Private Equity Fund Law

The Legal Protections Funds Have When Investors Fail

Many institutional investors and high net worth individuals have fallen on hard times, opening up the possibility of limited partners failing to meet capital requirements for private equity funds.  When a limited partners goes bankrupt, the general partners of the fund may also take a loss.  An important case in bankruptcy involved the limited partners of several private equity funds who sought and received recognition of insolvency proceedings commenced in the British Virgin Islands.

According to the NY Law Journal, in the event that an investor fails to meet a capital commitment, the manager of a private equity fund has the following recourse:

(i) offering the defaulting limited partner’s unfunded commitment to another limited partner or a third party,

(ii) withholding distributions to the limited partner,

(iii) offsetting distributions to the limited partner against unfunded capital calls,

(iv) compelling forfeiture of all or a percentage of the limited partner’s interest in the fund,

(v) charging interest to the limited partner on the unfunded amount until such amount is satisfied, and

(vi) initiating a lawsuit against the defaulting limited partner.

There seems an unfair advantage given to the defaulting party if the investor receives all the benefits of the partnership agreement without fulfilling the entire obligation.  Luckily, the NY Law Journal suggests several ways to remedy this unfortunate situation:

• Negotiate With the Debtor/Limited Partner:  Often the defaulting investor values his stake in the fund and will be willing to negotiate different terms or a suitable compromise so that he can keep his partnership interests.
• Relief from the Court: As previously noted, by appealing to the bankruptcy court for relief, a general partner may be able to still make capital calls or other remedies.  The GP will have to show that by not receiving the investors’ capital the fund is suffering and the court may lift the stay.
• Setoff or Recoupment: The Journal explains: “Section 553 allows a creditor to offset a debt owed to it arising before the commencement of a case against a claim of the debtor against the creditor also arising prior to the commencement of the case.
  Alternatively, the general partner may exercise the equitable remedy of recoupment, pursuant to which a creditor reduces the amount of debt owed to a debtor by the amount owed by the debtor to the creditor. Recoupment is an equitable defense; it is like setoff in the sense that one obligation reduces another, but in the case of recoupment the obligations arise out of the same transaction.” 
• Assumption or Rejection of the Partnership Agreement: “The general partner also may make a motion with the court seeking to compel the debtor/limited partner to assume or reject the partnership agreement (or other fund governing agreement) pursuant to §365 of the Bankruptcy Code.”

The Journal also suggests several ways to protect the fund against this situation in the pre-bankruptcy period, see this article for the full explanation of each measure.

It is important for General Partners to consider the unfortunate possibility that investors will default on obligations to the fund. I am not a lawyer, but the authors of the piece that this explanation of private equity and bankruptcy courts is based on are Richard F. Hahn and Michael E. Wiles are partners, and Bryan R. Kaplan is an associate, with Debevoise & Plimpton.  Disclaimer: consult a legal professional before following any of the preceding suggestions.  Source

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Tags: private equity law, legal protection, bankruptcy, bankruptcy court, private equity laws, buyout law, general partners, partnership agreements, limited partners, partnership, capital calls, commitments

Martin Curie Hedge Funds

Martin Curie: Hedge Fund Inflows at Pre-Crisis Levels

Good news at Martin Currie, the firm says its clients are investing their money in its hedge funds at levels not seen since before the financial crisis of the past 2 years. Martin Currie, which manages $1.2 billlion, had seen massive outflows totaling $300 billion from October to June; but impressive returns by many hedge funds in 2009 have brought back investors.

Martin Currie’s Japan hedge fund rose 0.8 percent last year and has gained 15 percent so far this year, according to documents obtained by Reuters.

Its Global Resources fund fell 10.2 percent last year and has risen 8.6 percent this year, while its China fund fell 14.4 percent last year and is up 18.6 percent so far this year.

Sowerby said Martin Currie saw net flows turn positive in February and said investors who had pulled out assets last year were returning to hedge funds.

The firm is also winning new business from institutions looking for more control and visibility from portfolios via so-called managed accounts — separate accounts where investors own the assets rather than units in a fund and can sell assets when they wish.

Sowerby said around 50 percent of Martin Currie’s hedge fund assets were held via managed accounts, and he expects this proportion to grow. Source

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HSBC Hedge Fund Losses

HSBC Alternative Investments Takes Biggest Losses

The hedge fund industry suffered heavy losses during the recession, unfortunately making the “biggest loser” a more competitive category than years past. HSBC Alternative Investments took the worst hit in terms of outflow.

The fund of hedge funds business failed to retain investors and lost 4.2 billion Swiss francs (almost $4 billion) in the first six months of this year. Since HSBC Alternative Investments hit its peak last September, its assets under management has fallen a staggering 52% from a combination of redemptions and losses on investments. The fund of hedge funds industry has been one of the hardest hit during the recession.

The Geneva-based fund of hedge funds business of HSBC reported the single-largest outflow, in absolute terms. Investors yanked 4.2 billion Swiss francs from the private bank in the first six months of the year, the Financial Times reports. That, combined with huge investment losses, leaves the firm’s fund of funds business with just US$22.27 billion, 52% less than it managed at its peak last September, when it boasted US$46.28 billion.

