Benson R. Cohen, Host
Sidley held its fourth Private Funds program at the AXA Auditorium at 787 Seventh Avenue in New York on June 13. The annual event featured a series of panel discussions on recent developments and hot topics affecting the private funds industry, ranging from the rise of private credit funds to future expectations regarding the regulatory landscape. The following summaries capture some of the larger takeaways from the day’s events.
State of the Private Funds Industry
Daniel F. Spies, Moderator
William D. Kerr
Stephen J.D. Ross
Since 2016, there has been an industry-wide push for structural creativity as sponsors continue to see pressure from investors to reduce fees and an increased focus on expense allocation. Hedge funds are also trending toward less liquid redemption structures. Emerging managers continue to struggle raising early stage capital, though seeding has increased and founders share offerings have helped. The fund-of-funds industry’s challenges continue due to fee pressures, lagging performance, retail product competition and industry-wide consolidations. Fund-of-funds sponsors have responded by attempting to differentiate product and service offerings for value creation.
Leonard Ng, Moderator
Alyssa A. Grikscheit
Europe. Europe’s Markets in Financial Instruments Directive (MiFID II) legislation is set to take effect on January 3, 2018, and both European managers and Western European managers with European counterparts will feel the full impact of the law. European managers will have to comply with new monitoring and reporting obligations, investment research unbundling, documentation, position limits and market structure changes. Britain’s eventual departure from the EU also will have large effects on EU managers of EU funds, but the impact on UK sub-advisers of U.S. managers and UK managers of non-EU funds is expected to be manageable. Managers should also stay tuned for potential issues regarding “equivalence” of non-EU countries and the proposed revision of the European Market Infrastructure Regulation (EMIR).
Latin America. Despite a decline in fundraising and political events affecting certain markets, the Latin America fund market is expanding. According to the Emerging Market Private Equity Association, Latin America ex Brazil is this year’s third most attractive international region for private equity fund investment, notwithstanding currency and other risks. Recent reforms in Mexico, Brazil and Peru are generally favorable to asset managers and investors and additional reforms are expected in Chile later this year.
Asia. Political movement also has correlated with market movement in Asia, where Chinese investment outflow has increased significantly in the past few years. In order to balance these capital outflows and attract inbound investment, a range of new China market access programs have significantly enhanced the ease and flexibility with which foreign fund managers can access the domestic markets in China, especially in respect of trading in listed securities and bonds. China’s new Foreign Asset Manager Program also marks an important historic milestone in allowing wholly owned compliant foreign entities or foreign joint ventures to register and operate as private fund managers in the nation’s markets in what is expected to be a game-changing development for foreign fund managers in the longer term.
The Rise of Private Credit Funds
David P. Kreisler
By most industry measures, we are in the midst of a fundraising boom for credit funds, including mezzanine, direct lending, special situation and distressed debt funds. Private equity-styled credit funds (as opposed to hedge fund-styled credit funds) have emerged as an important component of the alternative asset “shadow banking” system in the wake of the Dodd-Frank financial reforms. Although similar to traditional private equity funds in many respects, the terms of PE-style credit funds differ in significant ways due to the differences in their investment strategies as well as the assets in which they invest. In particular, the tax structures used for many PE-style credit funds are engineered at the outset to facilitate the participation of U.S. tax exempt and non-U.S. investors. The popularity of credit fund products comes at the price of more intense competition for available deals, which has prompted best of breed credit fund managers to emphasize their deep industry experience and their ability to creatively structure deals in the grey zone between debt and equity in order to access quality deal flow.
Fireside Chat with Industry Leaders
Michael J. Schmidtberger, Moderator
Marcy Engel, Chief Operating Officer and General Counsel, Eton Park Capital Management, L.P.
