Institutional Investors

Institutional Investors

Overview

Schiff Hardin’s Institutional Investors Practice Group counsels foundations, endowments, family offices, insurance companies, public pension plans, funds-of-funds, and strategic corporate clients with investments in the full range of public and private asset classes, typical of large, diversified portfolios.

In the last five years, we represented institutional investors in more than 250 private investment fund transactions.

We offer comprehensive services to support our institutional investor clients in the global deployment of capital, the establishment of contractual relationships with investment managers and other service providers, the administration of investment portfolios, and ongoing compliance requirements.

We believe our involvement in industry organizations including the American College of Investment Counsel (ACIC) and the National Association of Securities Professionals (NASP) helps us to be sensitive and responsive to the developments that affect our institutional investor clients.

Comprehensive Services

We craft comprehensive investment counsel services to help our institutional investor clients succeed. We handle both complex transactions and dispute resolution for our institutional investor clients.

In reviewing and analyzing our clients’ proposed and existing investments in private investment funds, we advise on all aspects of the transaction, including:

  • Advising private equity fund investments, hedge fund investments, real estate fund investments, venture capital investments, and direct and co-investments
  • Fund formation (including forming funds of funds) and compliance matters
  • Addressing governance issues as they arise on the life of a fund’s investments, key person events, conflicts of interest transactions, restructurings, and general partner removal
  • Identifying critical issues and formulating practical solutions to complex tax, ERISA, and other potential challenges facing our institutional investor clients
  • Advising and assisting clients on current compliance requirements and new statutes and regulations applicable to private fund limited partners and their impacts on private equity investments

Fund Investors

Limited Partners and Other Investors: We advise and assist our institutional investor clients with respect to their subscriptions to alternative investment vehicles (AIVs) and in allocating their investment to the correct platform where parallel funds are available from a fund sponsor or a blocker vehicle may be desirable for purposes of making an investment.

Separate Accounts and Funds of One: We assist institutional investor clients seeking alternatives to investing in co-mingled investment funds. We have extensive experience with various types of alternative investment funds and their associated structures. Our team assists in structuring customized funds of one to meet their commercial, legal, tax, and administrative needs.

Private Fund Investment Documentation: We have advised and assisted clients with reviewing and negotiating the principal investment documents including side letters, subscription agreements and other fund documents with respect to hundreds of private equity, buyout, mezzanine, venture, real estate, infrastructure, debt, and hedge funds over the last decade.

Workflow Plans and Checklists: We develop workflow plans and investment checklists with our clients carefully crafted to their investment objectives, regulatory limitations, and risk profile. In designing a workflow plans, investment checklists, and related materials, we collaborate with our clients to reduce to writing their investment due diligence standards in written form, creating a structured investment process.

Issues Memoranda: Depending upon our client’s needs, we prepare issues memoranda with respect to the fund investment agreements and highlight issues of particular concern to our clients for further consideration.

Review and Negotiation of Agreements: We negotiate LPAs daily—we know the market. We regularly review proposed investments with respect to corporate, tax, regulatory, and employee benefit issues. We are frequently called upon to review fund investment documentation, identify legal issues relevant to our clients, and resolve concerns through negotiations with the fund sponsors. Because we also represent fund sponsors and investment managers, we have a deep understanding of the issues associated with such agreements.

We review and negotiate:

  • Legal structures and tax issues
  • Carry, compensation expense reimbursement, and fee offsets
  • Waterfalls, distributions, and liquidation rights
  • Governance, voting, and consent rights
  • Valuation, financial reporting, inspection rights, and transparency
  • GP rights, obligations, and exculpations
  • LP rights and obligations
  • Self-dealing and affiliate transactions
  • Claw backs
  • Exits, break-ups, and no-fault divorce
  • Co-investing

 

We negotiate a full range of agreements associated with the management of diversified investment portfolios, including:

  • Asset management agreements
  • Custody agreements
  • Securities lending agreements
  • Funds of funds or managed accounts
  • Hedge funds
  • Other standard and customized arrangements

Direct and Co-Investments and Secondary Sales

We assist our institutional investor clients in many direct investments and co-investments across all asset types with many of the world’s preeminent private equity, infrastructure, and real estate sponsors.

Direct investments: We represent our clients in acquisitions of equity interests such as minority or controlling stock interests, limited partnership interests and limited liability company membership interests in operating companies venture capital round investments, and in senior or subordinated debt or debt-equivalent instruments.

Co-investments: We advise on co-investments, in which our clients may be investing alongside a fund into a specific portfolio asset, such as an operating company, an infrastructure asset, real estate, or a pool of debt or equity assets. We often provide assistance to our clients as needed in evaluating the risks associated with the underlying transaction in proposed co-investments.

