Introduction to Private Equity Funds with Simpson Thacher

hi everyone and welcome and thank you so much for uh joining us today so my name is genevieve antono everyone calls me genie and i will be your moderator for today to give a bit of background i'm a 3l here at harvard law school and i'm also the co-president of helm which is the harvard association for law and business um so halve is you know one of the biggest busiest student organizations at harvard law school and we pride ourselves on a lot of things we pride ourselves on you know having really great culture having you know really close-knit you know community of friends that's like really supportive and we also pride ourselves on you know bringing you um you know high quality programming that you know hopefully adds a lot of value so today's webinar is actually our first in you know our brand new series uh called the beginner's guide to corporate practice uh so this series is targeted at you know 2ls who are preparing for on-campus interviews in january and also at one elsewhere you know just kind of like exploring corporate practice trying to figure out what you want to do uh with your lives your careers right um so over the course of this semester we're going to have a lot of webinars like intro to capital markets intro to m a intro to hedge fund so on and so forth and if that sounds uh interesting to you guys on the call make sure that you are on the help newsletter because that's where all you know the announcements and the registration links are gonna go out um so i'm hoping that this is gonna be a really fun really substantive um series and that you know all of you are gonna just learn a lot and i'm super super excited about today's webinar which is intro to private equity funds um with maya reeves uh nathalie harand and michael walitzer from simpson thatcher for me you know like sims and thatcher and uh you know private equity funds basically go together like peanut butter and jelly right so the firm has you know represented private equity clients for over 40 years and it's played a really prominent role in you know the development of the private funds industry um it's probably not an exaggeration to say that you know stb is the world's uh leading legal advisor in the private equity sector and you know it's one of you know a ton of awards um from the stb website there's a you know like chambers global ban one ranking and global wide investment funds private equity fund formation law 360 private equity practice group of the year uh top two law firms in global private equity announced deals by value in eight of the last 10 years represented the sponsor in five of the largest leveraged acquisitions ever completed so on and so forth for me i'm really excited that today's introduction uh for private equity funds is with michael waltzer who is the head of the firm's investment funds practice as well as for maya reeves and natalie haran who are both um associates at the firm but that's enough from me as an introduction so um let's let's let's jump in with introductions um so michael uh maya and natalie thank you so much for uh joining us today uh can can you can we go around and just kind of like introduce ourselves can you tell us your name um if you're an associate what year you're in uh where you went to law school why you chose simpson and maybe one thing that people don't know about you hi everyone my name is natalie i'm i guess maybe a third year associate now at simpson i went to nyu for law school and duke for undergrad um i spent a couple of summers at simpson i did the seo program and then also spent my 1l and 2l summers at the firm um so i guess i just couldn't get enough but i chose since then because of the people and the strength of the practice areas i felt like as a summer i really got um good substantive experience and had a sense of what you know my career would be like as an attorney at a corporate law firm um and then one thing that people don't know about me or maybe they don't know i have four sisters so i'm the fourth out of five hey natalie i didn't know that you had uh four sisters so that's nice um hi guys my name is nya reeves i am a fourth year rising fifth year associate here at the firm i went to columbia for law school and university of michigan for undergrad um i came to the firm similar to natalie as an seo um when i was i see that go blue when i was a 1l we did not have a 1l program so i went to another firm um and i came back as a 2l and then spent the remainder of my career here i uh i think i chose to come back to simpson similar to what natalie said because of the people i met some really wonderful people as an seo um i think oftentimes in recruiting uh you you get sort of the a team the the folks that the firm wants you to see they're really personable really outgoing really going to sell the firm well um and and i loved all of those people but i think i was impressed with simpson's like b team so to speak um i just people who were not involved in recruiting heavily at all just really went out of their way to make me and the other seos my year feel very welcomed and just teach us about what their practices look like and going to school in the city i continued to remain in contact with a lot of the people that i had met as an seo um and i think that was really wonderful and folks kind of really went to bat for me to come back to the firm and we i built those relationships and you know seven years later they're still going strong i also saw a quick question before we turn it over to michael um we are all out of the new york office thanks maya you didn't give us uh a thing about you that's unique or people that's true um things that i don't know everyone at the firm knows this but you guys don't know those because you don't know me i am like the biggest ed sheeran fan in the entire world so uh thanks guys it's michael woolitzer um i went to duke as well and i graduated from columbia law school um you know i chose simpson in the late 80s it was you know it was different but it was the same you know it was one big corporate practice and when i didn't know what part of corporate i was going to go into but i what i knew was across the board simpson was top running top you know five at the time you know some were number one some are number two but everything was such a high highly ranked highly regarded corporate practice that i figured whatever area i went into i would do fine because every area was so well regarded little did i know that i would end up in a practice area that in 1989 didn't exist meaning private funds and what it's grown into today so um it was really that and then combined with of course um the people i i felt like you know it had great people but it didn't have like a distinct unique personality that it was very accepting of all