Shamina Sneed, Executive Director, Morgan Stanley Wealth Management
Rajesh Swaminathan, Partner and General Counsel, Jasper Ridge Partners
Michael Schmidtberger, managing partner of Sidley’s New York office, sat down with Marcy Engel, Shamina Sneed and Rajesh Swaminathan to discuss their perspectives on the asset management industry from the viewpoint of in-house lawyers responsible for a wide array of compliance, regulatory and/or business functions. Topics discussed included how a general counsel can add value beyond his or her legal and compliance responsibilities; the challenges of wearing more than one “hat” (e.g., both general counsel and chief operating officer); the key importance of investment and non-investment personnel as a first line of compliance defense; and how to identify and address potential problems before they become real. Among other themes, the panelists discussed the possibilities being offered by advanced technology, such as cognitive computing and machine learning, to improve accuracy and efficiency in legal and compliance functions, but also stressed the human input and analysis that are needed to secure full value from technology.
Litigation and Enforcement Update
Neal E. Sullivan, Moderator
Stephen L. Cohen
Nader H. Salehi
In recent years, the SEC’s examination staff and the Enforcement Division’s Asset Management Unit have made their presence felt in the private equity and hedge fund space. Although it is unclear whether the SEC’s efforts will be affected by the new Trump administration, initial indications suggest that the staff’s enforcement focus on private equity in particular is likely to continue. In addition to undisclosed fee arrangements, improper expense shifting and other inadequately disclosed conflicts, the SEC increasingly has been concerned with valuation methodology. Valuation processes should be fair, transparent, documented and recorded in detail. Fee disclosures must be clear, precise, detailed and emphasized.
Governance, Succession and Talent Management
James C. Munsell, Moderator
Elizabeth Shea Fries
Holly J. Gregory
Eric G. Hoffman
Various ownership, governance and management features commonly are included in the organizational documents of closely held private fund investment advisers to address succession planning and talent management objectives. Generally, private fund investment advisers use a variety of these features in combination to achieve a set of desired outcomes, which often include creating a culture of collaboration and shared accountability, retaining high performers, and achieving tax efficiency while positioning the firm to withstand the exit of the founders. The desired culture and possible future evolution of the business are often key drivers of governance structures. Succession planning is the process of establishing a sustainable ownership and governance structure for the future, while securing and monetizing going concern value for the benefit of the founder and his or her estate. A variety of techniques are commonly used by closely held private fund investment advisers to recruit and retain key talent, and to align the interests of key talent and the interests of owners. The structure usually is driven by a desire to achieve tax efficiency, and a desire to create a particular corporate culture.
Regulation and Compliance in the New Normal
Laurin Blumenthal Kleiman, Moderator
Geoffrey F. Aronow
Michael E. Borden
The legislative and regulatory environment under the Trump administration continues to evolve. Panelists discussed the new administration’s ambitious regulatory agenda, including the Financial CHOICE Act 2.0, possible revisions to the Dodd-Frank Act and continued focus on the Department of Labor’s Fiduciary Rule. Panelists also discussed the potential timetable for regulatory reform, given the current climate of political uncertainty, leadership changes at many of the regulatory agencies, key agency positions that have not yet been filled and the typically slow pace of regulatory reform. Other topics included the SEC’s 2017 exam priorities for private fund advisers, CCO liability, the status of anti-money laundering regulations and the SEC staff’s current focus on cybersecurity. The panel also reviewed CFTC regulatory, enforcement and compliance hot topics.
If you would like to view a recording of the program, please email firstname.lastname@example.org. CLE credit is available. Additional information can also be found by viewing the videos below.
Video: Complexities as Your Business Grows, David Form, Partner, New York
Video: Legislative Developments in Singapore, Han Ming Ho, Partner, Singapore
Video: Derivatives in a Global Market, Ken Kopelman, Partner, New York
Video: Illiquid Debt Funds in Europe, James Oussedik, Partner, London
Video: Trump Administration – Impact on Private Equity Funds, Beth Quintana, Partner, Chicago
Video: Counterparty Risk Management, Elizabeth Schubert, Partner, Chicago
Video: Winding Down an Investment Fund, Mark Whatley, Partner, San Francisco