- Increased Investor Communication and Transparency: Investment managers have stepped up the frequency and level of communication with their investors to address fund and organizational developments. It is important that when managers do so, that they treat all investors the same. For more information on best practices with respect to selective disclosure, please listen to our recent webinar Regulatory Updates with Seward & Kissel.
- Growth in Opportunistic Investment Structures: The significant market dislocation has created opportunities for many managers and allocators. There are many ways to structure these investments with numerous factors to consider. Seward & Kissel’s Investment Management group outlined several alternative structures and considerations that may be utilized when seeking invest opportunistically: Establishing an Opportunistic Investment Structure.
- Fund Finance Market Has Remained Healthy and Active: COVID-19 has placed significant stress on liquidity and financing markets with respect to the private equity industry, with fund sponsors concerned about liquidity streams at both the fund and portfolio company level. Generally, we have seen new facilities and the timeline on closing facilities to be timely in order to ensure liquidity for opportunistic investments. Additionally, many lenders are focusing on their current sponsor relationships, which provides an opportunity for other lenders to establish new relationships with smaller, emerging sponsors. To read more about what we are seeing in the fund finance market, read our COVID-19: Fund Finance Update.
- Operational Due Diligence (ODD) Goes Virtual & the Impact on Capital Raising: Given the current social distancing orders that are in effect, ODD teams are unable to perform on-site due diligence. As a result, investment managers with existing strong LP relationships and managers with “brand names” are reaping the rewards as there is an existing level of comfort with these managers’ track records and infrastructure. Nonetheless, allocators are still hyper-focused on operational areas as they conduct modified forms of due diligence via WebEx and videoconference applications. For more information on capital raising trends, read our most recent report Front Page Focus: Capital Raising in the Age of Coronavirus: A Special Flash Survey Report.
- Rise in Side Letters: There has been a growing number of large allocators who are proposing side letters as part of their capital contributions. Investor asks may range from fee and liquidity concessions to most favored nations clauses to more bespoke demands. For a copy of Seward & Kissel’s most recent side letter study, please click here.
- Material Adverse Change (MAC)/ Material Adverse Effect (MAE) Clauses: Many clients that are involved in M&A transactions are asking whether the effects of COVID-19 would constitute a MAC or a MAE. Such a trigger could entitle a party to walk away from its obligations under the transaction agreement. Historically, it has been extremely difficult to prove an event qualified as an MAE. Courts interpret these clauses very narrowly, and usually look for adverse effects that are durationally long, singularly affecting one company as opposed to an industry, and outside the contemplation of the parties. At this time, it is still difficult to predict the impact of COVID-19 on MAE termination rights in existing M&A agreements, since its duration is still unknown and its effect and severity on different industries may vary widely. Any such determination will be fact specific and will require an analysis of the specific definition of MAE in the transaction agreement. As a result, parties currently negotiating new M&A agreements may wish to incorporate more specific language regarding the existing pandemic or other similar types of events into their MAE clauses in an attempt to further protect their interests.
- Alternative Methods of Prospect/Client Engagement: As in-person meetings have become an impossibility, managers are relying heavily on alternative means to push the investor due diligence process forward. These include calls on Zoom, BlueJeans, Microsoft Teams, WebEx and other communications apps. Additionally, the SEC clarified requirements for virtual Annual General Meetings (AGM) which include adequate notice, notifying all relevant market participants and filing of an announcement on EDGAR. Seward & Kissel outlined the SEC’s clarifications in our memo: SEC Clarifies Requirements of Virtual Annual Meetings, Issues Disclosure Guidance in Response to COVID-19 and Extends Filing Deadlines.
- Business Continuity Plan Changes: Prior to the coronavirus pandemic, most BCPs were focused on physical infrastructure disruptions; however, unlike other BCP events, the pandemic has had a direct impact on personnel availability. Accordingly, we have seen amendments to BCPs focused on personnel redundancy planning and alternative workflows in case such personnel become unavailable due to illness, family-related issues or otherwise. Similarly, managers are reviewing cybersecurity measures for personnel working remotely and asking their key service providers for information about their own BCP setup to ensure no disruptions in service.
- Re-focused Cybersecurity Training: With most individuals working remotely, often on home or personal devices, there has been a significant spike in cyberattacks aimed at this segment. Bad actors will attempt to gain access by exploiting outdated virtual private networks (VPN), through phishing schemes and malware, and/or lack of the use of multi-factor authentication (MFA). Managers are responding through greater training and testing of their security systems. To review a full memo on cybersecurity considerations, please see our Cybersecurity Considerations in a Work-From-Home Environment memo.
- Return of the TALF: In late March, the Federal Reserve Board (Fed) extended a vital lifeline to the reeling asset-backed securities (ABS) market by announcing the establishment of the Term Asset-Backed Securities Loan Facility (TALF 2020). TALF 2020 is intended to support the flow of credit to U.S. consumers and small businesses by facilitating the issuance of ABS and improving ABS market conditions. To view Seward & Kissel’s memo outlining the terms released by the Fed in a high-level TALF 2020 term sheet, click here. On April 9, 2020, the Fed amended certain aspects of the initial TALF 2020 term sheet, as described in our Updated TALF 2020 Term Sheet memo.
- SEC Trends: The SEC is focused on maintaining market integrity and the need to be mindful of disclosure controls and procedures, insider trading prohibitions, code of ethics obligations, Reg FD, and selective disclosure prohibitions. Given significant disruptions to the markets, we expect managers’ process for the oversight of MNPI will receive even more regulatory attention. See SEC public statement on market integrity here: https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity.
