Registered Funds Alert

September 2020

Table of Contents
During Significant Market Downturns, 2Sponsors and Their Affiliates Can Provide
Capital Support
In times of market turmoil, regulated funds
may look to raise or borrow additional capitalto support their operations and take advantage
of market opportunities. In this Alert, we
discuss ways that sponsors can provide capital
support to regulated funds in compliance withfederal securities laws.
Click here for more

The Case to Permanently Extend the
SEC’s Temporary Co-Investment Relief
to Allow “New Funds” to Participate in
Follow-On Co-Investments

4

Under existing SEC co-investment exemptive
relief precedent, a fund that does not havea pre-existing investment in an issuer isunable to participate in a co-investmentthat is a follow-on investment to a regulated
fund’s existing investment. The SEC granted
temporary exemptive relief on this pointwith respect to BDC’s in light of COVID-19.
In this Alert, we make the case for the SEC topermanently adopt this relief and apply it to all
regulated funds.
Click here for more

Expanding Retail Access to Private
Markets Through Regulated Funds: A
Response to a Comment Letter From
Securities Law Professors

5

The latest edition of Simpson Thacher’s Registered Funds

A response to the concerns raised in thecomment letter submitted by a group of law
professors on the SEC’s recent concept release

Alert discusses how market disruptions affect regulated
funds and ways in which sponsors can provide financial

Click here for more

Notable Transactions: Q2 2020
A list of notable transactions that occurred in
the second quarter of 2020, including M&A
transactions and closed-end fund IPOs
Click here for more

Simpson Thacher & Bartlett LLP

9support; a call for the SEC to permanently adopt existing
temporary relief related to follow-on co-investments;
and a rebuttal to law professor comments on the SEC’sconcept release regarding private markets access andregulated funds.

During Significant Market
Downturns, Sponsors andTheir Affiliates Can Provide
Capital Support
A “black swan” event, such as the March 2020
downturn related to the COVID-19 pandemic, cansignificantly disrupt the operations of investmentcompanies, in part due to difficulties in complying
with requirements for raising capital under federal
securities laws during market distress. In this Alert
we discuss below how such disruptions can impact
closed-end funds and BDCs (together with closedend funds, “regulated funds”), and potential ways forsponsors of regulated funds to financially support
a regulated fund during such disruptive events ina manner consistent with the requirements of the1940 Act and other relevant federal securities laws.
Sponsors are in a position to act more quickly tosupport a regulated fund than third parties due totheir familiarity with the regulated fund (e.g., due
diligence is not required) and are often willing toaccept certain risks to act in the best interests ofshareholders. A more in-depth exploration of these
topics will be available in an upcoming issue of The
Investment Lawyer.

securities. This hampers a regulated fund’s ability totake advantage of potential investment opportunities
that may arise due to asset mispricings in a market
dislocation or to conduct normal operations.

“

A decrease in the value of a regulated fund’s
assets correspondingly reduces its asset coverage,
thereby limiting its ability to borrow additional
money or issue other senior securities.

”

In addition to 1940 Act considerations, reductions inasset valuations also may lead to a contractual breachby a fund of asset coverage covenants in existing
credit facilities or other lending arrangements,
potentially causing an event of default.
b. Reduced Ability to Pay Preferred ShareDividends or Declare Distributions to
Common Shareholders
Regulated funds with preferred stock or public
debt outstanding may not declare any distribution(except a dividend payable in stock of the issuer),
unless at the time of declaration, the regulated fundis in compliance with the 1940 Act asset coverage
ratios. Credit facilities for regulated funds also
may include similar contractual restrictions. Such
restrictions may affect regulated funds intending toqualify as regulated investment companies underthe Internal Revenue Code, as amended, as they are
required to distribute at least 90% of their income
to shareholders annually or be subject to entity
level taxation. A regulated fund’s inability to pay
dividends could cause substantial reputational harmto the fund or the sponsor, particularly if the fund isdesigned to provide investors with current income.
c. Reduced Ability to Repurchase Shares

Potential Disruptive Effects of a Downturn on
Regulated Fund Operations
a. Reduced Ability to Borrow or Issue Debt/
Preferred Shares Pursuant to Regulatory
Requirements and Under Existing
Lending Arrangements
Regulated funds must adhere to certain asset
coverage ratios to draw on lines of credit or issueindebtedness or preferred shares (collectively, “seniorsecurities”) under the 1940 Act. A decrease in thevalue of a regulated fund’s assets correspondingly
reduces its asset coverage, thereby limiting its ability
to borrow additional money or issue other senior