types of people and that there was a commitment to excellence and a commitment to um to good work but people were good to each other it was really that that drew me to the firm um and i'm glad i'm still there um 30 32 years later as far as the one thing that people don't know about me i'd say it surprises them is that i have a pretty regular yoga practice and that i do stand on my head maybe people think i stand on my head in my practice um in terms of my ideas that i think of but i actually do stand on my head as part of my yoga practice so that's the one thing that people don't know about me i love it can we get pictures we'll see we'll see all right so next we are going to jump into the teaching segment of our webinar and they're going to be slides and i'm going to be clicking through them so you know maya nathalie michael um feel free to give me verbal cues like you know like go forward go backward etc so question number one what is a private equity fund um so let's back up the tiny bit before we say what a private equity fund is um the all of these all of the funds that we practice in and other types of funds fall under the category of what we would call asset management um so you know in folks typically high high net worth individuals are really looking for ways to grow grow their money um and are looking for investment products that they can invest in that they don't necessarily have to manage themselves um and so within the asset management space you have sort of mutual funds hedge funds and then private equity or private funds um private equity is a specific subset of private funds but we often refer to the two interchangeably um here at simpson we don't really focus on mutual funds at all um we have a small focus on hedge funds um which we will discuss a little bit later in the presentation but for the most part we're going to sort of focus on private equity and private funds in in this presentation um you can go forward so so there's no uniform definition of of a private fund um historically private equity funds only invested in sort of equity investments um we'll speak a little bit later about what other types of investments there are covered under the private equity umbrella today um at its most basic a private fund is something we would call a collective investment vehicle where you're having lots of different individuals or entities pooling their money and and that money is then being invested for them that's sort of the basic there are some variations on that that don't involve exactly like pooled money you might have smaller uh individual type investments but we can leave that aside for now um and and like i said historically these these investment vehicles were only investing in private equity now there are various types of strategies um including the ones that you see listed buy out where the fund is actually going to go make a control type investment real estate where the fund is going to go and make real estate investments debt or credit where you're actually going to invest in debt products credit credit products mezzanine specific type of debt secondary where you're actually going and making investments but you're buying them from individuals or other investors who held that investment on a primary basis and for whatever reason are looking to get out of that investment sort of opportunistic investments where you're really sort of taking advantage of of a specific moment a specific um situation for example right now we're seeing with kovid we're seeing a number of funds that are looking to make investments sort of opportunistically based on the um the the opportunities that are being created by by the displacement in the market um i think we can go forward so um some just some i guess quick uh cap um characteristics um private funds are typically very very highly illiquid um a lot of the disclosure that you'll see that we'll talk about focuses on really sort of making sure that the investors understand that the investment that they're going to be making is very long-term and there's not a lot of not a lot of opportunity for them to get out of that investment once it's been made and there's not a lot of opportunity for them to control or direct um the you know direct that investment you're really relying on the manager um which typically is who simpson represents um sometimes funds will have a geographic focus they may invest globally they may invest in a specific region michael and i have a client together that only really does latam investing i have some other clients that you know invest only in the united states i've worked on products where they invest you know only only in asia um and then just a little bit about some of the types of investors that come into these types of products they're typically very sophisticated investors um and because they're sophisticated they're exempt from many of the securities and regulatory framework that you would see in a more traditional type securities practice like in a capital market the investors are typically a mix of u.s and non-us institutional investors sovereign wealth funds pension funds endowments universities other types of foundations family offices etc and then you actually have high net worth individuals and depending on the size of the fund and the type of investing the there's a range in what we mean by high net worth there are sort of minimum standards that are set by securities act and some additional regulatory frameworks which we'll talk about later at the end of the presentation that sort of really make these investors eligible something else to know that the terms of these these products are really driven by your strategy investment portfolio liquidity tax considerations market sponsor conventions so so what that means is you know different sponsors have their idea of how they want to get this done so they're maybe the blackstone way or the carlisle way and then you know if you're investing in you know for example if you're investing in brazil there are very specific tax regulatory frameworks that are going to dictate the structuring of your fund um your what else is also going to dictate the structuring of your fund is how long you're planning to hold these investments how long the fund is going to be in existence um and other types of considerations like that you know your terms may be materially different if you're focusing on real estate versus focusing on infrastructure versus focusing on a traditional buyout type structure so the the basics about the fund structure and sort of all the players um you're going to have typically a limited partnership sometimes it will be a limited liability company or other type of vehicle but i think a limited partnership is is most common and the limited partnership can be set up in sort of any jurisdiction but the jurisdictions