The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Special Purpose Vehicles

  • From Vol. 8 No.10 (Mar. 12, 2015)

    Structures and Characteristics of Activist Alternative Investment Funds

    Simmons & Simmons and the Alternative Investment Management Association (AIMA) recently undertook joint research to assess the development and state of shareholder activism by alternative investors, investigate the impact of such activism and identify certain trends and implications for future developments.  This article summarizes the findings of that research with respect to the structure and characteristics of activist alternative investment funds.  See also “Practitioners Discuss U.S. and Canadian Shareholder Activism and Activist Tools,” The Hedge Fund Law Report, Vol. 7, No. 45 (Dec. 4, 2014).  For a discussion of the fee and tax provisions of a publicly offered activist investment vehicle, see “Ackman’s Pershing Square Public Offering Features Novel Performance Fee Mechanism,” The Hedge Fund Law Report, Vol. 7, No. 39 (Oct. 17, 2014).

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  • From Vol. 2 No.34 (Aug. 27, 2009)

    Steel Partners’ Restructuring and Redemption Plan: Precedent or Anomaly?

    At the end of 2008, hedge fund manager Steel Partners LLC (Steel Partners) adopted a novel and controversial approach in response to requests to redeem approximately 38 percent of the net assets in its Steel Partners II family of funds (Steel Partners II Funds).  In a nutshell, Steel Partners proposed a restructuring plan in which investors could receive a cash distribution and either (1) shares (of limited or no liquidity) in a new publicly-traded entity that would hold the funds’ assets, or (2) a pro rata distribution of the funds’ (largely illiquid) holdings.  Certain limited partners sued to enjoin that plan and demanded an “orderly liquidation” of the funds.  On June 19, 2009, the Delaware Chancery Court denied the plaintiffs’ demand for a preliminary injunction.  See “Delaware Chancery Court Permits Hedge Fund Manager Steel Partners to Restructure Fund and Redeem Certain Limited Partnership Interests,” The Hedge Fund Law Report, Vol. 2, No. 26 (Jul. 2, 2009).  In light of the legal imprimatur of the Delaware Chancery Court, the following question has been floating around the hedge fund community: is the Steel Partners approach a precedent or an anomaly?  Based on original research and interviews with market participants, The Hedge Fund Law Report has concluded that the answer is likely the latter: the Steel Partners approach, while legally plausible, is practically and optically cumbersome, and unlikely to be imitated precisely (though parts of the approach may inform responses to heavy redemption requests by similarly situated managers).  In fact, quite apart from serving as a precedent for an anti-redemption technique, the Steel Partners case may induce hedge fund investors to demand language in the governing documents of future funds prohibiting such techniques.  We describe the Steel Partners redemption plan; discuss the legal challenge to it; identify three reasons why it is unlikely to serve as a precedent; and offer insight into how the plan and the reactions to it may affect drafting of future fund documents.

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    Delaware Chancery Court Permits Hedge Fund Manager Steel Partners to Restructure Fund and Redeem Certain Limited Partnership Interests

    After the 2008 market collapse, the Steel Partners II family of hedge funds (Steel Partners) was flooded with redemption requests.  Because the funds were locked into long-term investments, the funds’ manager proposed a restructuring plan under which the investors could receive a cash distribution and either (1) shares in a new publicly-traded entity that would hold the funds’ assets, or (2) a pro rata distribution of the funds’ securities holdings.  Certain limited partners sued to enjoin that plan and demanded an “orderly liquidation” of the funds.  Relying heavily on the fact that Steel Partners’ offering documents specifically contemplated temporary freezes on redemptions and permitted mandatory redemptions and distributions of assets in kind, the Delaware Chancery Court denied the plaintiffs’ demand for a preliminary injunction.  We explain the restructuring plan in detail, and explain the court’s analysis.

