], so we want you to do what you say you’re going to do.” This article summarizes the SEC’s action against the firm and its lessons for private equity fund managers. Read More »

Conferences & Seminars

  • April 27, 2017

    Proskauer Webinar Highlights Top Regulatory and Litigation Risks for Private Funds in 2017

    Although President Trump’s administration pledged that it would swiftly “roll back” federal regulations, including those related to private equity funds, executing the reality and details of that promise has been decidedly more complicated. With the recent announcement that any overhaul of Dodd-Frank will be postponed in favor of other legislative priorities, private equity fund managers should continue to exercise diligence in fulfilling their existing regulatory obligations, and temper expectations, at least for now, that a slackened compliance environment is on the immediate horizon. A recent Proskauer Rose webinar, “The Top Ten Regulatory and Litigation Risks for Private Funds in 2017,” addressed the most pressing regulatory, compliance and litigation risks facing private equity fund managers given the uncertain regulatory future. Partners Tim Mungovan and Josh Newville, associates Michael Hackett and William Dalsen, and special regulatory counsel Anthony Drenzek discussed conflicts of interest, valuations, pay-to-play, fund restructuring, performance marketing and whistleblowers, among other regulatory and litigation risks. This article highlights the key points the panelists made on the areas of risk identified most relevant to private equity fund managers. Read More »

  • April 13, 2017

    Understanding Various Fee Provisions in Private Equity Limited Partnership Agreements

    The Securities and Exchange Commission has in recent years focused its private equity fund manager examinations on the fees and expenses charged to portfolio companies on top of the customary management fees charged to investors. Underscoring this focus, the Office of Compliance Inspections and Examinations implemented a Presence Exam Initiative that found that fee provisions in portfolio companies’ limited partnership agreements were commonly drafted so broadly or vaguely as to include what were tantamount to hidden or opaque fees charged to investors that generated significant profits for fund general partners and caused a misalignment of interests between the manager and fund investors. During a recent webinar entitled Making Sense of Private Equity Partnership Agreements, hosted by the IMDDA, Michael Flaherman, a visiting scholar at UC Berkeley, outlined the fees private equity managers typically charge investors and portfolio companies, the impact they could have on the underlying investors and companies and how much of the revenues generated will offset the fees they pay. This article highlights the key points of the webinar. Read More »

  • March 30, 2017

    Planning, Preparation Key to Satisfying Investors’ Cybersecurity Due Diligence Concerns

    The SEC and FINRA recently reiterated their focus on cybersecurity via their respective annual examination priorities releases. But it’s not just regulators with a keen interest in cyber-related controls; cybersecurity remains a key aspect of due diligence—both on private equity fund managers by investors, and by those managers on third-party service providers—and with good cause. A breach can prove costly, causing major business disruptions, reputational damage, lost revenue and regulatory sanctions. A recent panel, hosted by the Investment Management Due Diligence Association, featured insight from Michael Stiglianese, managing director at BDO, Herrick Feinstein partners Rick Morris and Alan Lyons, and associate Erica Markowitz on the current cybersecurity landscape for investment managers. The panelists discussed, among other topics, key aspects of investors’ cybersecurity due diligence on managers, best practices investors should expect managers to implement to mitigate the risk of cyber attack and key terms of a cyber insurance policy. This article highlights the webinar’s key takeaways. Read More »


  • May 12, 2017

    More Family Offices Sidestepping Private Equity Allocations to Achieve Greater Control and Lower Fees Through Direct Investments

    Direct investments are not new. Family offices have long made direct investments in operating businesses, real estate properties and other asset classes. What is new, however, is that less-than-stellar returns, and fees that cut into those already lower returns, have spurred even more family offices to reevaluate their allocations to third-party investment firms. Although family offices still allocate to private equity, direct investment undeniably is encroaching upon firms’ cut of the pie, given the lure of exercising complete control over an investment, eliminating fees and increasing profits. This article discusses the main reasons behind the current trend of direct investments by family offices, how family offices source these deals, the benefits and drawbacks, and steps private equity managers can take to continue to attract family office allocations. Read More »

  • May 12, 2017

    Bain & Company Report Analyzes The Current Environment Around Deals, Exits, Fundraising and Returns; Identifies What Challenges Lie Ahead

    While other alternatives, notably hedge funds, of late have had performance struggles impacting their ability to raise assets, private equity funds have not suffered the same fate. In fact, by nearly any metric, 2016 was a solid year for the asset class. Fundraising remains robust, with investors clamoring to increase their allocations, and exits are normalizing after the wild swings of the post-financial crisis years. Returns continue to meet, or even exceed, investor expectations. Interestingly, though, dry powder has reached record levels, and asset prices are high, presenting GPs with the formidable challenge of maintaining performance expectations set in the past few years. A recent report by Bain & Company, entitled “Global Private Equity Report 2017,” discussed private equity funds’ performance in 2016 across various metrics, including exits, fundraising and returns as well as what’s in store for the industry in 2017 and beyond. This article summarizes the relevant aspects of the report. Read More »

  • April 27, 2017

    EY Survey Highlights Business, Regulatory and Compliance Issues Facing Private Equity CFOs

    The business of private equity has been evolving over the last few years. As well as the industry as a whole has done, time has shown that business resources are not unlimited. Resources that traditionally had been allocated to investment research and opportunities have been reallocated to addressing regulatory and compliance concerns and investor relations. For smaller registered private equity firms that can’t afford to add a dedicated chief compliance officer to their teams, the reallocation of resources may strain multiple business units and stretch the business to its limits, impacting a firm’s success and potentially its longevity. At the same time, investors increasingly are evaluating private equity managers based on the organization and sustainability of their business. For the chief financial officer in particular, efficiently and effectively allocating time and resources has become more difficult as time that would otherwise be spent on business and financial operations is increasingly consumed by regulatory filings and fulfilling investor requests. In its “2017 Global Private Equity Survey,” EY surveyed private equity firm CFOs to determine exactly how they’re facing business, regulatory and investor challenges in environments with fixed resources. The survey found that CFOs have nimbly responded by adding and leveraging technology to create better investment opportunities, automating time-consuming manual processes, developing and retaining key talent, and outsourcing functions too expensive to perform in-house. This article highlights the key findings of the survey. Read More »

People Moves