The Capital Commitment

Proskauer on Private Fund Litigation

Proskauer Partner Joshua Newville Discusses the SEC’s Focus on Valuation of Private Fund Investments

Proskauer partner Josh Newville discussed the SEC’s focus on valuation of private fund investments at the recent Securities Enforcement Forum West 2020. The global COVID-19 crisis has added a layer of complexity to the valuation process, requiring special care. As we predicted in our 2020 Top Ten Regulatory and Litigation Risks for Private Funds, ongoing economic uncertainty will likely lead to increased scrutiny on fund managers’ valuation of privately-held portfolio companies from both the SEC and investors. At the recent securities enforcement conference, Josh addressed the following potential risks.

  • In light of recent events surrounding tech unicorn IPOs, regulators and investors are likely to take a hard look at all parties involved in unicorn valuations that, in hindsight, may have perhaps been too optimistic.
  • Enforcement is also likely to focus on valuation and performance claims, particularly claims regarding performance based on unrealized gains, in marketing materials.
  • The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) will continue to raise questions regarding valuations during exams. OCIE has made clear that it will focus on fund advisers that rely on third-party vendors, including vendors that provide valuation services.
  • In light of economic uncertainty, credit funds may be fielding questions about their valuation of credit holdings as defaults, and the risk of defaults, increase.

Five Principles For Accurate and Reliable Portfolio Company Valuations

We have seen the SEC increase its focus on valuation of privately-held portfolio companies recently. The SEC’s increased focus is in line with our prediction made in the Top Ten Regulatory and Litigation Risks for Private Funds in 2020 post from the start of this year, and we expect the trend to continue. The global COVID-19 crisis has added a layer of complexity to the valuation process, which for illiquid assets can be challenging during even calm economic conditions. While some companies have benefited from the changes brought on by COVID-19, the overall market conditions resulting from the crisis have led some to predict an increased likelihood of down rounds and a decrease in expected returns, potentially impacting small portfolio companies and large unicorns alike. In some cases, economic uncertainty already has taken a quantifiable toll on the businesses and prospects of portfolio companies. And the process of estimating fair value remains even more challenging because the full scope of the economic downturn remains as yet unknown. Overly optimistic valuations can lead to inflated expectations of fund investors, as well as regulatory risks if the SEC decides to take a closer look at a particular valuation. Continue Reading

Poison Pills In the Wake of COVID-19: A Refresher on Terms and Variations of Shareholder Rights Plans

Shareholder rights plans, commonly known as “poison pills,” are arrangements that can be used by companies to stave off hostile takeovers or activist investors seeking to exert control over a company without paying a control premium. A typical rights plan, if triggered, would allow all shareholders except the triggering person to purchase additional shares in the company at a substantial discount. The resulting share dilution makes it significantly more expensive for the triggering person to purchase a controlling stake in the company. Because of this, it is extremely rare for a rights plan to be triggered; instead, rights plans can have the effect of encouraging hostile bidders or activist investors to negotiate directly with a company’s board of directors. Continue Reading

A Fund Managers’ Guide to Maximizing D&O and E&O Insurance Coverage

“A Fund Managers’ Guide to Maximizing D&O and E&O Insurance Coverage” examines best practices for fund managers—particularly in the current economic climate—for negotiating and obtaining strong insurance protection and maximizing recovery when claims arise. As the economic impact of COVID-19 continues to reverberate across all global industries, there is an increased risk of claims being asserted against private fund managers, their funds and portfolio companies, as well as key individuals, both in their capacity as members of fund management and/or as members of a portfolio company’s board. At the same time, however, the insurance market has become much more challenging for fund managers to successfully navigate.

In this article, Proskauer’s Insurance Recovery and Counseling team weigh in on some of the most important insurance issues adversely affecting fund managers and the recent shift in behavior from insurers as a direct result of the impacting global pandemic.

Read the full client alert here.

UK’s Financial Conduct Authority Warns That Fund Managers Are at Increased Risk of Cyber Attacks

With 46% of UK business reporting a cyber attack during 2019/2020 and 32% reporting at least one a week – see the UK Government’s Cyber Security Breaches Survey 2020 – the UK’s Financial Conduct Authority (“FCA”) has issued a timely warning to market participants of increasing cyber security threats in the wake of COVID-19. Continue Reading

ESG-Focused Fund Strategies Face SEC Scrutiny on Disclosures and Internal Procedures

As investors drive demand for investment products focused on environmental, social and governance (ESG) factors, fund managers have increasingly offered ESG-focused or “sustainable investing” funds. However, a recent speech by SEC Commissioner Elad Roisman has highlighted regulatory concerns for fund managers in the ESG space, particularly with respect to disclosures and internal compliance. Continue Reading

Ten Tips for Navigating Risks and Liability at Portfolio Companies During COVID-19

Many portfolio companies continue to confront business disruptions as a result of the COVID-19 pandemic. Even prior to the pandemic, we were seeing an uptick in litigation claims against sponsors and funds arising out of portfolio companies. The liquidity challenges since March have increased those risks at some companies. For sponsors, many of these risks arise from director positions and conflicts of interest, whether real or alleged. Below we provide tangible ways for fund sponsors to identify risks, educate their directors, and mitigate risk. Continue Reading

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