Negotiating market price, fund economics, management and other investors, documents, and approvals are key to leveraging fund-to-fund transfers.

By Nick BensonTom Evans, Huw ThomasDavid Walker, Katie Peek, and Catherine Campbell

Following significant fundraising activity, sponsors have substantial capital at their disposal. However, in Europe, there were 564 deals worth US$72.8 billion in the first half of 2019, the lowest volume since the first six months of 2009. Amid the struggle for high-quality transactions, more sponsors are focusing on existing assets, and utilising fund-to-fund transfers to retain prized portfolio investments. Multiple buyout firms have pursued fund-to-fund transfers so far this year — but achieving a deal that balances the interests of those involved can bring challenges. Further, as fund-to-fund transfers become more common, parties are likely to focus more closely on their rights in a potential fund-to-fund transfer scenario.

By Thomas Tharakan

The exit environment recently ranked as the second greatest challenge facing global PE fund managers, according to Preqin’s H1 2017 Outlook report. As buyout firms weigh an uncertain exit outlook, they are increasingly seeking to de-risk early by selling minority stakes in portfolio investments to preferred LPs. Partial exits to LPs have become more common in both Europe and the US, accounting for 24% of all partial exits this year, according to PitchBook.

Why Are Early Partial Exits Popular?

Such deals allow buyout firms to lock in a return, while also sharing in future appreciation of an asset which is expected to continue to perform well. In recent years LPs have sought to ramp up their investment management capabilities, seeking new ways to deploy larger amounts of capital by acquiring a minority stake and taking a more active role in managing an investment alongside a PE sponsor. The investment provides the LP with an early look at an asset that is likely to be on sale in the near future, as well as assisting to cement the relationship between the buyout firm and the LP.

How to Achieve a Successful Early Partial Exit

By Stuart Alford QC, Daniel Smith and Kem Ihenacho

Legal professional privilege allows clients to share information with lawyers, knowing it need not be revealed in court. Privilege extends to legal advice generally, and to documents prepared in contemplation of litigation. Privilege has important implications for private equity beyond litigation, and can affect how firms and portfolio companies conduct internal investigations worldwide, and how information is shared during and after deals. However, challenges to privilege are increasing; from civil litigants, regulators and prosecutors.

Findings of Internal Investigations May Not Be Protected

Data released by the Financial Conduct Authority (FCA) points to a significant increase in investigations of regulated firms. This comes as the FCA broadens the UK’s Senior Managers and Certification Regime to financial sponsors, as part of a programme to assign responsibility and accountability to senior executives. External investigations typically trigger an internal investigation, as firms want to understand and respond to potential wrongdoing or failings. However, buyout firms should note that two recent cases make clear that investigation materials, in particular interview notes and transcripts, might not be privileged and could be disclosable in civil, regulatory and criminal proceedings.

By Frank Sun

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Chinese acquirers are playing an increasingly important role as buyers of private equity sponsored companies — nearly 200 portfolio companies were sold to Chinese entities in 2016. However, in our view, measures taken by the Chinese government to scrutinise transaction fundamentals more closely and slow capital outflows have impacted deals. The number of deals completed so far in 2017 has fallen to 63, compared to 109 at the same point last year. With Chinese deals now facing higher abort risks, we consider what buyout firms must know and do in order to achieve a successful exit.

Why Do the Deal?

Chinese regulators are focusing on the authenticity and commercial purpose of deals by Chinese companies. Acquisitions with a solid rationale that benefit the Chinese economy are unlikely to be rejected outright. So-called “irrational” deals (outside of a Chinese buyer’s core sector, particularly in the real estate, media, sports or hospitality sectors) will face greater regulatory hurdles. Private equity firms and their advisers need to factor this into any approach from a Chinese buyer.

By Gail Crawford

Cybercrime has become a critical issue for buyout firms as hackers are increasingly targeting sensitive business data to profit from insider knowledge. According to a Private Funds Management survey of 91 PE houses, 54% of PE firms said they had been hit with a cyberattack, while 45% said cybersecurity was a high threat to business operations. Despite this, 66% of PE firms said their cybersecurity programme was only partially implemented.

Buyout Firms Are Vulnerable

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If a PE firm falls victim to a cyberattack, highly sensitive information is likely to leak. This is problematic, especially in cases of listed buyout firms where performance data will be market sensitive, or in public- to-private transactions where any leak is price sensitive. Even where entities are not listed, buyout firms hold valuable information, not only on acquisition targets and portfolio companies, but also on their investors, which may include sovereign wealth and pension funds.

In our view, cybersecurity needs to be a priority for PE firms. However, many PE firms may have a limited number of IT support staff and a small budget to fight cybercrime. In order to combat the growing threat, this will need to change.