Jun. 6, 2019

Investing in Cannabis: International Investments, Public Perception, Valuation and Service Providers (Part Four of Four)

Although cannabis is illegal at the federal level in the U.S., certain other jurisdictions, such as Canada, have sanctioned its production. Thus, these jurisdictions pose unique opportunities to fund managers who may wish to reduce risks of investment in this sector. Regardless of where a manager chooses to invest, it must carefully value those investments – which can be more of an art than a science – and ensure that it has the proper support from service providers, such as law and accounting firms. This article, the last in a four-part series, assesses the international prospects for investing, including in Canada; public perception and valuation issues; and service providers in the space. The first article discussed the legislative, judicial and executive cannabis framework, as well as state legalization and industry growth. The second article analyzed cannabis deal structures, ways managers should diligence investments, disclosures managers should include in offering documents and anti-money laundering concerns. The third article evaluated how federal illegality affects underlying businesses, as well as residency requirements for investing. For more on Canadian regulations, see our two-part series on how U.S. managers can raise capital in Canada while complying with local laws: Part One (Apr. 27, 2017); and Part Two (May 4, 2017).

Practical Tips and Considerations for Preparing PE Impact Investment Fund Offering Documents

Private equity (PE) sponsors are increasingly aware that they can attract investors while contributing to the greater social good by offering impact investment strategies. Adequately addressing impact investment considerations in offering documents allows sponsors to accomplish this by conveying their credibility to prospective investors. Given the relatively new and evolving nature of impact investing, however, the challenge for PE sponsors is to prepare impact investment offering documents that are legally and commercially appropriate. In a guest article, Ellen Kaye Fleishhacker and Reginald C. Young, partner and associate, respectively, at Arnold & Porter offer a practical guide to PE sponsors for addressing these impact investing considerations in their offering documents, which includes setting forth clear criteria for selecting and diligencing investments; a sound approach to measuring impact; and policies for navigating and addressing potential conflicts and risk. See our two-part series on environmental, social and governance factors in hedge fund investing: “Past, Present and Future” (Nov. 10, 2016); and “Designing an ESG Investing Policy” (Nov. 17, 2016). To further explore this topic, on Wednesday, June 12, 2019, at 2:00 p.m. EDT, our sister product, the Private Equity Law Report, will host a complimentary webinar discussing impact investing. The webinar, entitled “Current Issues and Trends in Impact Investing,” will be moderated by Rorie A. Norton, Editor of the Private Equity Law Report, and will feature Fleishhacker; Raúl Pomares, founder and managing director of Sonen Capital LLC; and Christine Looney, deputy director of the mission investments team at the Ford Foundation. To register for the webinar, click here.

HFA Briefing Explores Fundraising Environment, Investor Allocation Trends, Third-Party Marketers and Operational Due Diligence

A recent Hedge Fund Association (HFA) program explored the challenging fundraising environment, particularly for emerging managers; investor allocation preferences, including the outlook for private equity; expectations when dealing with third-party marketers and placement agents, as well as those firms’ expectations of fund managers; and trends and issues in operational due diligence. Joseph J. Puglisi, partner at Citrin Cooperman, moderated the discussion, which featured Tony Acquadro, HFA vice president and senior director at BroadRiver Asset Management, L.P.; Rajpal Arulpragasam, mathematician and long-time portfolio manager; Maura Harris, head of due diligence at fund-of-funds manager Bostwick Capital LLC; and Gilman C. Perkins, founding principal of Perkins Fund Marketing, LLC. This article summarizes their insights. For coverage of another HFA program, see “Briefing Covers U.S. and Global Regulatory Climate Relating to Liquidity, Enforcement, Examinations and Cybersecurity” (Jan. 4, 2018).

SEC Fines Fund Manager for Failing to Equitably Allocate Fees and Expenses to Its Affiliate Funds and Co‑Investors

In recent years, both hedge fund and private equity investors have markedly increased their demand for co‑investment opportunities. For all the economic upside co‑investments can offer investors, it introduces concomitant intricacies to fund manager compliance practices. See “How to Seize Upon Rising Opportunity While Minimizing Compliance and Market Risk” (Jun. 8, 2017). SEC scrutiny of co‑investment practices can result in fines and reputational harm for fund managers that fail to thoughtfully craft and execute appropriate policies and procedures. In an example of this risk, the SEC recently settled enforcement proceedings against an investment adviser for misallocating to its fund investors expenses that should have been shared with co‑investors, as well as for having undisclosed fee-sharing agreements. The SEC also found a conflict of interest arising from the manager’s failure to allocate fees and expenses to an affiliate fund composed of its employees. Despite fully reimbursing the injured parties before it was contacted by SEC enforcement staff, the manager was still ordered to pay significant civil penalties. This article analyzes the SEC settlement order. For more on co‑investments, see “Sadis & Goldberg Seminar Highlights the Ample Fundraising and Co‑Investment Opportunities in the Private Equity Industry, Along With Attendant Deal Flow and Fee Structure Issues” (Dec. 8, 2016); and “Private Equity Firms From Across the Industry Spectrum Advise on Trends and Terms in the Current Co‑Investment Market” (Aug. 11, 2016).

FCA Issues Final Rules on Disclosure Concerning Use of Benchmarks and Guidance on Descriptions of Fund Objectives

As part of its effort to protect retail investors and foster competition in the U.K. asset management industry, the U.K. Financial Conduct Authority (FCA) released a recent policy statement pertaining to authorized fund managers that manage authorized open-end collective investment funds. The policy statement includes final rule changes to the FCA Handbook’s Conduct of Business sourcebook and Collective Investment Schemes sourcebook concerning disclosures regarding use of benchmarks and calculation of performance fees. It also includes non-Handbook guidance on descriptions of fund investment objectives. This article evaluates the key provisions of those rules and guidance. See “FCA Chief Executive Offers Perspectives on the Importance of Asset Management” (May 17, 2018).

Former SEC Senior Counsel Joins O’Melveny’s New York Office

William Martin, former Senior Counsel in the SEC’s Enforcement Division, has joined O’Melveny in New York as counsel in the firm’s white collar defense and corporate investigations practice. Martin’s government and private practice experience will enable him to guide individuals and entities through internal investigations and enforcement proceedings, especially in areas involving the financial markets. For coverage of one investigation Martin handled while in the SEC’s Market Abuse Unit, see “SEC Enforcement Action Illustrates Focus on Investment Adviser Obligation to Secure Client Information” (Jun. 23, 2016).