Private Fund Services

Pepper Hamilton LLP’s Private Fund Services Group — a core component of the firm’s Investment Funds Industry Group — partners with U.S. and international funds and their sponsors, managers, advisers and investors to define and achieve their goals. The more than 25 lawyers in the Private Fund Services Group have represented hundreds of pooled investment vehicles, including independent sponsors and committed funds, and are well versed in the dynamic and ever-evolving arena of investment structuring and regulation. We work with our clients to help them not only understand the new regime of transparency, accountability and enforcement but to successfully adapt to it.

Our Private Fund Services team — which includes veterans of the asset management industry, the SEC, FINRA, the Department of Justice and other agencies — has experience in investment management, structuring, securities offerings, portfolio investment transactions and regulatory matters affecting investors, investment vehicles, family offices and portfolio companies. We regularly counsel on the various issues that may arise from different fund structures, fund strategies and investor bases. We are also able to call on our colleagues throughout the firm to assist with other issues arising during a fund’s life cycle, including technology, litigation and litigation-risk mitigation, government investigations and white collar defense, FCPA issues, FATCA compliance, CFTC matters, energy and environmental regulation, information management, privacy, governance, shareholder activism and public securities regulation.

Fund Life Cycle Counseling

We counsel funds and their sponsors, managers, placement agents, administrators and registered and unregistered advisers, as well as exempt reporting advisers, in all matters arising throughout the fund’s life cycle, including:

• fund formation and structuring (domestic and offshore)

• regulatory compliance

• investor negotiations and relations

• general partner and management structuring, compensation and succession

• investor relations, interest transfers, employee issues and other fund operations

• investment and divestment transactions

• annex, bridge and successor funds

• liquidity credit facilities

Fund Formation

At the outset of the fund formation process, we seek to understand and be aligned with our clients’ goals and expectations, the expected evolution of the fund’s structure, the fund’s investment strategy and the fund’s likely investor complement. Taking these factors into consideration, we provide practical advice on strategies for crafting the fund’s economic and management terms; the fund’s structure; possible exemptions under the Investment Company Act of 1940; the structure of the general partner and management company; compliance with the Investment Advisors Act of 1940; state law and ERISA issues; and contractual arrangements.

Fund Operations

On the operational side, we counsel clients globally on fund management issues, including the following:

• identifying costs as fund expenses or management company expenses

• the structure, constitution, use and compensation of advisory boards

• compliance manuals

• regulatory issues, including mock, SEC and other regulatory audits

• transfers of investor interests

• structuring and using employee participation vehicles, fund leverage and liquidity facilities

• conflicts of interest

• amendments to fund documents

• limited partner consents and defaults

• governance and operations

• portfolio company management and governance

• portfolio company valuations

• broker-dealer and execution issues

• derivatives use

• calculating and timing distributions to investors and the general partner

• clawbacks and management fee waivers

• establishing and maintaining reserves and holdbacks

• fund wind-downs or early termination

We assist our hedge fund clients with a wide variety of issues that arise within their industry, such as:

• partner withdrawals

• calculation and payment of incentive allocations

• hurdles and high-water marks

• private equity–like special allocations for initial costs

• withdrawal fees, reserves against withdrawals and withdrawal gates

• holdbacks for illiquid investments and special assets

• side-pocket investments

• rebates/discounts in management fees or incentive allocations

• separate series (“ring fenced”) partnership and LLC structures

• back-office service agreements

• custody and know-your-customer rules

• side letters

• International Swaps and Derivatives Association contracting

• leveraged swaps

• variable annuity wrapper funds and registered closed-end funds of funds

Funds of Funds and Investments in Other Funds

We advise clients on forming and operating private equity and hedge funds that invest in other funds — commonly known as “funds of funds,” as well as the unique issues that clients face in this industry. We regularly help clients with matters involving special structuring and flow-through issues, ratcheting carried interests and preferred returns, fee-stacking, confidentiality and transparency goals and problems, redemption and withdrawal, transfer and reinvestment rights and custody and compliance issues. We also often represent our fund of fund clients in their investments in underlying funds.