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  • From Vol. 2 No.16 (Apr. 23, 2009)

    Secondary Market Develops in Special Purpose Vehicle Interests as Use of SPVs to Effect Redemptions Becomes More Common

    All redemptions from hedge funds holding liquid assets are alike; each redemption from a hedge fund holding illiquid assets is complex in its own way.  At bottom, that complexity arises out of a basic tension: monthly, quarterly or even annual liquidity is, in many cases, irreconcilable with the holding period required to realize value in currently illiquid assets.  Rather than selling illiquid assets at fire sale prices to satisfy redemptions, managers of funds that offer reasonably frequent liquidity have been using various tools to prevent or delay such sales – tools such as gates, lock-ups, suspensions and side pockets.  However, with increasing frequency, managers have also been employing special purpose vehicles (SPVs) in an effort to reconcile investor demands for liquidity with the illiquidity of portfolio assets.  In effect, SPVs offer redeeming investors what might be called a “qualified liquidity”: SPV interests are more liquid than a gate, suspension or hold back, but less liquid than cash.  However, many investors that have submitted redemption requests of late need more than qualified liquidity – they need actual liquidity.  Because of the ubiquity of the credit crisis, many investors are willing to accept – in fact, are demanding – cash today rather than a contingent payment tomorrow, even while recognizing that the cash they receive may be a small fraction of the ultimate realization value of the assets in an SPV.  But managers do not have the cash to give investors – that’s why they put the assets in the SPV in the first place.  What can investors do?  One answer is that they can access a developing secondary market in SPV interests.  We define SPVs and synthetic SPVs, then detail the mechanics of the secondary market in SPV interests, relevant legal considerations (including issues relating to restricted securities, ERISA, AML, KYC and the Bank Holding Company Act), treatment of confidential information, valuation issues, what types of funds would be interested in participating in secondary SPV transactions, the benefits to managers and the potential for use of Dutch auctions.

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  • From Vol. 2 No.15 (Apr. 16, 2009)

    Hedge Fund Managers Using Special Purpose Vehicles to Minimize Adverse Effects of Redemptions on Long-Term Investors

    When a hedge fund is invested in illiquid assets, redemptions from that fund can adversely affect various constituencies, including non-redeeming investors, redeeming investors, the manager and even those who have day-to-day dealings with the assets.  Managers have various tools available to them for preventing or delaying redemptions, or mitigating the adverse outcomes that can flow from them.  Such tools include fund-level gates, investor-level gates, hard and soft lock-ups, rolling redemption periods, holdbacks, redemption suspensions and side pockets.  In addition, pension funds and other institutional investors are increasingly demanding access to hedge fund strategies via separate accounts, in an effort to minimize the mismatch between the time horizons of different investors in commingled vehicles.  With growing frequency, however, managers are employing a different strategy to effectuate redemptions – at least, redemptions of a sort – while avoiding many of the adverse outcomes normally associated with redemptions.  That strategy involves the use of special purpose vehicles (SPVs) – essentially, separate entities to which a fund can transfer illiquid assets, or economic exposure to illiquid assets, and which can issue interests that are transferred to redeeming investors in lieu of cash or the assets themselves.  In effect, managers formerly had been limited to three options when faced with redemptions: give nothing (i.e., impose a suspension, gate or holdback); give cash; or give in kind.  The use of SPVs introduces a fourth option: give interests in a new entity organized solely to house illiquid assets – if you will, a sort of “bad bank” for illiquid hedge fund assets.  More than anything, SPVs offer managers a way to control the timing of the disposition of currently illiquid assets, and to avoid forced sales into distressed markets.  We provide a comprehensive analysis of the use of SPVs in the redemption context, including a discussion of what SPVs are and how they work, what synthetic SPVs are and the contexts in which they can be used, a comparison with side pockets, recent examples, fee considerations and more.

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  • From Vol. 2 No.5 (Feb. 4, 2009)

    Icahn-Affiliated Entity Challenges Effort by Steel Partners to Convert Hedge Fund Investment into Publicly-Listed Vehicle

    On January 13, 2009, ACF Master Trust, an employee benefit plan for ACF Industries LLC that is affiliated with Carl Icahn, filed a lawsuit against Steel Partners II (Offshore) Ltd., a Cayman Islands based hedge fund and others, alleging fraud and breach of contract based on a reorganization of one of the fund’s investments allegedly undertaken in response to the fund’s recent losses and the ensuing wave of redemptions.  Our discussion includes details of the specific PPM provisions at issue and the mechanics of the reorganization, as well as a summary of the allegations and defenses based on a review of the pleadings.

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