Drafting and Reviewing the Key Documentation for a Private Equity Fund and Its Offering

February 10, 2017 (4 min read)

THE LAWYER’S MOST IMPORTANT ROLE IN CONNECTION with the launch of a new private equity fund (PE fund) will involve the preparation and negotiation of the key documents for the offering of its interests. The sale of PE fund interests to investors constitutes an offering of securities that must be registered with the U.S. Securities and Exchange Commission (SEC) and state authorities or meet an exemption from registration under federal or state securities laws. Therefore, counsel advising a PE fund should have a keen understanding of the relevant legal considerations, including compliance with securities laws, when negotiating and drafting the key documents composing an offering of PE fund interests. This practice note describes these key documents, including the private placement memorandum (PPM), the subscription agreement, the investor questionnaire, and the formation documents for the PE fund and its manager, as well as agreements with any service providers.

The Mechanics of Conducting the Offering and Closings

Legal counsel will typically become involved early in the launch of a new PE fund. The sponsor will approach counsel requesting help preparing the legal formation and offering documents for the new PE fund. The sponsor may expect counsel to have form precedents on file that can be quickly customized to the specifics of the PE fund. Counsel will typically start by drafting a PPM. It is customary for the sponsor to provide a description of the PE fund’s strategy and biographies of the business team, as well as information on the team’s prior track record, if applicable. Counsel should review these contributions carefully and be prepared to offer constructive and accurate feedback. Once the PPM has been drafted, reviewed, and revised, it will be sent to prospective investors in the PE fund (with supplements to come as the PE fund makes investments and/or material changes to its summary of terms). Counsel will then turn to the legal formation documents (such as the limited partnership agreement that governs the PE fund) and the subscription documents. Outside service providers like the administrator and any placement agents may each prepare their own form of service agreement, which the counsel to the PE fund and sponsor will review and negotiate, as necessary, or may expect fund counsel to serve up its own form of agreement.

Prior to deciding to invest, investors will typically engage in extensive due diligence, including legal due diligence conducted by their own inside or outside counsel. As part of legal due diligence, in addition to requesting a copy of the PPM and the legal formation documents for the PE fund, investor counsel may also request copies of the service agreements with the main outside service providers (if any), such as the administrator. Additional due diligence requests may follow for other material contracts to which the PE fund and its manager are parties, both those documenting investments made by the PE fund, if there are any to date (such as shareholder and stock purchase agreements), or those involving the manager’s access to securities data and investment research (such as data vendor agreements and agreements with expert networks). Finally, the manager’s internal written policies and procedures with respect to compliance, research, allocation, and operations may be reviewed. Investor counsel may provide comments on the limited partnership agreement and seek to negotiate various points. They may also propose a side letter containing additional provisions to be undertaken and representations to be made by the PE fund and/or its manager as a pre-condition to an investment.

To read the full practice note in Lexis Practice Advisor, follow this link.

Content adapted by Alyssa Heumann with assistance from David Schwarz. Alyssa Heumann is a Content Manager in Private Equity for Lexis Practice Advisor^®. Alyssa was most recently assistant general counsel at GoldPoint Partners LLC, a private equity boutique wholly owned by New York Life Insurance Company. She began her legal career as a member of the investment management group at Schulte Roth & Zabel LLP.