Letter From The Editors

As 2022 nears its midpoint, the ability of the private equity industry to adapt to change is coming into play on multiple fronts. As the combination of inflation, geopolitical instability and changes in monetary policy point to a likely turn in the credit cycle, sponsors and portfolio companies are preparing for a more challenging capital environment. The more aggressive approach by the DOJ and FTC to antitrust issues has brought increased scrutiny of the divestiture acquisitions that comprise an important component of private equity dealflow. Meanwhile, the SEC has been issuing a steady steam of proposed rules that would significantly alter everything from cybersecurity reporting requirements to the allowable commercial terms for private fund advisors. (There is, however, a welcome regulatory development coming out of Westminster, as the United Kingdom implements its new Qualifying Asset Holding Company regime.)

As always, sponsors continue to adapt to new opportunities for both capital and investment. Funds are using innovative rated note structures to access capital from yield-hungry insurance companies, while holding companies are turning to pre-capitalized trust securities as a leverage-neutral, covenant-lite funding source. On the investment front, new frontiers are being explored, as funds look to the opportunities presented by the privatization of activities in space and the growth of space-based technologies. And the rise of non-fungible tokens is bringing a new arena for IP assets—and where those assets need to be protected.

We hope that you find the Spring 2022 Private Equity Report to be a useful review of some of the key issues now on the private equity agenda.

• Navigating the Dynamic World of Antitrust Divestitures
  When a business needs to be divested before a merger to address antitrust concerns, sponsors increasingly fill the role of buyer. Increased skepticism of M&A from Washington, however, has resulted in a more challenging environment, which needs to be navigated with care.
• The Financing Flexibility of P-Caps
  Although less well known than other forms of contingent capital, pre-capitalized trust securities have become increasingly popular. Along the way, issuers may want to weigh a number of structuring options and must also consider costs, possible refinancing risk based on market conditions and the fixed maturity of any notes that are issued.
• Spring Roundup of Critical U.S. Regulatory Developments for Private Equity Sponsors
  In February, the SEC proposed extensive new rules that, if adopted, would substantially affect private fund advisers—even those that aren’t registered investment advisers. In addition to these proposed rules, which would require specific disclosures and prohibit certain commercial terms, other proposed changes affect Form PF and disclosure and investor protections around SPAC IPOs.
• How Private Equity Firms Can Prepare for the SEC’s Proposed Cybersecurity Rules
  The SEC’s proposed rules for cybersecurity risk management, incident reporting and disclosure for registered investment advisers and funds reflect the priority that the agency is placing on cybersecurity. The proposed rules will also introduce an entirely new set of regulatory concerns, with ramifications across affected organizations.
• A Close Look at the UK’s New “Qualifying Asset Holding Company” Tax Regime
  The United Kingdom has long been hampered by its lack of a competitive, coordinated holding company regime. The new qualifying asset holding company (QAHC) regime aims to correct that shortfall. Funds wishing to qualify as a QAHC must meet several eligibility conditions, some of which will require monitoring throughout the life of the fund.
• Innovative Rated Note Structures Spur Insurance Investments in Private Equity
  Rated note structures are a powerful vehicle to connect insurance companies and funds. However, they require careful structuring and the consideration of several variables. Both issuers and buyers also need to keep an eye out for possible changes in how the notes are treated under accounting principles.
• Credit Markets in Uncertain Times: Hope for the Best, but Prepare for the Worst
  A confluence of factors is making it more likely that the decade-long expansionary phase of the credit cycle is coming to an end. There are steps that sponsors and portfolio companies can take now to manage the possibility of increased costs through capital contraction, deal execution risk and post-transaction litigation risk.
• Funding the New Space Race: Risks and Opportunities for Sponsors and Investors
  The exponential growth in privately funded space activities is a reflection of the vast opportunities investors see in this area. However, pursuing those opportunities also means navigating a number of concerns, including regulatory risk, collision risk, liability risk and security risk.
• Understanding NFTs: Key IP Considerations for Issuers, Owners and Investors
  Just when everyone had gotten used to the idea of cryptocurrency, the rise of non-fungible tokens introduced another digital asset of which to keep track. NFTs bring with them considerable IP issues for portfolio companies that are brand owners—even if those companies themselves steer clear of NFT marketplaces.