I. Introduction

As COVID-19 continues to spread around the world, it has become apparent that it is having a significant impact on the global financial market, at least for the short- to medium-term. While the only constant is change, there are steps private fund managers can take that will help them weather the storm and best position themselves for the future.

II. Fundraising

A. Timing. As of this writing, international travel restrictions are in place in numerous countries across the globe, already delaying in-person meetings between fund managers and investors, as well as slowing down the investment process for investors, generally. We currently expect established fund sponsors nearing fund closings to maintain or even accelerate scheduled closings with investors that have concluded their investment approval process. Sponsors that are less well-established and/or not as far along in the fundraising cycle may find challenges getting the attention of the limited partner community. To prepare for the uncertainties ahead, sponsors anticipating a new fund launch in the near term, or that are already in the process of fundraising, should consider whether extending the fundraising period beyond the conventional 12-month period is advisable.

B. Investor Allocations to the Asset Class. There are as many possibilities as there are uncertainties. As we saw with the burst of the dot-com bubble and the financial crisis of 2008, we expect that investors will review, and ultimately adjust, their allocations to alternative investments to reflect changing market dynamics. Because internal benchmarks on allocations to alternatives are often tied to the overall value of an investor’s portfolio, an overall decline in the value of an investor’s public equity holdings could result in alternatives being over-weighted relative to the balance of such investor’s portfolio. Interestingly, however, history has also shown that periods of crisis can present opportunities for success. Funds raised in the midst of challenging fundraising environments have often subsequently demonstrated strong overall returns. Investors with the flexibility to take these – or similar – patterns into consideration might choose to increase previously established allocations to alternative strategies.

C. Financing Flexibility. In anticipation of potentially delayed fundraises, sponsors should review the documents for their current and new funds to determine whether GP affiliates or third parties are permitted to warehouse investments for the fund while fundraising is ongoing. If such warehousing activities are not permitted, sponsors should consider seeking amendments, or LPAC consents, if applicable, to permit those activities.

D. Risk Disclosure. In light of the speed at which global conditions are evolving, sponsors should consider including additional disclosures in their marketing materials, offering documents, and Form ADV Part 2A regarding the potential (and uncertain) impacts of the global pandemic on funds and sponsor firms, including both the more generalized impact on financial markets worldwide, macroeconomic trends, and supply chains, as well as other matters such as the funds’ investments, reporting, and operations.

E. Performance and Valuation Disclosures. Recent market volatility may lead sponsors to conclude that a review of current valuation disclosures is warranted. Sponsors should be particularly vigilant in following their valuation policies and, when appropriate, updating valuations in pre-existing marketing materials. Finally, sponsors with funds in the midst of fundraising that have acquired assets during the fundraising period that have subsequently declined in value should expect subsequent closing investors to review existing investments carefully and potentially take issue with the standard “cost plus interest” true-up mechanism with respect to “catch-up” amounts owed to existing investors.

III. Existing Funds

A. Use of Capital. Sponsors are advised to consider portfolio companies’ near and mid-term capital requirements in light of changing market conditions. Although funds past their investment period would typically still have the ability to make follow-on investments in existing portfolio companies, sponsors should review their fund documents for any caps or other limitations on the deployment of capital in follow-ons or the ability to recycle capital. Funds still in their investment period should consider their flexibility to recycle distributions, or consider seeking amendments, or LPAC consents, as applicable, for increases to their recycling caps or extensions of their investment periods. For funds that are capital-constrained, in addition to GP-led secondary transactions discussed below, sponsors may consider alternatives such as raising an annex fund to invest in follow-on rounds of an existing fund’s portfolio companies, re-opening a fund to accept additional or increased subscriptions, offering a new preferred class of interests to investors, utilizing single-asset co-investment SPVs, and, to the extent permitted in their fund documents, using debt financing alternatives such as fund-level NAV financing secured by a portion of the fund’s investment portfolio.

B. Investment Strategy. The current market presents a different landscape than when even very recent funds held closings just a few weeks ago, and may create attractive investment opportunities in areas not previously contemplated. For example, funds that have typically invested in private markets may now find public market valuations attractive. Sponsors are encouraged to review the investment objectives and limitations in existing fund documents to determine whether existing documents permit the fund to explore these new market opportunities, and to consider whether an amendment or discussion with the LPAC might be appropriate where they do not.

C. Financing. Sponsors may be inclined to lean more heavily on capital call lines or other types of credit facilities currently in place. Thus, sponsors are advised to examine the borrowing limitations in fund documents and reserve requirements, and to review the funding conditions under the relevant loan documents, which typically require both the absence of any default and the bring-down of representations and warranties. Sponsors should be prepared to see additional inquiries from lenders relating to the fund’s financial condition.