A regulated fund with senior securities outstanding(other than privately negotiated debt) may not
repurchase any of its outstanding shares unlessthe regulated fund is in compliance with the asset
coverage requirements discussed above. The share
repurchase programs of tender offer closed-endfunds and BDCs and interval closed end funds
operating under Rule 23c-3 of the 1940 Act may
be negatively impacted by an inability to comply
with the asset coverage limits, which could result
in redeeming outstanding senior securities orsuspending the repurchase program.
d. Inability to Issue Common Shares
The 1940 Act generally prohibits a regulated fundfrom issuing common shares at a price below current
2NAV per share without shareholder approval. Under
normal circumstances, shareholders may be willing
to approve a share issuance if the discount (i.e.,the difference between the NAV and market price)
is narrow, resulting in limited economic dilution
to current shareholders. If the fund’s share pricetrades at a premium (i.e., market price is higher
than NAV), only board approval is required. Duringmarket disruptions, share prices begin to depress,
thus limiting a regulated fund’s ability to raisecommon equity without shareholder approval. Botha regulated fund’s shareholders and its board may bereluctant to approve issuing shares at a significant
discount to NAV because of the higher economic
dilution that current shareholders would experience
compared to normal circumstances.
Affiliated Capital Infusion Alternatives
The occurrence of a significant market downturn
can cause typical sources of liquidity (e.g., revolving
credit facilities with banks, underwritten public debt
or common stock equity issuances) for regulated
funds to become unavailable or unfavorable, whether
due to reduced lending or regulatory constraints. In
such circumstances, the sponsor of a regulated fund
may provide an alternative source of capital.

provisions of the 1940 Act. A secured loan from anaffiliate, however, is viewed as prohibited for 1940
Act purposes.
c. Rights Offering Backstopped by the Sponsor oran Affiliate
One exception to the 1940 Act’s general prohibition
against issuing shares below NAV commonly usedby closed-end funds is a rights offering to current
shareholders, which may be issued at a subscription
price below NAV to incentivize participation. Sinceshareholders will experience dilution upon issuanceof shares in a rights offering when shares are trading
below NAV, the SEC, through no-action relief,
requires boards to make certain determinations,
including a good faith determination that the offering
would result in a net benefit to existing shareholders,
including those who choose not to exercise theirrights.

a. Equity Issuance
A sponsor can purchase common shares from a
regulated fund in a private transaction to provide
additional capital relatively quickly. Fortunately,
unlike the numerous affiliated transaction
prohibitions in the 1940 Act, the 1940 Act does not
restrict a sponsor’s ability to purchase securities
issued by a regulated fund. However, sponsors must
purchase the shares at or above NAV, which for
publicly traded funds likely will be above the current
market value per share to comply with the generalprohibition under the 1940 Act on issuing commonshares below NAV.1
b. Lending by the Sponsor to a Regulated Fundon an Unsecured Basis or the Issuance by
the Regulated Fund of Preferred Shares to
the Sponsor
To the extent that a regulated fund is not in dangerof breaching its asset coverage requirements, as
discussed above, a sponsor could act as a rapid formof liquidity to the fund by lending on an unsecured
basis or purchasing preferred shares. Similar to an
equity issuance, lending on an unsecured basis is notprohibited under the joint or affiliated transaction
1.

Of course, a sponsor can also purchase equity securities of a listed
fund in the open market in accordance with any limitations on insider
trading or market manipulation, but while that may have some effect on
the share price, it will not result in an infusion of capital to the fund.

To alleviate the risk of a failed rights offering, aregulated fund’s sponsor could act as a standby
purchaser, or backstop, for the shares by agreeing toparticipate in the rights offering and oversubscribe
to a significant degree. Acting as a standby purchaserof shares in a rights offering eases some of theeconomic burden on a sponsor by allowing thesponsor to purchase shares closer to the current
market price, unlike a common share issuance at
NAV, as discussed above.
d. Voluntary Waiver of Fees by the Sponsor
When a regulated fund is in distress or finds
expenses too high, sponsors often waive someor all of their management and/or incentive fees
(if applicable) for a period of time to reduce theregulated fund’s ongoing expenses. Unlike thetransactions described above, where a sponsor
provides capital to a regulated fund, the benefit offee waivers for sponsors is that they simply limit arevenue stream as opposed to actively putting capital3

at risk. During market disruptions, sponsors too mayfind themselves capital-constrained and waivers may
be a more attractive way to help a fund.
Significant market events can come with little
warning and stress test the operations of regulated
funds. Even though the 1940 Act carries with it anumber of significant constraints regarding affiliatedtransactions, sponsors should be aware that they are
not fully handcuffed from providing support to theirregulated funds in such circumstances.

