August 2015

Profile: Stephanie Breslow SRZ’s Leading Investment Management Practice

HAMLIN LOVELL

mongst many awards received by the development companies (BDCs) and other firm, Schulte Roth & Zabel (SRZ) was publicly traded permanent capital vehicles that A selected as “The Leading Global Law some hedge funds are setting up, as well as Firm” at The Hedge Fund Journal’s Awards other ‘40 Act funds that focus on the alternative for 2015, and SRZ partner Stephanie Breslow asset management space. was selected as one of EY and THFJ’s “Leading 50 Women in Hedge Funds” for 2015, having While Breslow has clients setting up these appeared in the biennial survey since its vehicles, and sees significant interest in BDCs inaugural publication in 2009. Breslow and SRZ in particular, she also sees limits to the growth partner Steven Fredman serve as co-heads of of lower-fee paying forms of traditional “liquid SRZ’s Investment Management Group, which is alternatives,” or to hedge fund managers chaired by founding partner Paul Roth. running long-only funds, for various reasons. “Their lower fees can cannibalize existing THFJ interviewed Breslow to hear her views on products, yet other costs can lead to higher a selection of hedge fund industry trends in overall expense loads and there is even more several areas of the investment management regulation to deal with” – hence some single- practice – liquid alternatives, fund formation, strategy hedge funds that cannot differentiate fees, hybrid structuring, conflicts between BIOGRAPHY these products from their main offerings, will vehicles, seeding, start-ups and mergers not launch liquid alts, Breslow predicts. Instead, and acquisitions. We also touched on a Education they may set up funds-of-one or dedicated few other topics relevant to other parts of • B.A. from Harvard University, cum laude, in managed accounts for big institutional SRZ’s multidisciplinary practice – regulatory 1981. investors, who may demand lower management reporting, compliance and governance. • J.D. from Columbia Law School in 1984, and fees, but not lower incentive fees. Breslow finds was a Harlan Fiske Stone Scholar from 1982 that “20% carry remains universal, and hurdle Breslow is currently chairing the International to 1984. rates are rare.” Bar Association (IBA) Private Investment Funds Current role Subcommittee. She finds the annual IBA • Partner in the New York office, co-head of Where fee structures are changing more conference held in March in London, which the Investment Management Group and a radically is at the other end of the liquidity is co-chaired by Roth, to be informative for member of the Executive Committee, Schulte spectrum – in hybrid or private equity-type “outside counsel and in-house lawyers, who Roth & Zabel LLP. structures. “Some funds, particularly in can hear current issues faced by other senior distressed debt or activist strategies, have practitioners in the field.” Other private equity-style back-end loaded fees, • Chair of the Private Investment Funds particularly in co-invested vehicles, where Subcommittee of the International Bar Indeed, SRZ increasingly has a two-way traffic Association. investors want to await realizations,” Breslow of lawyers with its clients. Breslow says • Founding member and former chair of the observes. Sometimes, identical investment “traditionally, associates who did not want Private Investment Fund Forum. portfolios are being offered with two different a lifetime career at a law firm viewed us as a • Member of the Advisory Board of Third Way fee structures – one with traditional mark-to- graduate school before they went in-house,” Capital Markets Initiative. market hedge fund-style fees, and another but now there is more of a dual flow, and SRZ • Member of Board of Directors of 100 Women charging only as investments are monetized. in Hedge Funds. welcomes this because “in-house lawyers bring • Member of the Board of Directors and named valuable regulatory knowledge on the inner one of the 2012 Women of Distinction by the But such twin portfolios can later decouple workings of funds and insights into practical Girl Scouts of Greater New York. due to the asynchronous time frames of the aspects, such as how trades are allocated.” fund structures. “A hedge fund is an evergreen Stephanie Breslow was selected as one of The structure that can carry on making follow-on SRZ’s latest hire in the Investment Management Hedge Fund Journal’s “50 Leading Women In investments, but private equity funds may not Group, John Mahon who is based in the firm’s Hedge Funds” for 2015. be able, or allowed, to do so, if they have passed Washington, D.C. office, specializes in business their investment period,” Breslow explains.