that i think we see most common are delaware cayman islands and luxembourg um obviously that can change michael and i have a client that primarily only uses ontario vehicles so that's a little different and then you have in terms of the players you have the fun sponsor which like i said simpson typically represents sponsors and uh you'll hear us refer to a sponsor or a general partner or a manager somewhat interchangeably they may be um specific different vehicles that are owned by our clients but when we are saying the sponsor or the gp that's that's what we mean our fines as opposed to sort of the parties on the other side would be the limited partners or the investors sort of the same same folks um you know the sponsors are really going to be dictating uh some most of the terms of the investment and and the direction of the investments and making the sort of investment decisions whereas the limited partners are really going to fund the capital to actually make the investments um because they're putting up their money and they're very sophisticated they make many many demands on what the terms of the fund will actually be and that's kind of where we we come in helping to negotiate those things i think we can um and then sort of before wrapping up on the private equity basics um some just really basic terms to know uh our our clients the sponsors take fees management fees for the privilege of managing your money um typically one to two percent of the lp's commitment during the investment period so during the period in which and the investments can actually be made and then um one to two percent uninvested capital thereafter so after you can no longer make investments in the life of the fund one to two percent on how much is actually has actually been invested um that can differ a little bit depending on strategies and what lps have negotiated but that's kind of the the most typical um and then these funds typically have what we call performance-based structure performance-based compensation um so in addition to the management fees which can be you know quite substantial in in the aggregate um if the fund is doing well our our clients are going to take what we call carried interest or you'll hear us refer to it as carry um carried interest is usually a specified percentage of the fund's profits um attributable to the capital that was invested by the lps a really typical number is like 20 um and then it's typically taken on realized investments i.e investments that have been disposed of um and it is often subject to a hurdle or a clawback meaning that you're not just going to get 20 of whatever the profit is there's there's sort of an or priority of distributions that you have to go through first to make sure that everyone is kind of aligned and if there's not enough money to go around you're not just taking 20 of the profits before lps are getting their money back or or things like that um and then the clawback meaning sometimes there are sort of contingent obligations you know after the life of the fun which is really sort of more of an lp give back um but also there may be a scenario in which the general partner is getting more carry than they should it may have made sense on a deal basis but it maybe doesn't make sense on the basis of the entire fund and so if you look at it from that perspective the general partners may be getting more than that 20 that we said they should be getting so uh lps will demand that they can claw back that money um it's not exactly perfect and it's highly negotiated um and then sort of the typical hurdle um that we're talking about is like this eight percent per annum and what that means is usually after you've returned the lp's money everything that they've invested to actually buy the investment and everything that they've invested in terms of fees so lawyers expenses etc um they usually get the first eight percent back of profit and so our clients taking that 20 percent of profit it's subject to them getting this eight percent first and some other there's some other things in between the the hurdle and the twenty percent but uh that's kind of basically how it works um and then you know sort of this really important concept is this return on invested capital the profits are generated based on the capital that is invested in the fund by by the fund sponsor lastly so you've got um there are some other like functions and and characteristics of private equity funds just in time funding i.e um asking lp's to sort of make investments make additional capital contributions um as needed for certain investments we're seeing that a lot during kovid as you can imagine many of these investments may now be distressed for example if you own a shopping mall people aren't really shopping right now um and then the proceeds are distributed generally in cash upon disposition of investments or when current income is received um meaning that our sponsors are going to give this out once the investments have been sold or realized um and then current income is a little i think we can actually kind of skip it right now just because i don't i think it's a little technical for where you all are in the investment but i'm happy to answer questions on it later um there's a concept called recycling in these funds where um sponsors can reinvest some of the games there's usually limitations on how much of the games can be reinvested um and there's usually limitations on how long they can do that um oftentimes only during the investment period as we said the period during which the fund can actually make investments um but basically this allows the fund sponsor to invest more than the lps have actually committed so if the lps have committed 100 you they may actually end up funding 120 over the life of the fund um the the funds that we typically represent are what we call closed ended funds meaning that there is a lifetime to the fund um by the terms of the fund the fund will dissolve at some point um as you can see down below the typical is about eight to 12 years and in a typical structure it can get a little bit longer and longer hold funds and it can be shorter sometimes um and then there's usually limited ability to get in and out of the fun which is what we were talking about these funds being highly illiquid um you can usually transfer your rights subject to certain limitations within the terms of the documents but you then have to kind of find either a buyer that's an affiliate of yours or a non-affiliate and get permission and kind of go through this negotiation process but um and they're very very limited ability to withdrawal wholesale um withdrawing wholesale sort of it's typically tied to like regulatory needs um you know you're going to violate some sort of law or regulation to which you're subject by by remaining in the