Secondary Sales: We advise clients and managers with respect to secondary sales of fund interests

Compliance and Governance Matters

Compliance

We assist our clients with planning and implementing compliance programs at both the due diligence and post investment phases, including for example:

  • Ensuring side letters contain necessary covenants to ensure that fund sponsors are in compliance with applicable state and federal laws and investment policies applicable to the capital commitment source
  • Dealing with investment restrictions under the laws of several states and helping them establish due diligence procedures to screen investments for these types of restrictions
  • Maintaining on-going compliance programs to ensure their alternative investment program managers are not engaging in prohibited or disfavored investments
  • Negotiating side letter provisions dealing with specialized geographic and industry investment restrictions (e.g., Sudan, Northern Ireland, firearms, tobacco)
  • Negotiating modifications to limited partnership terms such as limited partner indemnification requirements where state law restricts a public pension plan investor’s ability to indemnify an investment fund
  • Compliance with investor policies and state laws restricting the use of placement agents and pay-to-play restrictions at the federal level
  • Negotiating with fund managers to determine how to address concerns regarding proposed changes in the taxation of carried interest that could impact the managers' compensation

 

Governance

We help our clients analyze and formulate responses to issues that arise in the life of a private investment fund, including, for example:

  • Key person events
  • Fund restructurings
  • General Partner removals
  • Conflict of interest transactions
  • Partnership amendments
  • Fund wind downs and terminations
  • Secondary sales

Fund Formation

In addition to our work as investment counsel, we also have significant experience in structuring and forming a wide variety of investment vehicles, including:

Funds of funds: We represent a Chicago-based investment manager with respect to the formation of private equity funds of funds, including negotiations with a wide variety of public pension funds, and the ongoing operation of those funds of funds.

Hedge funds: We represented of a Washington, D.C.-based investment manager in the formation of a hedge fund.

Mezzanine funds: We advised Yukon Partners on its third mezzanine fund, Yukon Capital Partners III (Fund III), which raised a total of $558.7 million from investors that included domestic and international pension funds, insurance companies, endowments, foundations, consultants, and family offices.

Real Estate Funds: Represented an established promoter in the formation and financing of its twelfth real estate investment fund providing for investor capitalization in excess of $900 million.

REITs: Guided our client through the formation of an umbrella partnership real estate investment trust (UPREIT), negotiation of the partnership agreement and contribution of our client’s real estate assets to the UPREIT. We now represent the UPREIT in all of its corporate and real estate transactions, including SEC compliance matters.

A Team Approach

We employ a team approach to representing our clients by drawing upon the skills of attorneys in areas related to these investments including:

Tax; We regularly advise investors (both tax-exempt and taxable), U.S. persons, and foreign clients, about state and federal withholding and income tax issues associated with various investments. Our tax experience includes:

  • Dealing with tax issues associated with investments by U.S. and non-U.S. institutional and sovereign investors, pension trusts, public pension funds, and other tax-exempt investors in private equity funds and hedge funds;
  • Advising investors on selecting and setting up tax-efficient structures for making the investment, including structures to benefit from Section 892 exemption and to protect from Effectively Connected Income (ECI) and U.S. Foreign Investment in Real Property Tax Act (FIRPTA); and
  • Negotiating side letter provisions addressing tax issues relevant to sovereign and tax-exempt investors.

 

Securities:  We are familiar with the necessary offering exemptions typically relied upon by private investment funds, Investment Company Act exemption requirements, Investment Advisors Act requirements, and ERISA requirements. We also assist fund managers in complying with all relevant facets of the federal securities and commodity futures laws. We counsel investment advisers managing a wide range of hedge funds.

ERISA:  We are familiar with employee benefit plans that are regulated by ERISA and “look-through” rules provided in the plan asset regulations of the DOL which may cause fund’s assets to be treated as plan assets. We are also familiar with the methods to avoid such treatment through the de minimis participation in the fund by benefit plan investors or qualification by the fund as a venture capital operating company.

Derivatives: We advise all kinds of entities in how to comply with applicable Dodd-Frank regulations concerning their financial derivatives transactions, including whether the transactions are eligible for the end-user exception to the mandatory clearing requirement; how the parties to the transactions should meet their reporting and record-keeping obligations; and whether the parties should agree to the terms of the ISDA Dodd-Frank Protocols.

Finance.  We represent lenders, institutional investors, placement agents, borrowers, and lessors/lessees in various commercial and corporate debt financing contexts. These include secured and unsecured lending transactions, private placements, project and structured finance, equipment leasing, sales and leasebacks, synthetic leases, letter of credit and commercial paper financing, interest rate, commodities and currency hedging policies and transactions, medium term note programs, and a variety of other financing transactions.

Bankruptcy: We draw upon our Restructuring Practice Group’s experience representing debtors and secured as well as unsecured creditors, and litigating the matters that arise in such representations, to counsel our private investment fund clients in workout and bankruptcy situations.

  • Experience

    We have represented prominent institutional investors as limited partners in numerous domestic and international investments, including for example:

    • Represented limited partner in initial negotiation of a buyout fund’s limited partnership agreement and investor’s side letter. Also advised limited partner throughout the term of its investment in the fund, which included advising the limited partner with respect to a key person event at the fund.
    • Represented replacement general partner who was appointed by the State of Connecticut after it had removed the existing general partner.
    • Represented one of the limited partners that led negotiations with a general partner, which general partner was ultimately removed by a group of limited partners. We advised the limited partner throughout the negotiations, the removal of the general partner, and the appointment of a replacement general partner.
    • Represented the asset management division of an insurance company with respect to a $25 million investment in a $1 billion middle market buyout fund focusing on information services, industrial products, consumer products and healthcare and financial services.
    • Represented a foundation endowment with respect to a $50 million investment in a $500 million oil and gas fund focusing on controlling equity investments in small cap oil and gas companies, including newly formed startups.
    • Represented a university endowment with respect to a $25 million investment in a hedge fund seeking to maximize risk-adjusted returns over the course of various market cycles through a portfolio consisting primarily of concentrated equity investments.
    • Represented investment office of a U.S. insurance company in connection with a $15 million investment in a U.S. based private credit fund.
    • Served as primary counsel for an investment manager exclusively serving a public pension plan limited partner base whose fund of funds and separate accounts focus on investing in private equity funds.