PRIVATE EQUITY INDUSTRY INSIGHTS PERSPECTIVES FALL 2019 IN THIS ISSUE FOREWORD n Feature Article RETAIL INVESTMENTS WELCOME TO THE INAUGURAL ISSUE OF PERSPECTIVES, IN PRIVATE FUNDS �����������2 our quarterly publication featuring news, trends and legal developments in the private equity industry� We are n FOCUS ON FINANCE ���������5 thrilled to launch this new publication, which includes contributions from a cross section of our global team� n HEALTHCARE CORNER ������6 With a preeminent global private equity practice, we see n ASIA ANGLE ��������������������8 the market through a wide-angle lens—encompassing the full spectrum of fund and deal types and sizes—which n PE MARKET WATCH ����������9 informs our perspective� Each quarter, PErspectives will highlight noteworthy trends and other developments n SELECT relevant to private equity clients in the U�S� and around TRANSACTIONS �������������10 the world� In this Fall 2019 issue, we highlight: the SEC’s recent debate over whether to expand access to private funds to retail investors and retirees; the increased focus on partnerships with digital health companies; the rise of SPACs in the Asia market; the erosion of the “marketing period” in syndicated all-bank acquisition financings; and recent market trends around the use of rep & warranty insurance in lieu of seller indemnification (as observed Law Firm through data collected in our deals database)� of the Year “Leveraged Buyouts and We encourage you to reach out to any member of your Private Equity” Ropes & Gray team (or to the authors noted herein) with any “Private Funds/Hedge Funds” questions regarding the contents of this newsletter or any other legal developments of interest to you� We look forward U.S. News–Best Lawyers 2020 to continuing to bring our private equity clients timely news, trends and legal developments in the future� PERSPECTIVES FALL 2019 1 PRIVATE EQUITY INDUSTRY INSIGHTS PERSPECTIVES On June 18, 2019, the SEC published its Concept Release RETAIL INVESTMENTS IN PRIVATE FUNDS on Harmonization of Securities Offering Exemptions (the Regulatory Obstacles and Opportunities “Concept Release”) to solicit public comment on exemp- tions from registration under the Securities Act of 1933 INTRODUCTION (the “Securities Act”).4 Most of the Concept Release OVER THE PAST SEVERAL YEARS, regulators and market par- describes the requirements and limitations of Securities ticipants increasingly have called for the expansion of Act registration exemptions that make up the existing investment opportunities for retail investors and retirees. exempt offering framework and solicits responses to a These calls for expanded opportunities have cited market wide range of questions.5 Commenters’ responses are structure changes, the looming retirement crisis and basic intended to help the SEC assess whether changes to appli- fairness to retail investors and retirees who do not meet cable statutes and regulations are necessary or desirable existing regulatory proxies for investor “sophistication.” to improve specific exemptions and, more generally, the SEC Chairman Jay Clayton, for example, observed that, existing exempt offering framework. in 2018, more capital was raised in the private markets than in the public markets, and that retail investors STATE OF THE MARKET should (but currently do not) have access to those oppor- AT A HIGH LEVEL, the federal securities laws and ERISA tunities.1 Because retail investors are generally limited to essentially foreclose significant retail investment in private investments in public companies, market trends suggest funds. As described below, direct investment in private that the investment opportunities available to retail inves- funds is generally available only to investors who meet both the “qualified purchaser” and “accredited inves- tor” standards under the 1940 Act and the Securities Act, respectively. While a handful of “registered funds of private funds” currently exist in the marketplace, an SEC SEC Chairman Jay Clayton, for staff position requires that these products be sold only to example, observed that, in 2018, more accredited investors, which drastically limits their avail- ability in the marketplace. In addition, practical consid- capital was raised in the private markets erations and legal risks largely deter sponsors of defined than in the public markets, and that contribution plans (including 401(k) sponsors) from retail investors should (but currently do offering exposure to private funds to plan participants. not) have access to those opportunities. FEDERAL SECURITIES LAWS Private funds generally rely on an exclusion from the definition of “investment company” under Section 3(c)(7) of the 1940 Act to avoid registration as an investment tors have decreased.2 