investment um there's usually a fixed subscription period about about one year is pretty typical sometimes maybe a little bit longer maybe it's like 18 24 months um during which time lps can actually come into the fund they can make commitments to the fund um and to the extent that any investments are made during that period and lps actually have to fund capital before all of the lps that will finally be in the fund come in there are sort of equalization mechanisms that sort of try to account for that and true up to make sure that everyone is sort of bought into the old investments and interest has been paid because you know your your capital has been used earlier um and then finally we've been talking about this investment period so a period during which time the fund can actually go out and make investments by companies buy assets and that's typically about three to six years in a in a fund that's typically about eight to twelve years long next can you walk us through a basic private equity fund structure so this is the structure chart sure so building off of what maya was saying at the top you'll see the sponsor typically in our fund structures you'll have a general partner the general partner basically is in charge of the day-to-day operations of the fund they help make the investments and then you'll also have an investment advisor who advises um on the investments that are being made going lower into the structure you'll have a main fund so that's typically the vehicle where investors will subscribe to it'll have them in the capital commitments um oftentimes it'll be a delaware vehicle and then we also have this concept of parallel funds so these funds will invest and divest on the same terms um as the main vehicle and they're usually set up for either tax or regulatory reasons oftentimes you'll see um like a lot of the funds that i work on will have a luxembourg parallel vehicle and then um the investors that are coming into there usually have specific attributes um you'll also see on the structure chart deal specific co-investments so co-investments are typically um a small it's kind of like a fund raise it's usually on an accelerated timeline but if there's a specific investment or asset that the fund wants to make they can set up a co-investment vehicle um you may have investors that are in the main fund also participate in that investment and there could be other third-party investors that come in but once the investment is made it's kind of over so it doesn't have the same um sort of like life cycle and fundraising process that the funds that maya was discussing would have maybe i'll just chime in on the question that came through the q a so this is the basic building blocks we've obviously very much simplified this just to address a second question that came in earlier you know we have eight offices um well this firm has 11 offices but we have eight offices around the world where we practice private funds so we have um five offices in the u.s which is new york dc houston la and palo alto and then we have london to cover europe and then we have tokyo and um and hong kong to cover um asia where we have funds people senior funds people practicing the question that came through was well how does an asia fund different to differ and again as maya pointed out you know many of the geographies and strategies will end up with their own structure but this is the basic building block some sort of vehicle usually where the the general partner and the advisor is active and the limited partners are relatively passive and there's a vehicle where the money's collected and deployed into investments as far as asia funds specifically i would say asia funds tend to not use u.s structures they tend to use non-u.s structures most of the time um cayman islands is probably the most popular for asia funds you know hong kong is actually developing its own limited partnership structure we'll see if that takes off but for right now i'd say caiman is the most popular and you'd see this kind of gp lp structure using a cayman islands vehicle um for for asia funds india might have a different structure um dealing with singapore or mauritius to take advantage of some treaty benefits so again there's not a one size fits all but generally speaking to answer your question it's this basic framework probably leaning toward cayman michael there there was another question for clarification would the sponsor parent company at the top of the chart typically be a big bank like bank of america or chase i mean i would say the banks have generally moved out of of this business typically speaking the sponsors are private investment firms um some of them are public that that wouldn't have been true uh 20 years ago but a lot of the big sponsors now like blackstone and kkr and carlisle and others are all public companies but they're not banks they're public companies that do asset management and related services most of the sponsors by number are going to be independent privately owned firms that engage in one or more strategies to invest capital that that's the most common um client if you will like i said there are several public companies there are a handful of banks that are in this business goldman sachs and morgan stanley definitely have have this business and they do it you know volcker put some restrictions on that that they've worked around but generally speaking the private investment business tends to be either private independent sponsors or in the last 10 years some multi-strat public sponsors which are very large apollo aries oak tree i mean there's about seven or eight of them that are well known but but again it's largely still a privately owned sponsored business um as a general matter um so just quickly can you tell us about the life cycle of a typical fund so typically what will happen is you'll have investors well so the sponsor will want to raise a fund um and investors will provide capital to the sponsor they'll subscribe using subscription documents for the firm to invest and then the sponsor will go out make those investments and then they will improve the company um either implement new management and then they'll hold that investment for a set number of years um and then hopefully they'll sell the investment for profit um usually they'll like maya had mentioned before return the capital to 80 of the capital to investors and then they'll get 20 so in terms of just getting into the details of the fundraising process and closing as a junior associate this is definitely something that you're expected to kind of know and be really heavily involved in um so once you understand the client's goals you'll help them put together their offering documents for the fun so that'll be the offering memorandum it has typically a number of sections that are kind of consistent