HSBC AI blamed its decision not to chase market share or deposits by increasing rates and lowering margins for the continued first-half redemptions, according to the FT. But CEO Alexandre Zeller said high-net worth clients are again finding a taste for risk and are looking to return to the market. Source

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Tags: HSBC Alternative Investments, HSBC AI, HSBC Alternative Investments losses, HSBC earnings, redemptions, losses, investors, decline, investments, limited partners, hedge funds

India Family Offices

Family Offices Gain Popularity with India’s HNIs

The number of high net worth individuals (HNIs) has grown impressively leading to a similar rise in Multi-Family Offices. A family office is a unique capital source for private equity and venture capital funds so its important to track the development of this industry.

India had the second-highest increase in high net worth individuals in 2006 and 2008. India now has an estimated 84,000 families with net assets of at least $1 million (roughly Rs 5 crore). Family offices have emerged as a helpful way to manage that wealth.

What makes MFOs popular is that they earn money on the fee clients pay and ability to work with other financial services companies. This is absent in wealth management companies that earn income from selling in-house products.

“Ultra-rich families are increasingly thinking that product-driven wealth management companies do not serve purpose,” said Richa Karpe, director, investments at Altamount Capital Management, a multi-family office firm.

“Family office is at the top of the pyramid in wealth management space. It is for people who have liquid financial assets over Rs 50 crore,” said Rajesh Saluja, CEO, ASK Wealth Advisors. For any amount below that, the cost of managing the assets will shoot up. Most of the companies agree with this. Client Associate is the only exception that takes families on board with investible surplus of Rs 10 crore.

Read more…

If you’re wondering what a family office is, please see this educational video definition of a family office.

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Montagu Private Equity

Montagu Private Equity | Private Equity Profile

The following piece on Montagu Private Equity is being published as part of our Private Equity Tracker Tool, our daily effort to track private equity firms in the industry.

Resource #1: Montagu Private Equity is looking to sell British Car Auctions, Europe’s biggest used vehicle auction company, for £600million, according to reports. If true, it would bank a tasty £150million profit on the business that sells over 800,000 vehicles every year. It bought the company three years ago from a consortium of investors, including Lord Ashcroft, current deputy chairman of the Tory Party.

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General Atlantic

General Atlantic | Private Equity Profile

The following piece on General Atlantic is being published as part of our Private Equity Tracker Tool, our daily effort to track private equity firms in the industry.

Resource #1: US-based private equity (PE) major General Atlantic is learnt to be final stages of talks with Wockhardt Hospitals to invest around $140-150 million. Although there are some differences over the valuation and structure of the investment, the PE may pick up around 20% stake in the Indian company, sources said.

The hospital chain has been in talks with several PE funds after its initial public offer (IPO) got derailed earlier this year. Talks with most PE funds had also fallen through over differences about the company’s valuation, PE sources said. When contacted, a Wockhardt Hospitals spokesperson said: “We don’t comment on market speculations.”

Source

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AIG Private Equity

AIG Private Equity | Private Equity Profile

The following piece on AIG Private Equity is being published as part of our Private Equity Tracker Tool, our daily effort to track private equity firms in the industry.

Resource #1: AIG Investments, the asset management arm of global financial giant American International Group, has now officially confirmed that it is up for sale and is negotiating deals with two parties. AIG Investments oversees some $100 billion in assets for AIG clients including pension funds and other insurance companies.

In the just released annual report of AIG Global AMC (India), AIG Investments has said it has selected financial partners and has entered into a period of exclusivity during which the financial partners will finalise their due diligence and negotiate a definitive purchase/sale agreement. AIG Global Asset Management Company (India), which has managed assets worth Rs 1,500 crore through mutual funds, is a also member of AIG Investments. Source

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Talos Partners

Talos Partners | Private Equity Profile

The following piece on New York-based Talos Partners is being published as part of our Private Equity Tracker Tool, our daily effort to track private equity firms in the industry.

Resource #1: Talos Partners Buys 4.5% Stake in Spanish Media Company

On top of the ten million shares that Talos has purchased, it has also acquired a warrant for up to one million more shares at €6 each. PRISA operates in the fields of education, information and entertainment through via various media formats.

Robert Brazell, Talos’ chairman who has been openly critical of traditional media companies in books and articles, said, “PRISA is the first intelligent, diversified, customer-centric, device agnostic, media group I have seen in ten years. PRISA has successfully transitioned in the new media model and will continue to dominate the modern Spanish-speaking media for the next 20 years.

“This PRISA partnership has moved all over our firm during the past few months,” added Brazell. “It began as a strategic partnership, then migrated to our structured lending people, and finally ended up with our capital group. When our team presented the in-store media partnership, we became more interested in PRISA’s core business. The more we drilled down past vision into technology and asset integration, the more we wanted to own part of this business.” Source

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Morgan Stanley Private Equity

Morgan Stanley Private Equity | Private Equity Profile

The following piece on Morgan Stanley Private Equity is being published as part of our Private Equity Tracker Tool, our daily effort to track private equity firms in the industry.

Resource #1: Morgan Stanley Private Equity Asia Bids to De-List Sihuan

The takeover bid would be for S$0.975 per share, a deal valuing Sihuan at S$458m ($318m). MSPE Asia is valuing the cardiocerebral vascular drug maker at a premium versus its current market cap of around S$360m ($250m).

China Pharma is an investment holding company backed by MSPE Asia and controlling shareholders of Sihuan, including the company’s CEO Che Fengsheng. Source

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Investment Limited Partnerships

Investment Limited Partnerships Glossary Definition

A partnership arrangement which limits a partner’s liability to the amount invested and likewise places a limitation on the amount of profit he/she can make.

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