Debevoise & Plimpton Private Equity Report Winter 2009 Volume 9 Number 2 Everything Old Is New Again: WHAT’S INSIDE Guest Column: 3 A Discussion with Barry Gold PIPEs Go Up-Market of the Carlyle Group About Infrastructure Financing Although PIPEs—private investments in included Warburg Pincus’s investment in public equity—have long had a place in the MBIA, TPG Capital’s investment in 5 Limited Partner Defaults: private equity toolkit, the tool had, for most Washington Mutual, Corsair’s investment in The Improbable Becomes Reality PE firms, become rather rusty in the context National City Corp, Carlyle’s investment in of the strong acquisition and financing Boston Private Financial, Berkshire Stimulus Legislation markets of recent years. Indeed, the coercive Hathaway’s investment in Goldman Sachs 7 Provides Some Good News nature of certain “toxic” PIPE structures that and Leonard Green’s investment in Whole for Portfolio Companies were common in the early part of this decade Foods. Even the U.S. government’s had until recently led some investors to investments in AIG, Citigroup, Bank of Deconstructing Equal and 9 Ratable Security Clauses consider the investment structure, as a whole, America and a host of other financial somewhat less than fully respectable. institutions were essentially PIPE transactions. Emerging Markets Shine in a That changed in 2008. Any suggestion The recent resurgence of PIPE deals 11 Difficult Year that PIPEs were somehow “downmarket” was resulted from a number of factors, including belied by last year’s series of multi-billion- unprecedented funding requirements of large 13 Disruptions in the LIBOR dollar deals involving not only leading private financial institutions, a scarcity of other Market: Borrowers Beware When the Boilerplate Is equity firms but some of the country’s largest sources of capital, a desire for greater speed Broken financial institutions and most well-known and certainty than typically available in a public companies. Notable transactions take-private transaction, and regulatory Bridging the Gap: How to CONTINUED ON PAGE 30 15 Get Deals Done in an Unsettled Market SEC Weighs in on Approval 17 of Stock Mergers by Written Consent ADS v. Blackstone: 19 Strine Endorses Private Equity Cabins Final Exon-Florio 21 Regulations: What They Mean for Private Equity © 2009 Marc Tyler Nobleman / www.mtncartoons.com Tyler © 2009 Marc Duties of Directors of 23 Distressed Companies: Avoiding an Intrinsic Fairness Review Debt Exchange Offerings: 27 A Flash in the Pan? Letter from the Editor The private equity community is hardly alone in being challenged package, the debate over private funding for public projects has by current economic realities. And, to be truthful, it is probably, as taken center stage. An ad hoc group of private equity professionals, an asset class, among the most able to weather the economic storm. bankers and lawyers has been organized to focus attention on the But no one will argue that the role of private equity in the role to be played by private capital in the development of public business landscape is the same as it was a few short (or long) years infrastructure. In our Guest Column, Barry Gold, Managing ago. In this issue, we highlight some of the techniques that private Director of the infrastructure investment group at Carlyle, is equity can use to invest in the current environment and explain interviewed by another participant in the ad hoc group—our why those investments might just work. On the cover, we remind partner, Ivan Mattei—about “privatizing” public infrastructure. readers (to borrow from Peter Allen) that “Everything Old Is New For those of you who still manage to maintain a “glass half full” Again” and provide a primer on structuring PIPEs transactions. In world view, we do our best to help you with that perspective. We “Bridging the Gap,” we explain that in a world without many provide some updates on recent legislation providing tax relief for financing options, it makes more sense than it once did to use portfolio companies deleveraging or modifying debt and on final earnouts, seller financing and rollover equity to bridge financing regulations providing comfort that the new Exon Florio regime will and valuation gaps between sellers and buyers. not be as stringent for private equity as initially proposed. A few years ago, limited partner defaults were of concern only to While the financing markets are in their current state, we urge compulsive lawyers drafting the technical sections of fund you to remember that the devil is in the details. We provide partnership agreement. Today, the risk of limited partner defaults is guidance in “Deconstructing Equal and Ratable Security Clauses” on everyone’s mind and funds are grateful that their lawyers on how to add new secured debt without refinancing existing anticipated today’s reality. In our article entitled “Limited Partner bonds, while reminding borrowers in “Disruptions in the LIBOR Defaults: The Improbable Becomes