across sponsors but it may vary but you'll have a set of disclosures at the front and then you'll have a business overview or marketing overview you might have some information about the business professionals that are managing the company an overview of the sponsor and sort of their history and track record and then you'll have a term sheet that describes the terms of the offering and then you'll have a set of risks and conflicts which is um a pretty lengthy uh section of the ppm as we call it and that just sort of sets forth all of the potential risks and conflicts that could arise with this transaction we want to make sure that investors are making informed decisions and there's a number of different regulatory laws that kind of inform what kind of disclosure we include in the ppm we also prepared the partnership agreement i think later in the presentation we explain what it is but it's basically the document that sort of governs the rights of the investors and sort of it's the main governing document for the fund and then you have subscription documents so that's how lp's investors will sign up to be in the fund um so once we've prepared the documents and posted them for investors to review typically what will happen is investors will do due diligence they'll review the documents and then we'll engage in negotiations with them so even though the partnership agreement is the main sort of governing document that sets forth the terms and obligations often times investors will want to either negotiate provisions that are within the partnership agreement or due to the investor's jurisdiction or the type of entity that they are they have certain obligations so a lot of times either like pension funds will have certain reporting obligations that they um need to comply with and so they want to ensure that if they're going to be investing in this fund the sponsor can you know kind of work with them to meet their obligations as well and after we go through the negotiation process which usually takes a couple months it depends on the timeline of your fund you'll have your initial closing so we'll finalize the side letters with the investors we'll finalize the partnership agreement and then you'll hold a closing so basically what happens is once the investor subscription documents are complete we let them know that the sponsor has accepted their commitments and then the sponsor can go ahead and start deploying the capital that they've committed um there may also be subsequent closings where additional investors come in and then once um sort of the fundraising period has ended we engage in an mfn process or most favored nations so what will happen is investors typically have a provision in their side letter that says that subject to certain provisions and if they're applicable or not they can elect to get sort of the best provision that other investors received and that process is pretty time consuming but also really interesting because you get to see the scope of provisions that are given on any given topic and then there's additional ongoing work um once the fund raises sort of over but that's generally the life cycle what are some of the basic fun documents so we'll go into detail into some of the documents you've mentioned earlier so as i mentioned before the ppm is the main offering document um this document i kind of went through the sections but i think the risks and conflicts are probably the most important section aside from the term sheet um it helps protect the sponsor against risk it's sometimes drafted a bit dramatically i would say in terms of it's really setting forth any possible risk that could occur um some of the most recent risks that we've had to draft are related to kovid and sort of the liquidity issues that can happen the performance of investments and what investors can expect in terms of how the sponsor will be able to perform whether or not they'll be able to get financing etc then you have the limited partnership agreement so this is the main document that governs the rights and obligations of the investors as i mentioned investors can negotiate different terms if they don't agree with how the partnership agreement is drafted um and then you have a subscription agreement so this is the contract where investors it's it starts with the representations and warranties section so investors will basically wrap that they meet certain requirements that they've read all of the offering documents that we've provided that they're making an informed decision um they make representations with respect to their status as status as an erisa investor or not they agree to inform the sponsor if there's any changes to their tax status there's also provisions about the governing law of the agreement and data privacy and information rights and then there's a section that's a questionnaire so the investor will say the type of entity they are they'll make representations with respect to their status as an accredited investor and a qualified purchaser and they'll provide just some basically contact information bank details etc um so side letters as i mentioned are ancillary agreements that investors use to sort of negotiate specific provisions from the partnership agreement um it supplements the lpa these are i think probably the most time consuming and interesting documents to draft because you really have to think about the provisions that we've included in the lpa and how this can affect certain lps and you know whether or not the sponsor wants to agree to things and if you agree with one person there's a risk that during the mfn process other investors will be able to elect it so you really have to carefully think about whether or not the obligations that your client is agreeing to is something that you know they're willing to adhere to for however long the fund um is in existence and then you'll have an advisory agreement so as we mentioned there's often an investment advisor and this is just your the contract between the advisor and the fund and then there's other offering materials um pitch books and diligence questionnaires so what are some of the types of funds that exist and how do they differ sure so um you have what we call our traditional private equity funds um with traditional private equity funds where we're often will refer to them as buyout funds um typically they acquire a substantial or quote-unquote controlling stake in a private or public company that they then intend to take private um you may have a specific strategy to invest in public investments um but that's a specific type of fund and and not uh not as common um i think there was a question around here that is actually related to this right um can you briefly explain why private equity funds are illiquid and how the control and influence work and i think it's probably