2018 BDC Roundtable The Evolving Landscape of Co-Investment Relief and Other Affiliate Transactions

Transcription

1 2018 BDC Roundtable The Evolving Landscape of Co-Investment Relief and Other Affiliate Transactions September 5, 2018 Steve Boehm, Partner Anne Oberndorf, Counsel 2018 Eversheds Sutherland (US) LLP All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Eversheds Sutherland (US) LLP and the recipient. Eversheds Sutherland (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit

2 Basic Scenario (with Wholly Owned Sub) Middle of the Fairway With middle of the fairway exemptive relief, The BDC and its wholly owned subsidiary are permitted to coinvest at the same time, on the same terms. Investment advisory agreement The BDC Investment Adviser Investment advisory agreement Affiliated Private or Registered Fund* * Private fund relying on 3(c)1 or 3(c)7, another BDC, or a registered investment company under common control with the BDC. 100% owned SBIC, Blocker, or SPV Non-control Investment (debt or equity) Portfolio Company Non-control Investment (deb or equity) Investment (debt or equity) 2

3 Evolution of Co-Investment Exemptive Relief Middle of the Fairway Relief now includes: Multiple Advisers under common control Existing and Future BDCs and Registered Investment Companies Pro Rata Follow-ons and Dispositions without Board approval (after initial Board approval) While not quite Middle of the Fairway and not always applicable, the following should not delay receipt of an Order: New types of Private Funds included Board-Established Criteria Sub-advisers Wholly-owned investment Subs Proprietary accounts Eversheds Sutherland 3

4 Evolution of Co-Investment Exemptive Relief From Ares/Apollo: Board- Established Criteria means criteria that the Board of a Regulated Fund may establish from time to time to describe the characteristics of Potential Co- Investment Transactions regarding which the Adviser to the Regulated Fund should be notified. Key takeaways: Board-Established Criteria must be: objective and testable consistent with the Regulated Fund s Objectives and Strategies approved by a majority of the Independent Directors The Board should not modify these criteria more often than quarterly If no Board-Established Criteria are in effect, then the Regulated Fund s Adviser is notified of all Potential Co-Investment Transactions that fall within the Regulated Fund s then-current Objectives and Strategies. 4 Applications have received stand-alone Board- Established Criteria relief. 4

5 Evolution of Co-Investment Exemptive Relief Investment Adviser is Sub-Adviser to Another BDC or Private Fund. * Private fund relying on 3(c)1 or 3(c)7, another BDC, or a registered investment company under common control with the BDC. 5

6 Evolution of Co-Investment Exemptive Relief Investment Adviser is Sub-Adviser to Another BDC or Private Fund Initial staff view: The primary investment adviser and the fund must be listed as applicants and must comply with the applicable conditions Generally no relief available for future sub-advised funds advised by a different primary adviser More recent applications that have received orders take varying approaches but suggest that: Relief may extend to future sub-advisers, future sub-advised funds, and future primary advisers not in existence at the time of the application s filing 6

7 Evolution of Co-Investment Exemptive Relief Proprietary Accounts Prior Staff View: Only a few BDCs had obtained exemptive relief to co-invest with proprietary accounts (generally accounts owned by the investment adviser) Requires additional condition that proprietary accounts Eat Last There was uncertainty whether relief would be granted for proprietary accounts in future applications Recent Staff View: Several applications have since received orders that include relief for proprietary accounts to co-invest, and more applications have been filed Eat last condition included in all but 2 cases Eversheds Sutherland 7

8 Issues after an Initial Co-investment Refinancing Issues 8

9 Affiliated Fund Issues after an Initial Co-investment Staff view on transactions among Affiliated Funds after initial Co-investment: New Fund replacing existing Private Fund CLO Warehousing Season and Sell Sidecar Rebalancing 9

10 Apollo Expanded Relief Update Ares/Apollo Relief Expanded Relief Concepts Pre-boarding Investments / Enhancing Review Followons and Dispositions Additional types of co-investment transactions that may be completed without board approval Important Notes: Broader relevance in recent years Can copy entire application; Staff no longer requires supplemental explanation of need for expanded relief Condition 5 knowledge qualifier Footnote Oversubscribed allocations: pro rata based on size of internal orders Except for Board-Established Criteria and the knowledge qualifier in Condition 5 (one example), Staff has not allowed applicants to pick and choose some concepts Board-Established Criteria 2 additional Orders received following the Ares/Apollo Model and 1 application is in Notice period Delayed Settlement Compliance Requirements Annual Report At least 6 Applications have been filed that follow the Ares/Apollo Model 10

