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    Oct. 18, 2018

Primer on Deal-by-Deal Funds: An Overview of the Structure and Investor Perceptions Toward It (Part One of Three)

In recent years, the alternative investment industry has subtly evolved to suit the varying needs of investors and sponsors alike. While sponsors have sought flexible vehicles with minimal barriers to entry that reduce costs and increase profits, investors have desired more active roles in the allocation and management of fund investments. See “Beyond the Master-Feeder: Managing Liquidity Demands in More Flexible Fund Structures” (May 25, 2017). Conveniently positioned to satisfy each of these demands, the deal-by-deal fund structure – in which a dedicated vehicle is created to make an investment in a single target opportunity – has become increasingly popular among private equity sponsors and investors. This three-part series provides an overview of the different features of, and important considerations when adopting, the deal-by-deal structure. This first article provides a basic overview of deal-by-deal funds, as well as an exploration of how investors perceive the structure. The second article will describe the rolling fundraising process; analyze how the vehicle differs from the traditional private equity approach; and outline its structure, along with key provisions to protect investors and sponsors. The third article will address the issue of deal uncertainty and how some sponsors overcome it, as well as how various fees and expenses are handled in the deal-by-deal fund model. For additional information about private equity fund structures, see “Interest in Bespoke Fund Structures Surges As Markets Adjust to New Administration and Regulatory Regime” (Mar. 8, 2018).

Steps Fund Managers Should Take Now to Ensure Their Trading of Swap, Repo and Securities Lending Transactions Continues Uninterrupted After January 1, 2019

The regulatory fallout from the 2008 global financial crisis continues to affect derivatives and other instruments traded by private funds. Final rules issued in 2017 by three U.S. federal banking regulators (the U.S. Stay Regulations) alter how certain qualified financial contracts (QFCs) will be treated in U.S. bankruptcy proceedings. Although neither private funds nor their managers have direct obligations under the U.S. Stay Regulations, fund managers will nevertheless need to bring certain trading agreements into compliance with those regulations in order to continue trading QFCs with bank counterparties or their affiliates after January 1, 2019. In a recent interview with the Hedge Fund Law Report, Leigh Fraser, partner at Ropes & Gray and co-leader of the firm’s hedge fund group, discussed the U.S. Stay Regulations; the impact that these new regulations have on the trading and documentation of QFCs by private funds; and ways fund managers can ensure compliance with the new regulations, including a discussion of the recently released ISDA 2018 U.S. Resolution Stay Protocol. For additional insights from Fraser, see “Steps Hedge Fund Managers Should Take Now to Ensure Their Swap Trading Continues Uninterrupted When New Regulation Takes Effect March 1, 2017” (Feb. 9, 2017); and our three-part series on best practices in negotiating prime brokerage arrangements: “Preliminary Considerations When Selecting Firms and Brokerage Arrangements” (Dec. 1, 2016); “Structural Considerations of Multi-Prime and Split Custodian-Broker Arrangements” (Dec. 8. 2016); and “Legal Considerations When Negotiating Prime Brokerage Agreements” (Dec. 15, 2016).

Compliance Corner Q4-2018: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

Fund managers will need to take steps to ensure that they are prepared to meet quarter- and year-end compliance-related deadlines, as well as take note of recent industry developments that will impact their businesses. For example, funds formed in the Cayman Islands are now required to designate individuals as anti-money laundering (AML) officers, although the deadline for certain Cayman funds to report this information to the Cayman Islands Monetary Authority (CIMA) was recently extended until December 31, 2018. This sixth installment of the Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Anthony Frattone, director and consultant, respectively, at ACA Compliance Group, highlights upcoming filing deadlines and reporting requirements of which fund managers should be aware during the fourth quarter and discusses recent industry developments, including the SEC staff’s recent observations on common compliance issues related to best execution by investment advisers, CIMA’s new AML requirements and the newly released draft of the Global Investment Performance Standards. See “The Ins and Outs of GIPS Compliance: What Hedge Fund Managers Need to Know About the Voluntary Standards and Pending Revisions” (Aug. 30, 2018).

What Implicit Biases Are and Whether Interventions Are Effective (Part Three of Four)

Even though personnel at fund managers may reject explicit stereotypes, they may still hold unconscious biases associated with particular groups, which can influence their behavior. Those implicit biases can be dangerous, infiltrating decisions about prospective candidates for a position or affecting services provided to clients. Can those associations or biases be controlled? Research indicates that certain interventions may be effective at reducing biases in the short term, although it is unclear how durable those effects are. This article, the third in a four-part series, explores implicit biases, their harms and whether they can be reduced in both the short and long term. The first article discussed the lack of diversity within the financial services and alternative investment management industries and explained why fund managers should focus on diversity. The second article analyzed diversity training; performance ratings and hiring tests; grievance procedures; and specific actions managers can take to promote diversity and inclusion. The fourth article will evaluate methods for constraining decision making and review the role that legal and compliance leaders can take to promote diversity and reduce implicit biases. See “IMDDA Offers Fund Managers a Blueprint for Conducting Sexual Harassment Due Diligence” (Aug. 2, 2018).

Pepper Hamilton Attorney Discusses Fundamental Structuring Issues for Investment Advisers: Separately Managed Accounts, Registration and Securities Laws (Part One of Two)

A recent Pepper Hamilton program featuring partner Gregory J. Nowak looked at the key regulatory issues an investment adviser faces when developing its advisory business. This article, the first in a two-part series, summarizes the portions of the program that covered separately managed accounts, adviser registration and the applicable federal securities laws. The second article will cover taxation issues, organizational expenses, redemptions, publicly traded partnership rules, performance fees and alternative fund structures. For additional commentary from Nowak, see “Blockchain and the Private Funds Industry: Potential Impediments to Its Eventual Adoption (Part Three of Three)” (Jun. 15, 2017); and “Three Approaches to Valuing Fund Assets and How Auditors Review Those Valuations” (May 11, 2017).

Unregistered Crypto Fund Hit With Multiple Securities Laws Violations by SEC

Advisers who invest in initial coin offerings and other digital assets may run afoul of federal securities laws when those assets are deemed to be securities. In a recent enforcement proceeding, the SEC claimed that a fund manager and its founder, who ran a domestic fund that invested in digital assets, engaged in an unregistered, non‑exempt securities offering; failed to register the fund they were offering as an investment company; and falsely claimed that the fund was registered with the SEC. Although the alleged misconduct was egregious, the action is a timely reminder that advisers must exercise caution when entering the digital asset space. This article details the alleged misconduct and the terms of the settlement order. See “SEC Cyber Unit Files Charges Against Allegedly Fraudulent ICO” (Jan. 11, 2018).

Harry S. Pangas Joins Dechert’s Corporate and Permanent Capital Practices in Washington, D.C.

Dechert has strengthened its corporate and permanent capital practices by hiring Harry S. Pangas as a partner in the firm’s Washington, D.C., office. For more than 20 years, Pangas has developed a strong reputation representing financial services companies, including business development companies, registered closed-end funds and private investment funds in connection with securities offerings, M&A transactions and regulatory matters. For another recent Dechert addition, see “Dechert Hires Former SEC Branch Chief in Washington, D.C.” (Apr. 5, 2018). For commentary from other Dechert lawyers, see “How Cross-Border European Fund Managers Can Prepare for Brexit’s Momentous Regulatory Effect” (Apr. 6, 2017); and “Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors” (Jul. 14, 2016).

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