Private Equity Newsletter
January 11, 2016
This edition of Dechert’s Private Equity Newsletter reviews recent developments in private equity worldwide, including:
- Riding the BDC Consolidation Wave
- Hong Kong Profits Tax Exemption for Private Equity Funds
- Tools for Managing Environmental Risks in Deals
- Enhanced Investment Opportunities in 2016 for U.S. Financial Investors and Their Portfolio Companies in Germany – A Closer Look at Trends and Related Transaction Terms
- Recent Developments in Acquisition Finance
- Working Capital Adjustments: At the Crossroads of Law and Accounting
- Further Change to the UK Taxation of Carried Interest
- Recent Action Highlights SEC’s Continuing Scrutiny of Private Equity Firms
Riding the BDC Consolidation Wave
The past 18 months have seen a wave of consolidation among business development companies (“BDCs”). Oak Hill Advisors, L.P. took over the advisory role for NGP Capital Resources Company (now OHA Investment Company) after the BDC ran a process to pursue strategic alternatives, PennantPark Floating Rate Capital Ltd. acquired MCG Capital Corporation, and, as has been well publicized, TICC Capital Corp. has received advances from no fewer than three suitors. This article discusses what market participants need to know if consolidation is coming to the BDC space.
Hong Kong Profits Tax Exemption for Private Equity Funds
The Inland Revenue (Amendment) (No.2) Ordinance 2015 came into effect on July 17, 2015, extending Hong Kong profits tax exemption to offshore private equity funds. This is a welcome development for the private equity industry since in the past the profits tax exemption for offshore funds had very limited applicability.
Tools for Managing Environmental Risks in Deals
When parties to an M&A deal consider most environmental risks, they essentially seek the same goals that they seek with respect to other liabilities in the deal. M&A sellers, particularly private equity sellers, seek to avoid continuing environmental liability for companies or assets being divested. Buyers seek to avoid known and unknown environmental liabilities not factored into the purchase price. For private equity buyers, the investment horizon and need for an exit strategy are also paramount concerns. Given these goals, it is important to understand how the nature of the environmental risks have changed over time, as well as how the tools used to manage and allocate the environmental liabilities have evolved.
Enhanced Investment Opportunities in 2016 for U.S. Financial Investors and Their Portfolio Companies in Germany – A Closer Look at Trends and Related Transaction Terms
While for some years, profitable and market leading private equity backed companies pro-actively pursued acquisition opportunities in the U.S., U.S. buyers are increasingly looking to Germany and other parts of Western Europe for deal opportunities. Deal appetite of U.S. strategic and financial buyers has significantly increased in Germany in the last two years and as a result the German market for M&A and leveraged buy-outs has become increasingly vibrant and competitive. This article discusses these trends, reasons and associated deal terms.
Recent Developments in Acquisition Finance
Two recent court decisions may result in a broadening of the range of options available to an equity sponsor in respect of an insolvent portfolio company. The first decision may provide increased flexibility in structuring asset sales in certain chapter 11 settings, by utilizing escrows and other techniques to potentially avoid the need to apply asset-sale proceeds strictly in accordance with creditor priorities under the U.S. Bankruptcy Code. The second decision reinforces the principle that the fiduciary duties of directors of an insolvent Delaware corporation run to the entity as a whole and to all its stakeholders, with the result that, even if the directors adopt a business plan whose downside would be borne by creditors but whose upside largely would be enjoyed by equity holders, they generally will not be viewed as having breached their fiduciary duty to the corporation, so long as the business plan was rationally designed to increase profitability and enterprise value and their decisions were informed and made without improper conflicts of interest.
Working Capital Adjustments: At the Crossroads of Law and Accounting
In this article, which was originally published in the New York Law Journal, Dechert and Alvarez & Marsal together explore the various issues M&A counsel will face when drafting and negotiating working capital adjustments and highlight several potential "problem areas."
Further Change to the UK Taxation of Carried Interest
The UK Government, as anticipated, issued draft legislation on December 9, 2015 designed to establish clear rules as to when carried interest can qualify for favorable capital gains tax treatment. The draft legislation follows a consultation exercise announced in the Summer Budget (please refer to our earlier update in this regard).
In summary, the draft legislation purports to tax a carried interest return entirely as income unless it is derived from a fund which holds its underlying assets for an average holding period of at least three years. Where the holding period is between three and four years, a proportion of such returns will be taxed as income. Only where the average holding period exceeds four years will capital gains treatment be obtained in full.
Recent Action Highlights SEC’s Continuing Scrutiny of Private Equity Firms
A settled enforcement action announced by the U.S. Securities and Exchange Commission (SEC) on November 3, 2015 is but one in a growing list of SEC settlements concerning the allocation and disclosure of fees and expenses by private equity managers. It is anticipated that the SEC will continue to scrutinize the manner in which private equity fund advisers allocate fees and expenses. This article discusses these developments and offers suggestions on how advisers can avoid these pitfalls.
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