October 23, 2017

Private Equity: Fund Manager Investments

Private equity fund managers are increasingly interested in outside investment at the sponsor level. We’ve previously blogged about some of the reasons for that interest. This Davis Polk memo approaches fund manager investments from the investor’s perspective – and highlights some issues to keep in mind. Here’s an excerpt discussing the potential need for consents from the funds managed by the sponsor:

Depending on the size of the stake sold to the investor and the investor’s degree of control, consent may be required from each fund’s investors on a fund-by-fund basis (usually by reference to a stated percentage in the fund documents that may be required to approve a sale of the manager or, by analogy,the amendment of the underlying fund documents).

The negotiation will focus on risk allocation in several respects: is positive or negative consent required or deemed necessary on a business level; should obtaining consents with respect to all or a certain percentage of AUM (or specific clients) be a condition to closing or should the investor have to close regardless; and should the failure of any fund consent and any resulting loss in AUM lead to a price adjustment and, if so, on what basis (e.g., dollar-for-dollar, with a deductible or tipping basket, or with a deductible and a catch-up mechanism)?

The memo covers a variety of other topics, including post-closing governance, seller indemnification, retention issues, restrictive covenants, fund investment commitments & liquidity alternatives for the investor.

John Jenkins