a good time to answer it um private equity funds are sort of illiquid based on the nature of the investments that are being made once you go buy a company um you know let's say dunkin donuts um you can't really pull your money out of that company until you sell it um so it's sort of just some necessarily illiquid um it creates all kinds of accounting and regulatory issues if if you are coming in and out of the fund um and i guess you could exit your interest in the fund um maybe your obligations to continue uh funding capital and you know your your ob and your ability to vote etc but you still wouldn't be able to get your money out of the fund um because the investment just hasn't been sold um in terms of the control and influence when we say we're buying controlling stakes that may be 50 or more of the company but it may be a smaller percentage that has the majority of the voting rights and and what will happen is our sponsors will typically put some of their employees or that the employees of like the asset management portion of the the sponsor on the boards of these companies and then from there they make the controlling decisions about the companies um and so in addition to traditional private equity buyout funds you might have a real estate opportunity fund um which is formed to opportunistically acquire interest in real real property or real estate related to companies so hotels casinos um it's still somewhat of a it's still somewhat similar to the other type of fund it's just a different type of asset class that you're focused on similarly you have infrastructure funds same basic concept except again you're going to be focused on infrastructure assets as opposed to equity or as opposed to real estate um think about you know pipelines bridges toll roads etc then you have tactical opportunity funds which typically pursue investments on an opportunistic basis which we kind of discussed um these they can be multi-asset class based on prevailing market conditions so as we we talked about there are a number of conditions that are being um that we're seeing caused by kobut and we're seeing investing that has been somewhat uh focused on on that um so in addition you have debt funds where you typically pursue non-controlling strategies that seek to make debt investments in portfolio issuers so just like you can go to a bank and get debt you can also go to a private london and get debt um we we talked about the fact that there are hedge funds and we don't focus as much of our practice on hedge funds um hedge funds typically are more liquid than a traditional private equity fund um they tend to make investments in publicly traded stocks and bonds so although it's a fund and you're not um you're not investing your money directly the way maybe you would if you went and bought stock of google or facebook or whatever it is um it it gives you more ability to get out because the underlying asset can be sold more readily and the value can be realized more readily then you have open-ended real estate funds which are formed to acquire more stable real estate assets for the long term um think about something like acquiring like a a rental property where you're really taking uh money from from the rent that's coming in on on a pretty stable basis you have registered and publicly traded funds so uh these are funds that are actually registered on some sort of ex listed exchange um mutual fund funds permanent capital vehicles um and they can be designed for retail investors we do have a significant component of our practice that focuses on registered funds although michael and natalie and i are all more in the the private fund space but we do have a portion of the group that focuses primarily on registered funds and then i would just mention on that sorry to drop mine if any of you've met rajib chanda who's class of 2000 at harvard he runs our registered funds practice i'm out of dc and he's i know he's a big cheerleader with with harvard and harvard recruiting so if you've met him he is the person who actually runs our our registered funds practice and then finally you just have a sort of smorgasbord of additional types of funds you could have a bc venture capital fund um hybrid funds that kind of combine strategies secondary funds where you know we talked about briefly before that you're not going to necessarily invest on a primary basis you're not going to go find a sponsor that's in the market and actually sign up those documents you're going to go find an investor who has already been in the fund and they're looking to get out and like go buy their interests you could have a fund of funds where your strategy as a fund is to find other funds to invest in and then those funds will do the primary investing you could have permanent co-investment vehicles or you could have individual co-investment vehicles i.e you could have a fund where their strategy is to just make co-investments um or you could have a single vehicle that that is really established more for a deal where your your other fun your infrastructure fund your private equity fund for whatever reason can't take up the full portion of the deal and they go out and they raise additional capital to sort of cover that shortfall and that may be covered by lps who are in the fund already and they want to take up more of the deal themselves or it could be true third-party investors um you can have minority stakes vehicles where as sort of the opposite of you know the traditional buyout where you're really only looking to take a minority stake but there's a wide range of strategies that you you can see we've seen strategies including um investing in diverse managers or investing in in general partners themselves so if we could cover the basic regulatory framework in five to ten minutes tops that would be amazing yeah i think we can because i think it gets pretty down in the weeds and we'll try to keep it pretty high level um so you have a few acts which you're subject to which are going to be listed on the over the next couple slides the first of which is the u.s securities act of 1933 um you all may not know but investing in a fund is investing in securities so we are still governed by the securities act and we're still governed by the sec um funds typically have a very narrow subset of types of offerings under the securities act as which is a little bit different from our capital markets colleagues that may see a wider range of types of offerings so typically we have what we would call a reg d offering for our u.s investors um or a reg s offering for our non-us investors and because we're often marketing to u.s and non-us investors at the same time we typically offer like combined red d reg s offerings and get reps to that support um these types of offerings from everyone um sometimes you'll have for a