Anonymous User wrote: ↑Wed Feb 17, 2021 6:00 pm
Anonymous User wrote: ↑Sat Jan 09, 2021 12:00 pm
This thread has been really helpful, as I've been wondering the same stuff. One question I have: what does the pre-closing "fundraising" process look like at a Deb/KE/STB?
[mods: there's no way I'd be this frank if my name were attached. I'm responding on topic. Please don't out me]
I was in the funds group of two different large firms, one of which was Deb/KE/STB and expect that it's broadly the same at any good firm. Namely:
-Draft the PPM. Usually this involves starting with the last PPM, changing III to IV everywhere, updating risk factors, adding a bunch of footnotes, whatever the hell tax does, asking the client to make some fancy charts showing how they're definitely going to make money, and sending it to LPs. There are always going to be a few points that are oddly controversial - either because a MD at the client really doesn't want to talk about the deal where they lost a shitload of money or maybe there was an enforcement action concerning something the client does so you're trying to make sure the disclosure about a particular point is clear -- but overall this is just between you and the client. Because it's written in plain english and is theoretically the main selling document, the business team is definitely going to read it and have dumb comments that you nonetheless dutifully implement.
-Send the LPA to potential investors.
-Meanwhile, you draft the LPA. This has already begun before you send out the PPM, but you may not be finished by the time you send the PPM to investors. Like the PPM, you'll probably use the last fund's LPA as a starting point, but because this is actually going to govern what happens for the next 10 years, people are going to read the hell out of it. They'll be thinking "oh, we got screwed when we did deal X and couldn't charge the expense of some weird thing to the fund, so make sure that we can do so this time around" or "Jane wants the ability to retire in two years so make sure he isn't part of the key person clause." You'll probably focus on being really aggressive here because you're going to negotiate it.
-Negotiate the LPA with investors. They're going to say "we don't like that you can charge the expense of your private jet to the fund" (in funds that can charge this expense, there is a nearly 100% chance that any state or local pension plan that invests in the fund will object, though we'll see what happens post-COVID because now the funds have a really good argument) or "we don't like that Jane isn't a key person, we think she's really important to the returns of the fund" and you'll have to decide whether to give in. Changes you make to the LPA affect all investors, so you try to do those sparingly because you want to give the smallest amount possible. So you might put Jane back into the key person clause of the LPA.
-Draft the sub book. This is the agreement by which the actual securities in the fund are sold. It's 95% the same across all funds advised by a given firm so you're just updating III to IV and making sure that any new regulations are reflected appropriately (e.g. the change to the definition of accredited investor late last year).
-Negotiate side letters with investors. This is basically a separate agreement that says "notwithstanding the LPA, the terms of the deal just between you and I are modified as follows: ___". So you might have a side letter saying that if the expense of a private jet is charged to the fund, a pro rata portion will be rebated to a particular investor with a lot of bargaining power. Or maybe if the investor has less bargaining power, you'll promise an annual update on how much you used the jet so they can see that it's being used to travel to some random factory in Peoria, not to go on vacation in Aruba.
-Review sub books submitted by investors and ask for corrections when necessary. You'd be amazed how many sophisticated institutions apparently can't hire a competent lawyer, so the sub book will be filled out by Bob Johnson, the individual and then in one part of the sub book they'll check a box indicating they're a corporation, which you need to follow up on. This is classic junior work because it's tedious and pretty easy to teach, but it's super high stakes -- it could be that Bob Johnson is just some rich guy who has no idea what s/he is doing and needs to change the answer indicating he's a corporation, or it could be that Bob is the lawyer for some random corporation that's subscribing and yet he didn't give you any information about the company. You just need to keep an eye out for inconsistencies and flag things to a midlevel or senior associate.
-After they've received enough sub books, have a closing. This means the fund countersigns the sub books, thereby accepting the subscriptions from investors. At the same time the fund countersigns the sub books, the law firm will issue an opinion stating that the fund has a valid exemption from the 33 and 40 Acts, and is a partnership under the internal revenue code. The partner signs this opinion because s/he knows the associates have closely reviewed the sub books to make sure they've flagged, e.g., any investor who didn't indicate that they're an accredited investor (or gave an answer to the accredited investor question that was inconsistent with an answer elsewhere in the sub book) or who gave a confusing answer.
This omits a lot of detail but is hopefully enough that you can talk for 30 seconds during an interview.