Brexit spurs new protections in private equity fund terms

Monopoly board game and get out of jail free card


Get out of jail free: buyout firms are writing protective clauses into fund documents to give them more flexibility to cope with Brexit ramifications

Lawyers involved in fund formation say protective clauses now being used include the ability to move or restructure funds, depending on the outcome of the UK’s negotiations with the EU. Some lawyers say such protections are likely to extend to funds based in the Channel Islands, the Netherlands and Denmark.

Nigel van Zyl, a partner in the private investment funds group at law firm Proskauer Rose, said he had started to see more of such protections. “It’s generally around flexibility to move the domicile of the fund, to change the manager or to restructure the fund into a different form if the manager thinks it’s in the best interest to do so,” he said.

SL Capital Partners, an Edinburgh-based private equity firm that is a subsidiary of Standard life Investments, wrote Brexit provisions into its new £300 million debt fund to enable it to change the domicile from the UK to Dublin if necessary, Private Equity News, the sister title of Financial News, reported in July.

Law firm O’Melveny & Myers has written terms into one new fund’s structure to enable critical decisions to be made without a supermajority of investors, so the fund can restructure or move its domicile if needed, said John Daghlian, head of the investment funds practice at the firm.

“What we’ve put in the agreement is that the manager can make whatever changes it needs to with bare minimum consent,” said Daghlian. “Usually changes to a partnership require supermajority… It’s quite necessary to have the get-out-of-jail-free card.”

Terms are also being included in fund documents to allow firms to move investors into an alternative vehicle, according to lawyers.

Lawyers are wary about setting up fund structures in the Channel Islands because it is unclear how those jurisdictions will be treated post-Brexit, the lawyers said. Daghlian said O’Melveny & Myers would not write fund documents for a Channel Islands fund without including flexible terms.

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