much smaller offering um including for an sma or a separately managed account um you know under section 482 um and then funds relying on red d have to comply with bad actor rules so we get um reps from lps that basically just say that you haven't committed certain enumerated bad actions under reg d um typically under a reg d offering you have to you have to make your offering only to incredi accredited investors and there's like a number of ways that you can be considered a credited investor the sec uses this concept as a proxy for sophistication and justifying their lack of involvement in the right in the regulation of these types of products i think there was a question earlier about minimum wealth qualifications for who can invest in a private fund this is where this would come into play um there up until fairly recently accredited investing um was tied almost exclusively to minimum wealth standards um and then we'll talk about it in a little bit i think on the next slide or in a bit um you might also need to be a qualified purchaser for the type of offering that we're we're we're making and a qualified purchaser also has minimum wealth requirements um finally on this slide there's generally no general solicitation there there are specific types of funds that can can sort of generally solicit um we typically do not advise our clients to to offer those types of funds although i had a client once insist um and that kind of just means no general advertising like no public offering which is why if you've ever seen simpson in the news for um completing a fundraising it's after the fundraising has actually finished um so that way we we can't say that our ad you know our announcement of our involvement with this fund is is an advertisement so i think we can go forward um the the additional framework that you're subject to is the investment company act of 1940. um private funds but for certain exemptions would be considered investment companies and would be subject to the terms of the the 1940 investment company act um which we are seeking to avoid um so the investment company app requires registration of any issuer which is primarily engaged in the business of investing reinvesting or trading in securities unless an exemption is available and our sponsors typically rely on 3c7 exemptions not exclusively but typically and that limits the offering to qualified purchasers as i said um which for individual investors usually means having um a net worth of five million dollars and for and entities usually means having uh net assets of 25 million dollars there's um there are some details on the margins about how other ways you can qualify but those are traditionally like the minimum standards um there's also three c one exemptions uh which limits the offering to a hundred beneficial owners of securities in a three c one offering folks don't need to be qps um but it does have this sort of counting rule and for and because the accounting isn't super straightforward oftentimes we see our our sponsors relying more on 3c7 than 3c1 it also allows for larger offerings um dollar wise um then you have 7d non-issuers owned by non-us investors or non or u.s investors that are qualified purchasers um we don't do those offerings as frequently as 3c7 but that's that's also a possibility there is what we call a ke or knowledgeable employee carve out which can sort of exempt you from the minimum um wealth standards but what it means is that usually you have to be an employee of the sponsor who by function of your job um you have enough information about the investing to really make a sort of sophisticated uh decision and and the sec doesn't feel the need to worry about your level sophistication or knowledge um and then there are certain exemptions for s for employees security companies um which is a separate part of the practice and then you also have we are also subject to the investment advisors act of 1940 it's a little confusing both being from 1940 because we will often refer to them interchangeably as the 40 act um and but the advisors act basically says that unless a sponsor qualifies for an exemption that advisor must be registered as an investment advisor with the sec and so the sec regulates in that way as well by by overseeing the investment by advisors themselves investment advisors have fiduciary duties to their clients um the most good faith to act in the best interest of the client and make full disclosure of all material facts so we've been talking a lot about disclosure um we we want that both from a um a securities act perspective in the sense that we have a disclosure based system and a lot of things can be okay just as long as you disclose them ahead of time before people make investments but also we have obligations under the advisors act to make um full disclosure of material facts and that registered investment advisors are subject to various rules and requirements including that advertising um including presentation of your track record so uh how your funds in the past have done um cannot be false or misleading um and then they are also subject to section 206 anti-fraud provisions which apply to all advisors whether they are registered or not um there are additional types of advisors including exempt reporting advisors that we don't focus on as much because most of our clients fall on the registered spectrum but they would also still be subject to section 206 um which essentially uh basically says you can't commit fraud um and then for example 2063 has a prohibition on principal transactions without client consent so thinking about a sponsor acting for their own account or buying or from or selling to a client without getting that client's consent um that that would be picked up by the fraud provisions um you also got the securities and exchange act of 1934 um specifically the post jobs act post jobs act limits 2000 holders of record of any class of equity securities to avoid a 12g registration which basically means that uh while 3c1 says that you can have no more than 100 investors um the exchange act basically says you can't really have more than 2 000 investors in any particular class of equity securities um we don't typically see offerings that large so um it is a limitation it just doesn't often come into play um then you also are subject subject to cftc um many sponsors rely on a de minimis exemption for limiting commodity trading post 2012 um post the repeal of 4.13 a4 um include it includes swaps as commodities um typically we just try to avoid this entirely um i know that michael do any of our sponsors really not not some strategy that we're talking about as you get into more trading strategies cftc comes into play but usually if you're doing an illiquid strategy buying a company buying real estate the need for commodities is pretty de