Some sponsors may choose to pay down or pay off outstanding capital call line borrowings earlier than usual or required in order to reduce the risk of a default if limited partners default on a later capital call if the current situation continues to deteriorate. Other sponsors, particularly those with uncommitted capital call credit facilities, may choose to proactively draw down capital in advance of a particular need, to the extent permitted by the applicable loan documents, to take advantage of the lowered cost of such capital. All sponsors should assess their funds’ loan documents to re-familiarize themselves with the definition of “included investors” and the consequences under the loan documents and with respect to the borrowing base if one or more limited partners in a fund were deemed to no longer satisfy such definition.

With respect to existing asset-based credit facilities, sponsors should also plan for any potential decrease in the net asset value of the underlying portfolio, which may impact the borrowing base as well as compliance with any loan-to-value ratio requirements or other financial covenants under such facilities. Sponsors should also anticipate requests for funds to guarantee their portfolio companies’ indebtedness and should review current documents to determine any limits to such guarantees.

D. Valuation. Sponsors should ensure that valuations continue to be conducted in accordance with their valuation policies, notwithstanding the uncertainty in the markets. It may be prudent to seek input from independent valuation advisors on weighting of methodologies, for example, in cases in which precedent transaction analysis may not reflect the most current market information.

E. GP Clawback. In the event of a significant decline in valuations, sponsors are encouraged to review their fund documents to evaluate any clawback potential and the need for any additional reserves, as well as reserve policies at the GP entity level.

F. Information Sharing with LPs. Sponsors may consider taking a proactive approach regarding information sharing with the limited partners, such as gathering feedback from portfolio companies on the anticipated impact of COVID-19 on their operations and performance, and preparing standard responses to limited partner inquiries. Further, sponsors should evaluate and confirm their ability to meet the reporting timeline provided under fund documents, including ensuring that, in turn, portfolio companies are able to provide the information necessary for the fund’s reporting by the requisite deadlines.

G. LP Meetings. Funds that had annual in-person limited partner meetings scheduled in the near term should be prepared to provide virtual alternatives, to postpone such meetings if fund documents require in-person meetings, or to seek appropriate consent to deviate from the manner required by the fund documents.

H. LP Defaults. Sponsors are encouraged to take a proactive approach in anticipating limited partner defaults as a result of the economic shock triggered by the pandemic, especially with respect to funds that rely heavily on commitments from high net worth individuals. Sponsors should analyze fund documents with respect to potential remedies for a default and are advised to give careful consideration to their fiduciary duties when determining if and when to apply default remedies. In addition, sponsors should also evaluate any consequences of defaults by limited partners under their credit facilities to ensure compliance with reporting and other obligations to lenders. Finally, sponsors might also canvass secondary market participants to determine who might be interested in purchasing fund interests from those limited partners wishing to sell.

I. Secondaries. Sponsors and secondary buyers and sellers are likely to witness a certain level of disruption with respect to existing secondary processes, resulting from fluctuating valuations and liquidity challenges. “Material adverse change” clauses, which permit buyers to walk away from deals under certain circumstances, have largely been absent in the private fund secondary market since the financial crisis of 2008, but may be re-introduced by buyers if significant market volatility continues. In the medium- to long-term, it is possible that the current market volatility will result in a rise in the level of secondary market activity as some investors seek liquidity solutions, although secondary buyers may initially be reluctant to engage until the markets stabilize. Similarly, market dislocations may also present opportunities in the medium- to long-term for GP-led secondaries, particularly with respect to individual portfolio companies in need of additional capital to maximize value in the long-term. Moreover, the use of leverage in secondary transactions may continue to rise in a low interest rate environment.

IV. Management Company Operations

A. Business continuity plans. Sponsors should review their business continuity plans (“BCPs”), if they have not already done so. Firms may consider establishing a task force to continuously monitor the development of COVID-19 and adjust firm policies accordingly, including ensuring the availability of key persons and planning for long-term flexible working time arrangements, remote-working capabilities, restrictions on business travel and alternative communication channels both internally and externally. Firms should also liaise with key service providers such as brokers, IT system providers, administrators and custodians to confirm they have robust business continuity procedures in place to avoid disruption caused by COVID-19. Registered investment advisers should document any revisions to their BCPs, any deviations, and reasons for deviations as business continuity plans may be a focus for the U.S. Securities and Exchange Commission (the “SEC”) in future examinations. We note that as of this writing, the SEC has reached out to a number of investment management firms to inquire about their BCPs, including plans to address COVID-19 issues.