Calls for expansion of retail invest- company.6 To rely on the Section 3(c)(7) exclusion, a ment opportunities have also noted that lack of access to private fund’s securities must be owned exclusively by investments in private funds3 is contributing negatively to persons who, at the time of acquisition of the securities, the retirement savings of many U.S. workers. Comment- are “qualified purchasers.”7 In our experience, most ers have also noted the direct link between retail inves- private funds of any significant size are Section 3(c)(7) tors’ access to investment opportunities, on one hand, and funds that accept investments only from qualified private companies’ and small businesses’ access to invest- purchasers. Approximately 98% of U.S. households are 8 ment capital, on the other hand. not qualified purchasers. PERSPECTIVES FALL 2019 2 PRIVATE EQUITY INDUSTRY INSIGHTS PERSPECTIVES The investor protection policies underlying the definitions of “qualified purchaser” and “accredited investor” have been a key feature of the federal securities laws. Investors who are neither accredited investors nor qualified Welcome LATERAL PARTNERS purchasers—i.e., retail investors—are effectively blocked WE ARE PLEASED to announce that eight from investing directly in private funds. high-profile lateral partners with extensive experience serving private equity clients ERISA joined Ropes & Gray in 2019. Defined benefit plans are significant investors in private funds, and there is evidence that exposure to private fund investments is contributing to the outperformance of defined benefit plans compared to defined contribution plans.9 Over the past few decades, however, employer- sponsored retirement accounts have migrated sharply Scott Abramowitz Eve Ellis away from defined benefit plans and toward defined Private Equity Asset Management New York London contribution plans as the sole retirement plans for employees. This shift has resulted in increasing numbers of plan participants and their beneficiaries being deprived of the benefits of exposure to alternative asset classes in their retirement plans, despite sponsors and fiduciaries of Andrea Hwang Leonard Klingbaum defined contribution plans having shown interest in hedge Finance | New York Finance | New York funds and private equity investments.10 The DOL could facilitate investment in private funds by defined contribution retirement plans by providing formal guidance that (i) reaffirms the long-standing Violetta Kokolus Edward McNicholas principle that a 401(k) fiduciary must consider the Intellectual Property Data, Privacy & totality of factors related to investment options as Transactions Cybersecurity New York Washington, D.C. opposed to just focusing on liquidity and fees and (ii) expands the safe harbor for plan fiduciaries who are making good faith efforts, well informed by expertise on long-term retirement investing, to provide participants with access to alternative asset classes that offer the potential for Cristine Pirro Carolyn Vardi attractive gains and greater diversification to hedge risk. Schwarzman Private Equity Business Restructuring New York New York POTENTIAL BENEFITS OF PRIVATE FUNDS The policy argument for expanding opportunities for retail investors to obtain exposure to private funds is that most such investors are missing out on an increasingly important set of investment opportunities. Some commenters claim inequality in the U.S.11 Separately, the significant number that the federal securities laws, by foreclosing most of households that are not prepared for retirement also investors from access to private offerings, facilitate wealth supports expanding retail access to private funds.12 PERSPECTIVES FALL 2019 3 PRIVATE EQUITY INDUSTRY INSIGHTS PERSPECTIVES POSSIBLE ALTERNATIVES tribution networks capable of marketing to retail investors We examine three possible approaches to expanding retail and may not have the operational or administrative capac- access to private funds: (i) direct access, (ii) investment ity to service large numbers of retail investors. A potential through a registered vehicle organized as a “registered fund solution to these operational and administrative challenges of private funds,” and (iii) investment through a feeder might involve an unregistered “feeder” fund sponsored by a fund advised by a registered investment adviser (“RIA”). financial intermediary. An unregistered feeder would require regulatory changes similar to those described above. REGISTERED FUND OF PRIVATE FUNDS In a “registered fund of private funds” model, a fund Three possible approaches to sponsor would organize a registered investment company expanding retail access to private funds: that would invest its assets in a number of underlying (i) direct access,