11 Other Affiliate Issues Private BDC Split-off Application Staff recently issued the first exemptive order to a private BDC allowing it to undertake a liquidity event that might otherwise be a prohibited affiliate transaction Such relief provides investors of a Private BDC an option to exchange their shares in the Private BDC for shares of an Extension Fund, which would seek to conduct an IPO and list its shares on an exchange 11

12 Issues after an initial Co-investment Solution to Roach Motel in Restructuring 17d-1(d)(6) permits exchange of securities same securities and pro rata. BDC $10M Term Loan A Original Investment: Term Loan A Affiliated Fund $5M Term Loan A Portfolio Company Restructuring $15M Term Loan B $7.5M Term Loan B BDC Restructured Investment: Term Loan B Affiliated Fund 12

13 Miscellaneous Issues and Questions Adding an affiliate to an investment in an issuer Scenario 1: The BDC is invested in a portfolio company first, and an Affiliated Fund wants to invest in the same portfolio company: The BDC The BDC Affiliated Private or Registered Fund* Yes, Affiliated Fund can invest Portfolio Company Portfolio Company Scenario 2: If the Affiliated Fund is invested in the portfolio company first: Affiliated Private or Registered Fund* Affiliated Private or Registered Fund* The BDC No, BDC cannot invest Portfolio Company Portfolio Company 13

14 Miscellaneous Issues and Questions Affiliated Fund Controls Portfolio Company If the Private Fund owns a >25% of equity of Portfolio Company, middle of the fairway exemptive relief does not permit the BDC or its 100% owned subsidiary to co-invest. Investment advisory agreement The BDC Investment Adviser Investment advisory agreement Affiliated Private or Registered Fund* 100% owned SBIC, Blocker, or SPV Investment (debt or equity) Portfolio Company > 25% of equity * Private fund relying on 3(c)1 or 3(c)7, another BDC, or a registered investment company under common control with the BDC. Investment (debt or equity) 14

15 Miscellaneous Issues and Questions Staff Position on Joint Transactions Portfolio Holdings of Companies Electing Status as BDCs The staff is aware that certain private funds that plan to elect status as business development companies under the Investment Company Act ( Planned BDCs ), hold securities (typically, debt securities) issued by companies ( Portfolio Companies ) controlled by other private funds ( BDC Affiliates ) advised by the Planned BDC s investment adviser or an entity controlling, controlled by or under common control with the Planned BDC s investment adviser. The staff is of the view that if, following the election of BDC status, the BDC holds securities issued by a Portfolio Company controlled by a BDC Affiliate, the BDC and the BDC Affiliate may be participating in a joint enterprise or other joint arrangement or profit-sharing plan within the meaning of section 57(a)(4) of the Investment Company Act and rule 17d-1 under that Act ( Joint Transaction ). Section 57(i) of the Investment Company Act makes rule 17d-1 applicable to BDC Affiliates. Under rule 17d-1, a BDC Affiliate may not participate in a Joint Transaction unless an application regarding the Joint Transaction has been filed with the Commission and granted by an order. [November 27, 2012] 15

16 Miscellaneous Issues and Questions Standard Allocation for Oversubscriptions $20M opportunity Allocation Factors Asset class Industry Portfolio diversity Available capital Other $10M opportunity According to standard coinvestment relief, it must be allocated based on available capital, up to the original allocation. The BDC $100M of available capital Oversubscription Affiliated Fund $50M of available capital Allocation $16M $4M $6.67M Allocation $3.33M $8M NOT $2M 16

17 Questions? 17

18 Steven B. Boehm Partner T: Anne Oberndorf Counsel T: Sixth Street, NW, Suite 700 Washington, DC T: eversheds-sutherland.com This information pack is intended as a guide only. Whilst the information it contains is believed to be correct, it is not a substitute for appropriate legal advice. Eversheds Sutherland (International) LLP can take no responsibility for actions taken based on the information contained in this pack. Eversheds Sutherland All rights reserved.