minimis and you can meet the minimus requirement um so sort of lastly you're you're also subject to erisa which is the employee retirement income securities act which governs sort of uh retirement assets um there are specific fiduciary rules that you would have to comply with if your fund were to become what's called a plan assets fund um and you would become a plant assets fund if you couldn't couldn't satisfy one of the exemptions that we typically rely on so for example the 25 test meaning that no more than 25 percent of the fund is uh is erisa money um or sort of a vcoc or are or rock exemptions um it depends on the structure of the fund and the nature of the deals but most of our sponsors comply with 25 or one of these other exemptions to avoid having to comply with the heightened fiduciary standards of erisa there are tax overlays to all of this funds are typically treated as partnerships for u.s tax purposes but um that doesn't always work for lps so sometimes we create alternative investment vehicles um or feeder funds that are sort of blockers quote unquote um and it blocks certain types of incomes and filing requirements and that's usually uh those are all driven by attacks um there's a world sky a f m i d a i f m d overlay meaning that just because we're we're u.s sponsors or our clients are us sponsors or even if they're not they're making a u.s offering doesn't mean that there aren't other uh you know non-us overlays so there are certain marketing requirements etc and other non-us jurisdictions that are our sponsor clients need to be mindful of if they're going to go into those jurisdictions and try to market to entities or individuals from from other jurisdictions um they they're going to need to comply with the securities laws in those jurisdictions we don't advise our clients on those but we do sort of try to give them a quick overview and point them in the direction of of competent council and local council that they can talk to if they have more specific questions um then there are sort of oftentimes local notification or registration requirements with local regulators um especially in europe um following the the passage and implementation of of the aifmd framework and then finally you have blue sky overlay which is similar to world sky except that it's focused on the united states as opposed to non-us jurisdictions um our clients are still going to need to comply with the securities laws of each of the individual states that they are making offerings in not only on the federal level so what can uh new private funds associates expect and just as a time check if we can do this in like a minute and a half that would be great um so as mentioned junior new associates um typically will help correspond with investors you get a lot of investor contact early on helping guide them through the subscription document process your job is to review the sub docs make sure they've answered the questions correctly make sure that they're cleared from a tax and an aml or anti-money laundering perspective you'll also help draft side letters you'll draft sections of the ppm and the partnership agreement um you'll also help with legal opinions which is basically just an opinion from the firm saying that you know we can attest to certain facts um the sponsor is in good standing you'll help update checklist because of the life the length of the life cycle of a fund um being organized and staying on top of where everything is the investors that have come in the commitment amounts what filings have been made whether or not someone is an erisa investor specifically because if you are above the 25 test you may become a fiduciary so there's a lot of tracking that is involved and you work with paralegals and different team members to help stay on top of everything junior associates also help put together closing emails these are just emails that are sent to the investor once we've finalized all of the documents saying that the sponsor has accepted their commitment here are the documents for the um just so that they have a record of it uh you also assist with transfers so if an investor no longer wants to hold their interest in the fund but they can't exit they can transfer that interest subject to certain restrictions in the partnership agreement and so you have to put together essentially an agreement that says the interest is being transferred the new transferee makes certain representations that are similar to what's in the subscription document and they also have to be cleared for tax and aml you also help coordinate with a bunch of specialists primarily tax and erisa but one thing that i think is really interesting and i like about our practice and simpson is that you get to work with a lot of other teams so i work with credit i work with the blue sky team the regulatory team um tax and arisa obviously but you're not just limited to funds one of the matters that i'm working on i've been getting a lot of contact with the m a team and real estate teams and so it's good exposure to how other practice groups work and other people at the firm um okay well those are all the points that are on this slide already all right and so that uh is the presentation thank you so much natalie maya and michael um so if you are a 1l or a 2l uh in the audience we hope that uh you learned a lot we wanted this presentation to be super substantive and uh i think it definitely was um if you want to be you know if you're super inspired and you want to be you know a private fund's attorney now and you want to write fan mail to stb recruiting their email address is legalrecruiting at stblaw.com in the final minute michael can you give us any uh words of wisdom what do you want our one else and two else to know you know i think you got a flavor for the private funds industry and what do you do it's very varied you're kind of a renaissance lawyer you know the things i always liked about it is you do drafting you do disclosure documents but you do negotiate like a deal then after the fund is closed you spend the next several years counseling clients and giving advice so the aspects of it of drafting then negotiating and then counseling all in the same practice is what i think really um is what kept is kept it fresh for me and i think is very appealing to a lot of people who are trying to figure out what they want to do um because it has um all of those different aspects so that that's probably the overarching thing that i would share uh judy all right so thank you so much for joining us today we will see you at uh the next help webinar all right bye everyone bye

Channel: Harvard Association for Law & Business

Views: 39,077

Keywords: Harvard Law School, HALB, Harvard Association for Law and Business

Id: 8YdD98ehC-U

Length: 55min 32sec (3332 seconds)

Published: Wed Oct 28 2020