The Hedge Fund Law Report

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

Articles By Topic

By Topic: Break-Up Fees

  • From Vol. 9 No.33 (Aug. 25, 2016)

    Expense Allocation and Fee Practices Fund Managers Should Avoid to Reduce Risk of SEC Scrutiny (Part One of Three)

    There were no specific regulations – and minimal SEC guidance – for fund managers to reference prior to 2015 when allocating expenses between themselves and their funds. To fill this void and protect investors, the SEC announced in 2015 and 2016 that private fund fee and expense practices would be a priority of its Office of Compliance Inspections and Examinations. A flurry of enforcement actions followed, targeting practices often viewed as “market” by hedge fund managers at the time. Fund managers must study those actions to date to ensure they do not commit the same violations highlighted by the SEC. To illuminate best practices for fund managers to avoid expense allocation violations, The Hedge Fund Law Report spoke with top practitioners in the industry and examined SEC enforcement actions and statements by SEC staff. This article, the first in a three-part series, outlines trends in the types of expense allocations most aggressively scrutinized by the SEC. The second article will examine the flaws in disclosures to investors and the gaps in policies and procedures of managers that frequently result in expense allocation violations. The third article will describe best practices fund managers should adopt to prevent violations, as well as remedial actions to take upon discovering the improper allocation of an expense. For additional coverage of expense allocations, see “Battle-Tested Best Practices for Private Fund Expense Allocations” (Oct. 10, 2014); and our two-part series entitled “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds?”: Part One (May 2, 2013); and Part Two (May 9, 2013).

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  • From Vol. 9 No.32 (Aug. 11, 2016)

    Private Equity Firms From Across the Industry Spectrum Advise on Trends and Terms in the Current Co-Investment Market

    Co-investments can offer investors additional exposure to a specific investment and flexibility in regard to fees and liquidity; they provide additional capital to managers and allow them to make larger investments without running afoul of fund concentration limits. See “Co-Investments Enable Hedge Fund Managers to Pursue Illiquid Opportunities While Avoiding Style Drift (Part One of Three)” (Feb. 21, 2014). A recent program sponsored by Katten Muchin Rosenman offered a look at co-investing from the perspectives of advisers participating frequently in co-investments. Katten partner Noah J. Leichtling moderated the discussion, which featured David McCoy, a managing director and portfolio manager at fund-of-funds manager RCP Advisors (RCP); Christopher S. McCrory, a vice president at 50 South Capital (50 South), the alternative investment arm of Northern Trust Corporation; and Andy Unanue, a managing partner of AUA Private Equity Partners (AUA). The panelists focused on the sourcing and allocation of co-investment opportunities; fees, expenses and other deal terms; characteristics co-investors desire when seeking out investment opportunities; and the outlook for the co-investment market. This article summarizes their insights on these and other topics. For more on co-investments, see “ How and Why Hedge Fund Managers Are Capitalizing on Co-Investment Opportunities” (Dec. 11, 2014); and “Co-Investments in the Hedge Fund Context: Fiduciary Duty Concerns, Conflicts and Regulatory Risks (Part Three of Three)” (Mar. 7, 2014).

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  • From Vol. 2 No.23 (Jun. 10, 2009)

    District Court Awards Hedge Fund Manager $1.5 Million “Break-Up” Fee Pursuant to Financing Deal’s Letter of Intent

    On May 19, 2009, the United States District Court for the Southern District of New York ordered Fair Finance Company, Inc. (FairFin), a financier of retail stores that traded in accounts receivables, to pay FCS Advisors, Inc. d/b/a Brevet Capital Advisors (Brevet), a hedge fund manager, a $1.5 million break-up fee and due diligence expenses based on FairFin’s breach of a letter of intent (LOI).  The LOI stipulated that Brevet would provide FairFin with up to $75 million in financing, and contained an exclusivity provision that required FairFin to pay Brevet $1.5 million if FairFin closed with another party “in lieu of” the financing contemplated in the LOI.  The district court entered summary judgment on behalf of Brevet after finding that no reasonable jury could dispute that Brevet had exercised its option to pursue financing with FairFin, that FairFin violated the exclusivity provision, and that FairFin then closed a similar financing transaction with another financier “in lieu” of a transaction with Brevet.  We explain the facts of the case and the court’s legal analysis.

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