We are in interesting and unprecedented times. Events are ever-changing in terms of government reactions around the world and advice about what, and what not, to do.
Many of the challenges facing fund managers will be specific to the funds that they are managing, however, we have set out below some areas that you may wish to consider to help you identify where appropriate actions are required.
For fund managers who are currently out fundraising there is likely to be a delay in reaching the next planned closing as travel restrictions (between countries and within countries) hamper investor due diligence meetings and investors adopt a "wait and see" approach.
This is understandable in the current climate but for closed-ended funds does put pressure on the investment period, as a reduction in both the number of closings and the projected fund size creates challenges regarding the pipeline and anticipated deployment of capital (see below).
Those investors who are able to make commitments without delay may consider that they have a stronger negotiating position now as we likely move away from the strong fundraising market we have seen in recent years. As a result, more "investor friendly" terms may be sought.
Practical step: fund managers should revisit their fundraising strategy, speak with current and prospective investors and, for closed-ended funds, consider whether it will be necessary to extend the final closing date of the fund.
Deployment of capital
Over the last few years we have seen high levels of dry powder, which resulted in its own challenges of being able to deploy capital within the investment period. As a result, there will be many funds that still have large amounts of capital to deploy. For fund managers looking at investments each acquisition is likely to present its own particular issues, heightened by the problems of not being able to carry out site visits (both for the fund manager and any specialist advisers), engagement with relevant stakeholders, delays in obtaining information and project oversight.
Practical step: fund managers should look at the impact on the investment timeline and consider whether it will be necessary to extend the fund's investment period and, if so, what approvals will be required to do this.
Sale and purchase of investments
With respect to sale and purchase agreements that are in the negotiation phase, there will be a lot of discussion around issues such as material adverse change (MAC) clauses, seller disclosures (particularly in the context of warranties given and changes to the valuation and financial position of the asset), specific conditions, obligations and timelines and long stop dates.
- Fund managers should take a fresh, detailed look at live sale and purchase agreements to identify any new risks in light of the COVID-19 outbreak. For any conditional contracts it is important to identify any deadlines as soon as possible and look at ways that these can be extended if necessary. Consideration will also need to be given to the practicalities of being able to sign documentation.
- It may be prudent to connect with investors to ensure that they are not experiencing any issues that would mean that they would not be able to meet a drawdown request as normal.
- In some cases, fund managers may consider extending the life of a fund to avoid having to sell assets in a challenging market.
Management of the fund and of its business
Where staff are required to carry out certain functions either in an office or on the ground, it will be of paramount importance to ensure that there are measures in place to safeguard their welfare. Regulated firms are required to have appropriate risk management strategies including contingency plans to deal with major events such as the COVID-19 outbreak. The health and safety measures implemented in relevant jurisdictions will need to be considered and relevant policies updated as necessary. This is likely to require continued monitoring as the situation evolves especially as staff levels are likely to fluctuate as people are put in isolation or take self-isolation measures.
Practical step: fund managers should review current health and safety policies and update staff regularly with regard to the changing position.
The operation of service providers (for example, administrators, depositaries, auditors and asset managers) will also need to be considered to ensure that the fund and its business can continue to function.
- Board meetings can usually be held via teleconference, although with directors being unable to travel consideration will need to be given as to any unintended tax consequences of holding the meeting in a particular jurisdiction.
- Fund managers should speak with all service providers to understand how they are dealing with the situation and what measures are being put in place to ensure both the health and safety of their staff as well as business continuity for the fund. In addition, it will be important to look in detail at the service contracts that are in place and to identify where the risks are and who bears the risk.
- Where the usual provision of reporting (including being able to accurately value assets) is impacted in any way this should be discussed as soon as reasonably practicable with investors so that they are made aware. Certain investors are likely to have underlying reporting obligations and so will need to manage any knock-on impact and will want to understand what measures are being put in place to minimise any future disruption.
Communication with investors is always very important for any fund manager. Good communication is the bridge between confusion and clarity and in these times clarity is crucial.
The above is not an exhaustive list of the issues that may arise over the coming weeks and different funds will experience different issues (including managers of open-ended funds having to manage potential redemption runs). Please get in touch if you would like to discuss any of the issues highlighted or if we can assist in identifying any other potential risk areas specific to your business.