February 23, 2024
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The SEC staff clarified that private fund sponsors that wish to exclude the effects of subscription credit facilities when presenting gross internal rates of return in performance results must also exclude such effects when presenting the corresponding net internal rates of return. I advise that there is.
February 6, 2024, U.S. Securities and Exchange Commission Staff (“SEC staff”) Updated Marketing Compliance FAQ regarding Advisers Act Marketing Regulations[1] (“''marketing rules”) New Interpretative Guidance (“FAQ”) Concerning the display of the performance of privately placed investment funds utilizing a fund-level subscription credit system.[2]
In particular, the SEC staff advised private fund sponsors who wish to exclude the effects of subscription credit facilities when presenting gross internal rates of return:Total IRR“”) in the performance results is the corresponding net internal rate of return (“”)Net IRR”). Otherwise, the presentation of gross IRR must be accompanied by a net IRR calculated over the same period of time as gross performance and using the same type of return and methodology, according to SEC staff. You would be in breach of the requirements of the Marketing Regulations.
Additionally, the SEC staff took the position that it is impermissible under the general prohibitions set forth in the Marketing Regulations.[3] Private fund sponsors (i) use performance presentations that only show net IRR, including the impact of fund-level subscription credit facilities; do not have or (ii) “appropriate disclosure.”[4] We discuss the impact of such features on the net performance provided.[5]
In light of the FAQ, we encourage all private fund sponsors to promptly review their PPMs, pitchbooks, and related marketing materials for compliance with the new Interpretations summarized above.
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[1] Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended.
[2] “Subscription Credit Facility” broadly includes borrowings secured by unfunded commitments of investors in the Fund, such as subscription line financings, capital call facilities, and bridge lines.
[3] Rule 206(4)-1(a).
[4] The FAQ is not clear on what constitutes “adequate disclosure” in this context, but at least the net IRR takes into account leverage, which may result in higher than expected returns. It is thought that it includes a clear statement that there is a possibility of obtaining. We never used that kind of leverage.
[5] Marketing regulations generally do not require gross performance to be included whenever net performance is presented, so sponsors that comply with this requirement are also not required to present corresponding gross performance.
The attorneys at Gibson Dunn are available to answer any questions you may have regarding the issues and considerations listed above. Please contact any of the Gibson Dunn attorneys, authors, or leaders and members of our investment funds practice group with whom you regularly work.
Jennifer Bella Maguire – Los Angeles (+1 213.229.7986, [email protected])
Kevin Bettsteller – Los Angeles (+1 310.552.8566, [email protected])
Albert S. Cho – Hong Kong (+852 2214 3811, [email protected])
Candace S. Cho – Los Angeles (+1 310.552.8658, [email protected])
John Fedeley – Singapore (+65 6507 3688, [email protected])
AJ Frey – Washington DC/New York (+1 202.887.3793, [email protected])
Shukie Grossman – New York (+1 212.351.2369, [email protected])
James M. Hayes – Houston (+1 346.718.6642, [email protected])
Kira Idoko – New York (+1 212.351.3951, [email protected])
Gregory Mertz – Washington, DC (+1 202.887.3637, [email protected])
Eve Mrozek – New York (+1 212.351.4053, [email protected])
Roger D. Singer – New York (+1 212.351.3888, [email protected])
Edward D. Sofer – New York (+1 212.351.3918, [email protected])
William Thomas Jr. – Washington DC (+1 202.887.3735, [email protected])
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