Should you wish to obtain a form of business continuity checklist for a fund manager or its portfolio companies or would like to know more about Proskauer’s AI contract review tools that, compared to a manual review, can swiftly identify and evaluate key contractual terms such as force majeure clauses, material adverse change clauses and change in law provisions, please reach out to Proskauer’s COVID-19 Taskforce.

B. Labor and Employment. In devising and implementing policies in response to COVID-19, sponsors should bear in mind requirements under labor and employment laws, such as the Occupational Safety and Health Act, the Americans with Disabilities Act and the Family and Medical Leave Act, as well as state and local laws and regulations, which are discussed in more detail here.

C. Insurance. Sponsors also should review insurance coverage for business disruption and other claims, paying close attention to any exclusions under the insurance policies and any notification requirements for claims. For what to look for in insurance policies, see Proskauer’s recent client alert here.

D. Privacy and IT Infrastructure. As covered in our recent blog post here, sponsors are encouraged to identify potential data privacy risks arising out of a possible restructuring of the workforce and remote-working arrangements. Stress testing of IT systems and close monitoring of cybersecurity threats, including a rise in COVID-19 phishing scams, are also advised in connection with any remote-working arrangements.

E. Working Capital. Management companies, like their portfolio companies, should also review their own financing arrangements on an ongoing basis to ensure that they have sufficient working capital at the management company level.

F. U.S. Regulatory Developments. As covered in our recent client alert, the SEC announced the issuance of a pair of exemptive orders providing conditional relief for investment advisers. The relief, among other things, provides a 45-day extension to advisers that are unable to meet the deadlines for (1) amendments to Form ADV, (2) Form PF and (3) brochure delivery due to circumstances related to current or potential effects of COVID-19 provided that they notify the SEC and disclose on their websites certain information.

G. U.K. Regulatory Developments. The U.K. Financial Conduct Authority (“FCA”) recently published a statement confirming that the regulator remains focused on business continuity plans for financial institutions. The statement further confirms that it expects regulated institutions to take all reasonable steps to continue meeting their regulatory obligations and will expect firms to have contingency plans to deal with major events (and that those plans have been tested). While the FCA accepts that certain regulatory requirements may not always be met (for example, difficulties in submitting their regulatory data or telephone recording), firms are expected to maintain appropriate records during this period and, for regulatory data, should submit the data as soon as possible. Firms should be prepared to discuss with the FCA if there are concerns that certain regulatory obligations will not be met.

Proskauer will continue to monitor events and provide updates as needed. If you have any questions, please contact your attorney team at Proskauer.

Photo of Michael R. Hackett Michael R. Hackett

Michael R. Hackett is a partner in the Litigation Department and a member of the Asset Management Litigation practice. Mike is an experienced litigator and trial lawyer focused on sophisticated business disputes.

A significant portion of Mike’s practice concerns disputes and regulation involving…

Michael R. Hackett is a partner in the Litigation Department and a member of the Asset Management Litigation practice. Mike is an experienced litigator and trial lawyer focused on sophisticated business disputes.

A significant portion of Mike’s practice concerns disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to disputes between limited partners and general partners, to representation of investment advisers in connection with regulatory examinations, investigations and enforcement matters. Mike also routinely represents fund sponsors and their portfolio companies, including in significant post-closing disputes.

In addition to his private funds practice, Mike represents public and private companies in a variety of complex commercial and securities litigation matters, including in the areas of corporate governance, fiduciary obligations, capital markets, financial services, and bankruptcy and insolvency.

Mike has been named a “Rising Star” by Massachusetts Super Lawyers, and was identified as an “associate to watch” by Chambers USA in 2017 and 2018.

During law school, Mike served as an intern judicial clerk to the Honorable William G. Young of the United States District Court for the District of Massachusetts.

Photo of Howard Beber Howard Beber

Howard J. Beber is a partner in the Corporate Department and co-head of the Private Funds Group, which is recognized by Chambers GlobalChambers USA and US Legal 500. His practice focuses on representing private funds sponsors in all aspects of…

Howard J. Beber is a partner in the Corporate Department and co-head of the Private Funds Group, which is recognized by Chambers GlobalChambers USA and US Legal 500. His practice focuses on representing private funds sponsors in all aspects of their business, including fund formation and ongoing operations and internal structuring and compliance. His practice includes buyout, growth equity, venture capital, private credit, secondary and fund-of-funds, ranging from some of the largest and well known sponsors in the industry to newly-formed managers.