Reality” we explore how general Market: The Boilerplate Is Broken” to watch out for changes to partners can sensibly manage defaults and potential defaults by their boilerplate governing standard yield protection and increased cost limited partners to mitigate their impact on the rest of the fund. provisions that may prove to be expensive. On a more positive note, we also report on continued growth in We hope we have managed to update you on some recent 2008 for emerging market funds and on some of the challenges for developments in private equity and have given you some new sponsors structuring those funds. thoughts on how to deal with the current environment. If there is Infrastructure investing has been a part of the private equity something you’d like discussed in a future issue, please let us know. menu for many years, but, with the passage of the federal stimulus Franci J. Blassberg Editor-in-Chief Private Equity Partner/Counsel Practice Group Members The Debevoise & Plimpton Frankfurt Franci J. Blassberg Geoffrey Kittredge – London Stephen R. Hertz Private Equity Report is a 49 69 2097 5000 Editor-in-Chief Anthony McWhirter – London David F. Hickok – London publication of Jordan C. Murray James A. Kiernan III – London Moscow Stephen R. Hertz Andrew M. Ostrognai – Hong Kong Antoine F. Kirry – Paris Debevoise & Plimpton LLP 7 495 956 3858 Andrew L. Sommer David J. Schwartz Jonathan E. Levitsky Associate Editors 919 Third Avenue Hong Kong Rebecca F. Silberstein Li Li – Shanghai New York, New York 10022 852 2160 9800 Ann Heilman Murphy Christopher Mullen – London Hedge Funds 1 212 909 6000 Managing Editor Dmitri V. Nikiforov – Moscow Shanghai Byungkwon Lim Robert F. Quaintance, Jr. www.debevoise.com 86 21 5047 1800 David H. Schnabel Gary E. Murphy William D. Regner Cartoon Editor Washington, D.C. Please address inquiries Mergers & Acquisitions Kevin A. Rinker 1 202 383 8000 regarding topics covered in this The Private Equity Andrew L. Bab Jeffrey J. Rosen publication to the authors or Practice Group E. Raman Bet-Mansour – Paris Kevin M. Schmidt London any other member of the All lawyers based in New Paul S. Bird Thomas Schürrle – Frankfurt 44 20 7786 9000 Practice Group. York, except where noted. Franci J. Blassberg Wendy A. Semel – London Paris Richard D. Bohm Andrew L. Sommer All contents ©2009 Debevoise Private Equity Funds 33 1 40 73 12 12 Thomas M. Britt III – Hong Kong Stefan P. Stauder & Plimpton LLP. All rights Marwan Al-Turki – London Geoffrey P. Burgess – London James C. Swank – Paris reserved. Kenneth J. Berman – Washington, D.C. Marc Castagnède – Paris John M. Vasily Erica Berthou Neil I. Chang – Hong Kong Peter Wand – Frankfurt Jennifer J. Burleigh Margaret A. Davenport Woodrow W. Campbell, Jr. Leveraged Finance E. Drew Dutton – Paris Sherri G. Caplan Katherine Ashton – London Michael J. Gillespie Jane Engelhardt William B. Beekman Gregory V. Gooding Michael P. Harrell David A. Brittenham Felicia A. Henderson – Paris Paul D. Brusiloff GUEST COLUMN A Discussion with Barry Gold of the Carlyle Group About Infrastructure Financing The passage of the federal stimulus package leaders of the potential benefits of private billion of total investment. The U.S. has reinvigorated debate over the funding of investment in infrastructure. Why is such an Department of Transportation has public infrastructure projects in the United effort necessary and what are the group’s goals? estimated that every $1 billion of States. An ad hoc group of private equity infrastructure investment will create and The heavy legislative calendar (not just the professionals, bankers and lawyers has been support 34,800 jobs for one year. If you stimulus package, but also the anticipated working to focus attention on the important take the $450 billion of potential private legislation for the creation of a National role to be played by private capital in the investment and deploy it over 10 years, that Infrastructure Bank and, later in the year, development of public infrastructure.1 On implies the creation of over 1.5 million jobs transportation reauthorization)2 creates an February 25, 2009, Barry Gold, Managing each lasting for a decade. If this capital is opportunity for Congress and the Director of the infrastructure investment deployed more quickly, it would pack a Administration to make significant changes group at The Carlyle Group and a leader in correspondingly greater punch in a shorter in the way U.S. infrastructure is funded, the field of private investment in public period. There is concern in many corners maintained, and operated. infrastructure, sat down with Ivan Mattei to of our market that Congress is not At this moment of crisis, there are discuss the activities of the ad hoc group sufficiently focused on the importance of multiple competing and worthy ways to and Carlyle’s views on the opportunities private capital as a source of funding for spend every available dollar of federal and challenges facing infrastructure funds in infrastructure projects.