IMpact: Investment Management News

Welcome to IMpact: Investment Management News. In this regular bulletin, DLA Piper lawyers share their insights on key developments that are impacting the investment management industry.

1. Sponsors face expanding regulations and regulatory uncertainty

Both domestically and internationally, private fund sponsors are facing enhanced governmental scrutiny and increased regulations, which have raised the industry’s barriers to entry and left sponsors with additional administrative and compliance costs. Recent US developments, including the Fifth Circuit’s invalidation of the SEC’s Private Fund Adviser Rules and the Supreme Court’s rejection of the Chevron deference doctrine, have further complicated the regulatory landscape. These changes leave sponsors uncertain about current and future obligations and the potential for new rules that could significantly impact how private funds are regulated.

2. Institutional Limited Partners Association releases new NAV facilities guidance

In light of the growing popularity of net asset value (NAV) facilities, the Institutional Limited Partners Association (ILPA) released new guidance outlining NAV facility recommendations for limited partners (LPs) and general partners (GPs). The guidance includes a framework for case-by-case engagement between GPs and LPs on the rationale for using a NAV facility for a particular fund, the proposed use of proceeds of the NAV facility, and the structure and key terms of the NAV facility. The release follows notable concerns from LPs regarding changes to the overall risk profile of the fund, risks related to the cross-collateralization of performing and underperforming investments, and the use of NAV facilities to create “artificial” cash flow that masks true fund performance (and that is often recallable from LPs).

3. The enduring appeal of separately managed accounts

Asset managers across alternative asset classes continue to see strong investor interest in separately managed account (SMA) solutions. Whether in a fund of one, or in a contractual or balance sheet format, SMAs can allow for greater customization than a commingled fund investment. Large institutional investors may prefer a SMA due to regulatory factors (such as more favorable National Association of Insurance Commissioners, or NAIC, risk-based capital charges for insurance companies), or the ability to have bespoke investment guidelines/restrictions and more control over their investments (such as with investment-by-investment approval rights and/or no-fault termination rights). SMAs may be structured to invest alongside one or more commingled funds, or on a standalone basis. Assuming an investor’s commitment justifies the relative lack of control, and the cost of establishing such a product, the SMA may be a useful tool for managers to maximize their fundraising potential.

4. “Retailization” of private markets

While alternative investment managers often target institutional investors when raising capital, many managers have become increasingly focused on raising capital from the mass wealthy market and “retail” investors. In certain cases, intermediaries – such as registered investment advisors, wealth management firms, and wirehouses – have increased their recommended allocations to such investments. This shift has resulted in a flurry of new investment products.

To cater to certain clients, private equity managers have established white-label funds, feeder funds, or access vehicles, fund of funds and secondaries firms have launched interval and closed-end registered funds, private credit managers have established business development companies to co-invest in certain loans or other assets alongside their other funds and accounts, and real estate managers have launched and acquired NAV real estate investment trusts (REITs) to access this market. While this trend offers opportunity, investment managers should consider the challenges and regulatory constraints before engaging with the mass wealthy and retail markets.