He advises clients on a broad range of secondary transactions, including the acquisition and sale of partnership interests, tender offers, preferred equity financings, continuation funds,  fund restructurings and other GP-led transactions, and has worked with several management teams on large spin-out transactions. Howard routinely represents some of the most active institutional and fund-of-fund investors when investing in venture capital, growth equity, buyout, private credit and other private investment funds, as well as co-investment transactions.

Howard has been an active member of the Private Investment Funds industry for many years. He is frequently invited to speak at major industry events and has authored numerous articles regarding managing and investing in private investment funds. Howard is a contributing author to “The Business of Venture Capital,” a leading book on the venture capital industry.

Photo of Camille Higonnet Camille Higonnet

Camille Higonnet is a partner in the Corporate Department and a member of the Private Funds Group.

Camille concentrates in the areas of corporate and securities law, with an emphasis on representing private investment fund sponsors in structuring funds and portfolio investment activities…

Camille Higonnet is a partner in the Corporate Department and a member of the Private Funds Group.

Camille concentrates in the areas of corporate and securities law, with an emphasis on representing private investment fund sponsors in structuring funds and portfolio investment activities, as well as regulatory and compliance matters. Camille’s practice includes advising on marketing and fundraising as well as key trends in fund terms, conducting negotiations with investors, and advising on ongoing operational issues.

In addition, Camille represents both U.S. and non-U.S. institutional investors in their investments in private investment funds, as well as in connection with secondary market activities, including traditional portfolio sales, structured secondaries, synthetic secondaries and fund restructurings.

As businesses and asset managers globally continue to be impacted by the Coronavirus (COVID-19) pandemic, Camille is a member of the firm’s Coronavirus Response Team, helping clients approach and respond to a broad scope of issues, including but not limited to in connection with The Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Recognized for her leadership, innovate practice approach and expertise in representing private investment fund sponsors, Camille was named to PEl’s inaugural 40 Under 40: Future Leaders of Private Equity list. Camille is also a member of Proskauer’s Diversity Task Force and she is actively involved in Proskauer’s Diverse Lawyer Mentoring Circle Program (MCP) as a partner mentor to junior-level associates.

Camille spent two years on secondment at the firm’s London office.

Photo of Kirsten E. Lapham Kirsten E. Lapham

Kirsten Lapham is a partner specialising in financial services regulation. She advises a broad range of both institutional and individual clients on a variety of financial services regulatory and compliance issues. Her practice has a specific emphasis on the regulatory issues arising under…

Kirsten Lapham is a partner specialising in financial services regulation. She advises a broad range of both institutional and individual clients on a variety of financial services regulatory and compliance issues. Her practice has a specific emphasis on the regulatory issues arising under the AIFMD, and MiFID II for a range of EU and indirectly impacted firms outside of the EU.

Experience in this area includes advising multiple clients on the EU marketing and registration regimes and overlaying local regulatory considerations, such as the U.K. retail distribution review and Financial Promotion regime. Kirsten has also worked on MIFID II implementation projects and provided ongoing support for well-known asset managers and advised multiple clients on re-papering arrangements under the Directive. Kirsten also routinely advises on the regulatory issues that impact M&A transactions. She has represented some of the largest and most well-known alternative investment managers, including: TPG; PIMCO; Citi Private Bank; Dragoneer Investment Group; and a number of US and UK boutiques among many others.

Photo of Stephen T. Mears Stephen T. Mears

Stephen T. Mears is a partner in the Corporate Department and co-head of the Private Funds Group. He concentrates on private investment funds, including venture capital, growth equity and buyout funds. He represents fund sponsors in all aspects of fund formation, operation and…

Stephen T. Mears is a partner in the Corporate Department and co-head of the Private Funds Group. He concentrates on private investment funds, including venture capital, growth equity and buyout funds. He represents fund sponsors in all aspects of fund formation, operation and management, including fund structuring, portfolio investments, sales and distributions, internal governance and management, regulatory compliance and ongoing maintenance and administration. Stephen also represents institutional investors in connection with their participation in private investment funds.

Stephen has recently represented sponsors in raising funds ranging in size from under $100 million to over $2.5 billion.

Photo of Robin Painter Robin Painter

Robin A. Painter is a partner and the global co-head of the Private Funds Group. She has previously served as co-head of the firm’s corporate department. She has a global network of clients and contacts developed over her more than 25 years of…

Robin A. Painter is a partner and the global co-head of the Private Funds Group. She has previously served as co-head of the firm’s corporate department. She has a global network of clients and contacts developed over her more than 25 years of experience in the private equity and venture capital industry. She advises fund managers, institutional investors and investment advisors on a broad range of issues, including structuring private investment funds, portfolio investments, spin-outs, secondary transactions, internal governance and divestments and distributions.

