Offering
("PPM")
Agreement
(Funds)
Advisers to Private Equity Issuers &
Private Funds
of compliance issues that may impact
the IA depending upon whether it is
considered to have custody of client
assets or funds. Given the brevity of this
article, I will not address those issues
other than to say that the operation
and controls of the IA have a material
impact upon the compliance obligations
associated with whether the IA must
comply with the custody regulations or
not. Generally, IAs seek to have a third
party custodian that has economies of
scale in its compliance with the custody
regulations and takes the necessary
steps, including, but not limited to
surprise examinations, audits by a
report, issuance of client statements on
at least a quarterly basis, etc.
that adequate due diligence has been
performed. The selling BD, syndicate
manager, IA and/or third parties such as
laws firms, compliance specialty firms,
etc. may perform the due diligence.
Moreover, multiple firms may perform
various aspects or segments of the due
diligence exercise. Where firms are
affiliated with the issuer, a combination
of approaches must exist, including
disclosing the affiliation, the potential
conflict of interest and the potential
effect of the conflict (and any steps put
into effect to mitigate the effect of the
conflict). The securities industry refers
frequently to conflicts of interest between
the managers, partners, issuers, IAs and
BDs. Perhaps the first conflict of interest
that firms should consider in private
equity deals is with the issuer itself. In
other words, the business plan itself is
developed by the issuer and so IAs and
BDs must strive to validate the business
plan. Specific areas of due diligence
should otherwise include the issuer and
management, business prospects, issuer's
assets, etc.
Investigation
information reviewed (including dates
of review)
meetings and conducted the reviews
Equity Failures
the deal
expenses
parties
to evolve under the microscope and
political scrutiny of regulators, investors
and others. Private equity products serve
as a catalyst and an essential component
to the capital formation process,
particularly for small and medium-
sized enterprises. As an industry, we
have unfortunately experienced and/or
been privy to some of the "war stories"
and abuses that have exacerbated
the scrutiny that we now confront. As
securities industry professionals, it
is incumbent upon us to distinguish
ourselves from the proverbial "bad
guys" and thereby demonstrate that our
firms care about "doing it right." Due
diligence; compensation; formation, sales
and management processes; deal features
and many other aspects of private fund or
private project financing ecosystem will
play an important role in whether we can
demonstrate we did it the right way and
are worthy of retaining our livelihood in
this important and valuable sector of the
financial marketplace.