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 Tom Alabaster and Nick Benson

Increasingly complex fund structures and documentation mean that analysing how potential portfolio acquisitions interact with the fund at the top of any deal structure is more important now than ever.

Investor Excuse Rights for Environmental, Social, and Corporate Governance (ESG) Compliance

As investors focus on ESG compliance, requirements for “excuse rights” for non-compliant investments are expanding. Firms usually avoid the most obvious red flags with ease but in our view, restrictions on investing in businesses breaching environmental or anti-corruption standards are more problematic, as even blue-chip multinationals are not immune from these issues. Where an investor is excused, the GP must source cash elsewhere — ideally from remaining investors, who can often be required to increase participation to fill the gap. With many funds accepting commitments representing significant proportions of the total fund size from a small number of large LPs, sophisticated investors are increasingly concerned about the consequences of large LPs being excused from investments and have sought to mitigate such risks through negotiating restrictions on “topping-up” participation. Deal teams must engage in careful diligence early in the deal process and be cognizant of the impact of LP opt-out rights on a fund’s capacity to participate in a deal.