The majority of Robin’s practice involves representing sponsors in structuring private investment funds and funds of funds and representing U.S. and global institutional investors and investment advisors in the private equity field. She routinely supervises teams of lawyers that represent sponsors in structuring their funds and institutional investors, or their advisors, in their investments across the alternative asset class.

Robin also represents large institutional investors, or their advisors, in connection with the acquisition and sale of secondary partnership interests, and she has been involved in several of the largest bulk purchases of partnership interests in the industry.

Photo of Chip Parsons Chip Parsons

Chip Parsons is the co-chair of the Corporate Department and co-head of the Private Funds Group. Chip regularly advises financial institutions and fund sponsors on a broad range of matters, including:

  • private investment fund formation
  • spin-outs and restructurings
  • co-investments
  • separate accounts
  • asset manager

Chip Parsons is the co-chair of the Corporate Department and co-head of the Private Funds Group. Chip regularly advises financial institutions and fund sponsors on a broad range of matters, including:

  • private investment fund formation
  • spin-outs and restructurings
  • co-investments
  • separate accounts
  • asset manager acquisitions and joint ventures
  • internal governance and compensation arrangements
  • compliance and operational issues

His practice focuses on the organizing, raising and ongoing operation of credit funds (including distressed credit funds), private equity funds, real estate funds and a variety of types of funds of funds. In addition, he advises institutional investors and funds of funds with respect to their investments into private equity and other alternative asset funds.

Chip represents a wide range of private fund clients, from large financial institutions to newly formed asset managers. His clients include: AllianceBernstein, Almanac Realty Investors, Clarion Partners, DLJ Real Estate Capital Partners, JPMorgan Chase and Proprium Capital Partners.

Photo of Michael Suppappola Michael Suppappola

Mike Suppappola is a partner in the Private Funds Group specializing in fund formation, buy and sell side secondary transactions and restructurings, institutional investor representation, co-investments and day-to-day operational and regulatory matters.

He advises a broad spectrum of private funds clients on the…

Mike Suppappola is a partner in the Private Funds Group specializing in fund formation, buy and sell side secondary transactions and restructurings, institutional investor representation, co-investments and day-to-day operational and regulatory matters.

He advises a broad spectrum of private funds clients on the structuring and operations of private funds globally, including buyout, growth equity, venture capital, private credit, distressed debt, real estate and fund-of-funds sponsors, as well as geographic and sector specific funds. After the fundraising period, Mike continues to serve as a trusted adviser to private fund sponsors throughout the lifespan of a fund, with a focus on ongoing general partner and management company internal governance and day-to-day operational issues.

Photo of David W. Tegeler David W. Tegeler

David Tegeler is a partner and global co-head of the Private Funds Group, and also head of the Boston office.

David concentrates his practice on representing asset managers in a broad range of matters, including private investment fund formation; governance, succession planning and…

David Tegeler is a partner and global co-head of the Private Funds Group, and also head of the Boston office.

David concentrates his practice on representing asset managers in a broad range of matters, including private investment fund formation; governance, succession planning and other “upper tier” concerns; regulatory advice; and asset manager M&A. In addition, David has significant experience in buy and sell side secondary transactions, fund restructurings, direct secondary transactions and private investment fund finance. He also represents U.S. and non-U.S. institutional investors in their investments in all types of private investment funds.

Over the last three years, David has managed teams of lawyers who have closed over 50 fund formation projects, with more than $20 billion raised. He has extensive experience in structuring all kinds of domestic and international funds, including venture, growth equity, buyout, credit, opportunity, special situation, funds of funds and secondary funds.

Photo of Nigel van Zyl Nigel van Zyl

Nigel van Zyl specializes in advising asset managers, institutional investors and investment advisors across the full spectrum of investment fund matters.

Praised for his keen business sense and practical approach, Nigel advises leading international fund managers on all aspects of their fund business…

Nigel van Zyl specializes in advising asset managers, institutional investors and investment advisors across the full spectrum of investment fund matters.

Praised for his keen business sense and practical approach, Nigel advises leading international fund managers on all aspects of their fund business, including the formation, raising, maintenance and ongoing operation and compliance of their investment funds. He also advises on internal governance, compliance and organization, carried interest and co-investment arrangements, spinouts, re-organizations and restructurings.

Nigel represents institutional investors, including fund of funds, sovereign wealth funds, and global asset managers, with respect to their investments into private equity and other alternative asset funds.

He also advises buyers and sellers of secondary fund interests and the structures used for these transactions, including synthetic secondary and co-investment structures.

Photo of Weixiao Sun Weixiao Sun

Weixiao Sun is an associate in the Corporate Department and a member of the Private Funds Group.