Samantha Koplik and Naz Zilkha Featured in Private Equity Law Report Q&A
Dechert private equity partners Samantha Koplik and Nazim Zilkha were featured in a two-part Q&A published by the Private Equity Law Report exploring the topic of rescue capital. In the Q&A, Ms. Koplik and Mr. Zilkha identify multiple types of salvation investments that are suitable under various circumstances and they discuss how these investments are being deployed during the current coronavirus pandemic. They also provide insight on some of the process, conflict of interest, governance, tax and structural considerations a PE sponsor needs to assess before providing rescue capital to a portfolio company.
When discussing the basics of rescue capital, Ms. Koplik explained, “We think about rescue capital as a context for an investment, rather than an investment having a fixed or finite definition, amount or source. With that said, it’s a capital investment, in the form of debt or equity, made after an initial investment in a company and at a time when the company needs liquidity to meet its obligations and stay afloat. Companies receiving rescue capital are typically in more distressed situations than those receiving normal follow-on investments, but they are not yet considering bankruptcy or liquidation. True to its name, rescue capital is a way to rescue a company before its options become far more limited and before its investors need to evaluate bankruptcy or wind-down proceedings.” Ms. Koplik went on to explain that rescue capital can take many different forms, with the most common being Equity Cure, Additional Equity, Debt Financing, and Sponsor Backing.
Mr. Zilkha highlighted that providing rescue capital raises many factors for GCs and CCOs to consider, including concentration limits in its fund documents; borrowing limitations under its financing facilities; mandatory cash reserves they need to retain; third-party funding sources available to each portfolio company; and co‑investment opportunities with their LPs. He went on to say, “Let’s also not forget that any proposed solution requires PE sponsors to weigh the fiduciary duties they owe to their LPs. They need to be aware of potential conflicts of interest if they’re involved in providing the capital as a sponsor, such as avoiding any self-dealing and ensuring transactions are at an arm’s-length. They also need to be mindful of the risk of diluting non-participating existing investors if the sponsor is making the additional equity investment in a portfolio company. Sponsors need to think through how to navigate each of those potential conflicts and issues if they provide rescue capital to their portfolio companies.”
Click here to listen to Dechert’s recent broadcast on Rescue Capital for more information on this topic.
Dechert is a leading global law firm with 26 offices around the world. We advise on matters and transactions of the greatest complexity, bringing energy, creativity and efficient management of legal issues to deliver commercial and practical advice for clients.