Private Equity Fund Restructurings: Due Diligence, Sponsor Fiduciary Concerns, Key Deal Points for New Investors

Description

In a fund restructuring, new investors agree to make a significant cash investment in a fund that is approaching the end of its term, providing existing investors seeking liquidity with a more attractive valuation than would be available on the traditional secondary sale market, while offering new investors the opportunity to benefit from the potential upside in the funds investment portfolio.

Sponsors must consider a number of threshold issues. Regulatory or contractual consents may be required. Certain investments might be carved out from the overall transaction, either because those investments are close to liquidity or are difficult to value. If the sponsor has or will receive carried interest as a result of the transaction, the potential of a clawback must be taken into account.

A fund restructuring may provide a means to achieve certain objectives relating to the fund, such as adjusting the fund economics (carried interest and/or management fee) or accessing additional capital. However, in pursuing its own objectives, a sponsor must ensure it is transparent with its investors about the potential conflicts of interests they may present.

The new fund agreement may differ from the initial agreements as to capital contributions, the distribution waterfall, portfolio investments, governance, reporting, the scope of representations and warranties to be provided, the survival period for existing claims, and any holdbacks or escrows. The Tax Cuts and Jobs Act introduces new provisions that will affect both incoming and exiting investors and must be taken into account.

Listen as our authoritative panel discusses these and other concerns of sponsors, existing investors and new investors in the restructuring of a private equity fund.