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Different timing of entries and exits is and Volcker, so large multi-strategy hedge look for alpha, so those strategies have a lot of one potential conflict of interest between funds can play the roles banks have vacated.” traction right now.” investment vehicles, and SRZ advises managers Meanwhile, “big institutional investors writing on how to mitigate or avoid such conflicts. large tickets like to see strong operational Distressed debt as a strategy tends to use little Another instance of potentially divergent controls and a robust back office,” and more or no leverage on the fund’s balance sheet, interests amongst vehicles can occur when regulation favours size. and generally, Breslow observes there is much different tranches from the same issuer are less leverage in the system now. This is partly owned by different funds. This might simply be Regulatory demands may grow yet further. because “post-Lehman people grew more debt versus equity, or it could involve senior Teething troubles around regulatory sensitive to risks they had not focused on so debt versus junior debt, but in either case, the reporting such as Form PF have now been fully, leading to more demand for cash sweeps owners of higher-ranked instruments may not overcome, Breslow hears, but hedge funds and tri-party repos, more asset segregation and have any incentive to see recoveries on more may soon expand the scope of their Form ADV less re-hypothecation.” She also thinks that “the subordinated paper. submissions to include managed accounts. low inflation and low interest rate environment Form PF is confidential, whereas Form ADV is discourages funds from leveraging.” “We need to be sensitive about how to manage public, but Breslow does not view the latter as these issues,” says Breslow, who works closely sensitive because it does not report portfolio The relatively low leverage of the hedge fund with clients on possible approaches, which positions or compensation. industry is one reason why Breslow says she might include “being passive on one side, does “not expect regulators will seek to levy ensuring the same tranche is in both places, Regulation is one factor making life tougher for fines on hedge funds in the way that they or ensuring one holding is not too large.” start-ups, but she does think the climate has do with banks.” SRZ may advise funds on Sometimes independent valuation agents are improved since immediately post-crisis. Still, the negotiating settlements with regulators, and brought in to advise on fair value. average start-up must be bigger – though not fines for a handful of hedge fund managers necessarily as large as Rokos’ breakaway from have been a fraction of those applied to banks Occasionally, opposite ends of the liquidity Brevan Howard, or Scott Bessent’s planned spin- as “hedge funds are not as large and are not as continuum can be married in the same out from Soros. engaged in activities that create the same giant product. Some fund-of-funds and private market exposure that a LIBOR case does.” equity-style products are parking investors’ “Most funds cannot achieve a billion-dollar size committed capital in liquid alternatives, or launch, but the days of $25-million seed deals But some individuals working at hedge funds other liquid asset classes, pending drawdown are behind us,” says Breslow, who reckons “the do face increasing potential personal liability. requests from the manager. This neatly bare minimum is now $100 million to build One affected group is chief compliance officers addresses the problem that “realistically, something that makes sense.” The Volcker Rule (CCOs), who Breslow says “can be held liable, private equity requires liquid funds to cover means US banks are more likely to be divesting and SEC fines may not be covered by insurance, capital calls, but you don’t know the timing of from, than investing in, hedge funds, but SRZ so they may see their careers destroyed.” the draws,” Breslow says. Liquid alternatives is seeing small amounts of seed capital coming Moving onto Cayman fund directors, although can be disposed of in time to meet the typical from high-net-worth individuals and family the fines for Weavering’s directors were 10-business-day deadline for capital calls, offices with larger amounts from selected ultimately overturned, Breslow thinks the reducing the risk that investors miss the calls. institutions. case “still had a transformational effect as it made people more conscious that they need to Certainly, a growing number and diversity Those seeking to start new firms or funds face document involvement and ask questions, as the of investment vehicles are housed under “more pressure to differentiate themselves,” Weavering facts were egregious.” This raises the common corporate umbrellas as the industry Breslow has noticed. The most popular areas bar for investor due diligence and increases the consolidates. SRZ is actively advising on for fund formation in mid-2015, according standards investors demand of fund governance M&A deals amongst alternative investment to Breslow, include activism (for which THFJ bodies, including fund directors. THFJ managers, and Breslow thinks corporate recently interviewed London-based SRZ partner activity will continue, as it “makes sense Jim McNally to discuss how the landscape for on a lot of levels.” There are supply-side and activists in Europe differs from the US), multi- demand-side drivers. The opportunity set for manager platform activity, the energy sector for hedge funds is expanding as “investment both private equity and hedge funds, and credit banks are less present, thanks to Dodd-Frank and distressed, where Breslow thinks “investors

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