on the internal rate of return of the fund’s investment in the relevant portfolio company, and for this reason it is preferable that such follow- on investments are part of any original financial projections in respect of the investment.


If the intention is to undertake a leveraged acquisition, the lender


“If the intention is to undertake a leveraged acquisition, the lender or lending syndicate will need to be provided with sufficient security for the provision of finance.”


Any relevant confidentiality requirements, under a non-disclosure


agreement or confidentiality agreement entered into with the seller, will need to be observed. For this reason it is helpful to ensure, at the time such an agreement is made, that the fund can make necessary disclosures to the investors for the purposes of ensuring that there are no excuse provision issues.


In addition to the terms of the Fund Documents themselves, the


general partner, investment manager or investment advisor will need to consider whether any “side letter” provisions, which would prohibit or otherwise affect the terms of the proposed investment, are relevant. The ever-increasing prevalence of side letters means this will continue to be a potential issue to be considered at the time of making any proposed portfolio investment.


Another factor that the general partner, investment manager or


investment advisor will need to consider is the requirement to make a drawdown of capital from the investors. As most private equity funds draw down capital commitments from their investors only as and when required, the fund will not generally be holding the relevant capital at the time that a share purchase agreement is entered into in respect of a new portfolio investment. There will, invariably, be a requirement to provide a certain period of prior notice to investors in connection with making a drawdown of any portion of their capital commitments. This period will vary but, in certain instances, may be material, so the wording in any share purchase agreement entered into on behalf of the fund will need to take account of this in terms of the closing timing and mechanics.


If it is contemplated that further capital will, or may have to, be


invested in subsequent tranches after the proposed initial investment, then another factor that the general partner, investment manager or investment advisor will need to consider is the implication of any prescribed “investment period”.


As most private equity funds allow for the drawdown of capital


commitments from their investors only during a fairly limited period during the first part of the fund’s term, typically referred to as the “investment period”, the fund may not be able to make further investments in any portfolio (“follow-on” investments) after the termination of this investment period.


In the case of private equity funds that do allow follow-on investments, this further investment requirement will have an impact


52 CAYMAN FUNDS | 2012


or lending syndicate will need to be provided with sufficient security for the provision of finance. This security could take the form of a charge over the shares in the portfolio company being acquired, or a charge over other assets of the relevant fund. In other cases, there is a potential requirement for security interests to be given by investors over their undrawn capital commitments. This is to provide recourse to the lender not only to the current assets of the fund, but also to the further capital that may be drawn down, up to the full amount of each investor’s capital commitment.


In the context of acquisitions by a private equity fund, due to the


term of the relevant fund being limited, the general partner, investment manager or investment advisor will, even at the time of making the investment, need to be thinking about the exit strategy.


Typically, the term of a private equity fund will be in the range of five


to eight years, with a possible one- or two-year extension to provide for the orderly liquidation of the fund’s investments. This does not allow for a long-term buy and hold strategy.


Rather, taken together with the “carried interest” performance


fee model adopted as the industry standard, the requirement and motivation is for the general partner, investment manager or investment advisor to make acquisitions followed by rapid financial and operational restructuring, in the expectation that this will result in an improved asset for which the value can then be crystallised through an appropriate exit strategy. Typical exit strategies include an initial public offering (IPO) and stock exchange listing, or a sale to a strategic corporate acquirer for whom, due to perceived synergies, the asset will have a value sufficient to provide the fund with its desired internal rate of return (IRR) on the investment. The general partner, investment manager or investment advisor should be considering the identity of potential strategic corporate acquirers at the time that it is contemplating making the investment.


As can be seen, when working on M&A deals where the acquirer


is a private equity fund, it is important to ensure that fund counsel is involved with the team working on the transaction in order to ensure that the above, and other, fund-specific considerations are properly taken into account.


Marc Parrott is a senior associate at Campbells. He can be contacted at: mparrott@campbells.com.ky


Marc Parrott specialises in investment funds of all types, including private equity funds and hedge funds. He also advises clients on various other aspects of mainstream corporate and finance law. He has significant experience in the Cayman Islands, having practised with Walkers. Parrott has also had considerable top-tier international experience in Australia with Freehills, in London with Linklaters and in Dubai with King & Spalding LLP.


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