Secondary Transactions

We often represent funds on both sides of secondary transactions, analyzing exposure to potential liabilities, negotiating the terms of sale and negotiating the terms of consents of fund managers, lenders and others. When we represent the buyer of a portfolio of interests, we also examine the underlying portfolio to assess the tax liability and reporting exposures to the buyer’s mix of investors.

Successor Fund Counseling

Our work for clients on successor fund issues includes planning for the next fund and reconciling fiduciary responsibilities to limited partners and other principals within the general partner with management resources and responsibilities. We also help clients in situations when conflicts may arise, such as when two affiliated funds co-invest.

Management, Succession and Cultures of Compliance

We advise fund managers and advisers, including general partners and investment managers, on a variety of business matters, such as tax issues, applicable regulatory frameworks, defining and documenting governance standards and mechanisms, and issues ranging from compensation of principals to non-compete covenants. We also ensure our fund manager clients begin succession planning early on to avoid unexpected disruptions to fund operations.

We also advise managers, advisers, general partners and principals regarding the following issues:

• co-investment opportunities

• business dealings with investors in the fund

• procedures for advisory and investment committees

• participation in other activities, including conflicting activities

• forming follow-on or other investment funds

• follow-on and “rescue” investments

• adding “annex” funds

• LP defaults

• resetting economics

• designing codes of ethics, operating and compliance manuals, and marketing and trading policies

• developing trading policies to allow for side-by-side management of funds, registered products and separately managed accounts

• negotiations with placement agents, administrators and prime brokers and developing operating procedures to manage third-party service provider relationships.

We also work with managers on broker-dealer and futures market regulatory issues and advise on the overlap and entanglements of different regulatory agencies’ requirements, with the aim of helping managers develop and maintain “cultures of compliance” in their fund operations.

The Enforcement Environment

With asset managers facing increased scrutiny from federal and state regulators, as well as self-regulatory organizations, the Fund Services Group and our securities enforcement litigators work side by side to counsel and defend fund, advisory and broker/dealer and CPO/CTA clients at every stage of matters involving government oversight.

We guide our clients through investigations and litigation involving a wide variety of allegations, including insider trading, allegations of financial fraud, market manipulation, market timing and late trading, improper sales practices, excessive markups and advisory fees, inadequate supervision of securities professionals and accounting irregularities by corporate executives.

Understanding the reputational harm caused by an enforcement action, we work with clients to evaluate all options and ensure proactive communication with regulators.

Employee Participation Vehicles

As the market for alternative investment vehicles matures, principals look for more creative ways to attract good management and to share the rewards associated with strong fund performance. As long as capital gain treatment for carried interests income remains a possibility, fund managers will likely be interested in sharing those tax benefits with personnel deep within their organization, and we have helped clients establish investment vehicles that enable employees to invest in the fund or share in the carried interest earned by the sponsor.

New Challenges for the Private Funds Industry

Alternative investment funds, particularly hedge and private equity funds, have been subject to heightened scrutiny from legislators and government agencies in recent years. With increased regulation under the Dodd-Frank Act, new actions from Congress and the SEC and changing requirements in international jurisdictions, this trend is likely to continue in the future. We work with our clients to ensure they both stay on top of these developments and prepare for future change.

Second Opinions

Given the complex regulatory environment in which funds and their advisers must now operate, we are regularly consulted by persons who are not yet clients of Pepper to provide “second opinions” to verify the conclusions and recommendations of management, in house counsel or other outside counsel, or simply to offer a differing point of view. The scope of a second opinion can be as narrow or broad as the particular issue under consideration and the client’s business objective. Second opinions also provide a vital link in the due diligence analysis applicable to complex investments, transactions and the ever-changing regulatory mandates.