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    Sep. 5, 2024

Key Pay to Play Issues for Fund Managers During an Election Year

Rule 206(4)‑5 of the Investment Advisers Act of 1940 - known as the pay to play rule – comes into focus in major election years. That is particularly true in the current election cycle in light of Kamala Harris’ selection of Minnesota Governor Tim Walz as her running mate, as contributions to her campaign by employees of investment advisers could be limited by the pay to play rule. With political activity gaining momentum heading into the upcoming election, the Private Equity Law Report interviewed Skadden partner Ki P. Hong to help fund managers identify and avoid pay to play compliance risks and other potential legal pitfalls. This article outlines relevant federal, state and local pay to play rules; examines key differences between those regimes; summarizes SEC enforcement activity targeting political contributions; and prescribes steps fund managers can take to ensure compliance. For additional commentary from Hong, see our two-part series: “Federal Pay to Play Rules” (Feb. 14, 2019); and “State and Local Pay to Play Rules; Traps for the Unwary; and Compliance” (Feb. 21, 2019).

Structuring and Finance Considerations of Evergreen Private Credit Funds

As non-bank lenders continue to serve as an alternative to traditional lenders, and private credit investments remain attractive to institutional LPs, fund managers may wish to consider evergreen fund structures to reduce the costs of raising new funds and to grow LP capital invested in private credit strategies. To achieve that goal, the two most common evergreen structures adopted by fund managers are rolling vintage funds and liquidating account funds. Although both types of structures are evergreen, they offer a range of different considerations for fund managers to weigh at the fund formation stage. In a guest article, Seward & Kissel partners Jeffrey Berman and Kevin Cassidy describe alternatives for customizing the fundraising, equalization, investor liquidity and recycling terms in both types of evergreen private credit fund structures, as well as considerations when using subscription or net asset value financing facilities with either approach. See “Trends in Management Fee Base Calculations, Evergreen Structures and Tax Issues for Private Credit Funds (Part One of Two)” (Jan. 26, 2023).

Recent Survey Shows Market Adversity Is Tempering LPs’ Ability to Negotiate Key PE Fund Terms

Despite continuing headwinds, a “slow but improving fundraising market” is one of the primary trends reflected in Paul Weiss’ recent survey of fund documents (or offering materials) for more than 50 recently raised PE funds (Surveyed Funds). The Surveyed Funds – mostly based in the U.S. – all had a minimum target fundraising size of $2.5 billion and 70% were raised by the top 100 firms based on PE assets under management. “Notwithstanding the many challenges, there is sustained and growing demand for PE by LPs and, with an improving deal environment, a rebound in fundraising is likely in late 2024,” opined Paul Weiss partner Marco V. Masotti. This article summarizes the key takeaways from the survey results presented in Paul Weiss’ report, as well as further insights provided in an interview with Masotti. For coverage of the previous year’s survey by Paul Weiss, see “How Key PE Fund Terms Are Being Shaped by Current Fundraising Challenges, Liquidity Needs and Distinct Shifts in the Market” (Feb. 9, 2023).

Offering Process, Key Fund Terms and Regulatory Considerations of Co‑Investments and Pledge Funds (Part Two of Two)

The pendulum of negotiating leverage is constantly swinging and, as of now, is squarely with LPs amidst the difficult fundraising environment. That advantage goes beyond traditional PE funds to other arrangements, including co‑investment opportunities and pledge fund vehicles offered by GPs. Thus, it behooves fund managers to pursue every advantage in the book – how they structure access rights, draft fund documents and negotiate individual fund terms – to excel during co‑investment and pledge fund offering processes. To assist with those goals, Strafford CLE Webinars recently hosted a program analyzing all facets of co‑investments and pledge funds, which featured Schulte Roth partner Phyllis A. Schwartz and former DLA Piper partner Nathaniel M. Marrs. This second article in a two-part series describes the importance of access rights and preparing fund documents when offering co‑investments and pledge funds; details key terms to negotiate in the fund documents; and highlights regulatory considerations for GPs to keep in mind. The first article summarized why co‑investment opportunities are appealing to GPs and LPs; some of the unique fund structures that can be used to facilitate co‑investments; and alternative ways to achieve the common objectives of those structures. See “What Does It Take to Get Across the Finish Line in the Current Fundraising Environment?” (Mar. 7, 2024); and “Latest on Co‑Investments Amidst the Impending Recession and on Regulatory Efforts Targeting ESG (Part Two of Two)” (Jan. 12, 2023).

Compliance Program Implementation: Compliance Calendars and Testing

Once an adviser has established a compliance program with appropriate policies and procedures, it must implement that program effectively. An ACA Group presentation that is part of its ongoing “Building a Gold Standard Compliance Program” focused on two important elements of program implementation: compliance calendars and compliance testing. The program, which featured ACA Group’s Cari Hopfensperger, director, and Jaqueline Hummel, director of thought leadership, explored the importance of creating a compliance calendar; assigning responsibility for compliance; identifying common test areas; using available information for testing; incorporating testing into the annual compliance review; and embedding compliance throughout an organization. This article summarizes the relevant takeaways for closed-end fund managers. See our three-part series on tailoring a compliance program: “Why Fund Managers Should Customize” (Aug. 24, 2021); “What Fund Managers Should Consider” (Aug. 31, 2021); and “When Fund Managers Should Review and Update” (Sep. 14, 2021).

Registered Funds Specialist Joins Davis Polk in Washington, D.C.

Christopher P. Healey has joined Davis Polk’s investment management practice as a partner in the firm’s Washington, D.C., office. His practice focuses on the development, formation and ongoing operation of funds registered under the Investment Company Act of 1940. See “Quest for Permanent Capital: Why Sponsors Look to Unlisted Registered Funds to Achieve ‘Functional’ Permanence Beyond Typical Private Funds (Part One of Three)” (Dec. 8, 2020).

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