The Case to Permanently
Extend the SEC’s Temporary
Co-Investment Relief to Allow“New Funds” to Participate in
Follow-On Co-Investments
In prior Alerts, we have critiqued certain aspects ofthe current form of co-investment exemptive ordersthat the SEC has granted to regulated funds seeking
to invest alongside affiliated funds in negotiatedtransactions. We also have encouraged the SEC toapprove a new form of co-investment relief, which
has now languished with the Staff for over a year but
would fix many of the issues that arise under existingco-investment orders. Recently, the SEC temporarily
addressed one common criticism levied against
existing co-investment orders by allowing an affiliate
of a BDC to participate in a follow-on co-investment
even if the affiliate had not previously participatedin a co-investment with respect to the same issuer.
In this Alert, we make the case for permanent
implementation of this temporary relief and theextension of the relief to all regulated funds, as we
believe it addresses a key investor protection problem
inherent in the structure of existing co-investment
exemptive orders and will enhance capital flow to thesmall businesses BDCs were designed to support.
Rationale for the Current Restriction on “NewFunds” Participating in Follow-On Co-Investments Is
Faulty and Inadvertently Creates Investor Protection
Concerns
Historically, the co-investment relief granted by
the SEC has been premised on the idea that aregulated fund and its affiliates should be similarly
situated with respect to the investments they holdin an issuer. Illustrating this point, one of the key
conditions of the relief prohibits a regulated fundfrom investing in reliance on the relief if certain
affiliates have any pre-existing investment in theissuer. The purported policy rationale behind

this condition is that it protects investors from asituation in which a regulated fund’s assets could be
used to “prop up” an affiliate’s existing investment.
Accordingly, this condition is often referred to
colloquially as the “propping up” condition.
The SEC has allowed only two exceptions from thepropping up condition. Under both exceptions, any
participating regulated fund is required to alreadyhave an investment in the issuer, which should serveto mitigate the propping up concern. These two
exemptions allow a regulated fund to participate ina follow-on co-investment in reliance on the relief
with one key requirement—all affiliated funds thatparticipate in the follow-on also have a pre-existing
investment in the issuer (and, except in limited
circumstances, all participants must hold the same
securities of the issuer). However, by requiring all
follow-on participants to have existing investments
in an issuer, the SEC has failed to account for certain
fundamental characteristics of private funds,
inadvertently reintroducing propping up concernsthat can harm investors in regulated funds.

“

However, by requiring all follow-on
participants to have existing investments in anissuer, the SEC has failed to account for certain
fundamental characteristics of private funds,
inadvertently reintroducing propping up concernsthat can harm investors in regulated funds.

”

The SEC seemingly has failed to account for the factthat private funds typically have a limited investment
period. For example, a private fund may have an
initial commitment period of one-to-two years,
followed by a three-to-five year investment period
and two-to-three year period of managing portfolio
investments prior to selling those investments,
winding down operations and distributing capitalback to investors (and/or raising a successor fund).
This limited lifecycle may prevent a private fundfrom providing capital in follow-on co-investmentsthat occur after its investment period. Under
current co-investment relief, if a private fundinitially participated in a co-investment alongsidea regulated fund and that investment later requires
additional capital support, the regulated fund willneed to provide that support on its own, and asponsor cannot use capital from any affiliated private
funds or proprietary accounts of the sponsor that
do not have a pre-existing investment in the issuer(collectively, “new funds”). This can result in theregulated fund being required to prop up the private
fund’s investment by funding more than its share of4

a follow-on investment. If the regulated fund and anyother affiliates that are eligible to participate in thefollow-on co-investment cannot provide sufficient
capital, the investment could decline in value or the
regulated fund could lose the investment altogether(for example, another sponsor provides the needed
capital and refinances the issuer’s debt), which harms
the Main Street investors who make up the bulk of
capital in BDCs.
In the order temporarily permitting a BDC toparticipate in a follow-on co-investment with new
funds, the SEC acknowledged that a BDC “may facechallenges absent these exemptions in providing
capital” to portfolio companies in light of COVID19. The order does not acknowledge that this issue
predated the pandemic and will continue to be anissue after the temporary relief expires. For thereasons outlined above, the temporary exemptive
relief should be extended permanently, and be
expanded to apply to all regulated funds that would
seek to co-invest in a follow-on with new funds.
Many BDCs Have Successfully Utilized the
Temporary Exemptive Relief, but it Still Has Its
Limitations
A number of BDCs have relied on the temporary
ability to participate in follow-on co-investmentswith new funds. This has allowed sponsors to
support portfolio companies better during the
pandemic, which has proven to be particularly
challenging time for the type of portfolio companies
BDCs are designed to support.

“

This has allowed sponsors to support portfolio
companies better during the pandemic, which has
proven to be particularly challenging time for thetype of portfolio companies BDCs are designed tosupport.

”

While the issuance of the temporary relief has
helped support the BDC industry, it does not provide
a complete solution to cash-strapped BDCs. In
order for a new fund to participate in a follow-on
co-investment under the temporary relief, a BDC
is still required to participate in the follow-ontransaction. Thus, while the temporary exemptive
relief helps sponsors provide support to existing
investments without forcing a BDC to overextend
itself or sell other desirable investments at depressed
prices to the same extent it may have absent therelief, the BDC still may face difficulty in funding
even a small portion of a follow-on opportunity.

Adopting a New, More Principles-based Form of CoInvestment Relief Remains a Better Path Forward
In issuing the temporary exemptive relief, it isapparent that the SEC is not overly worried about
private funds and a sponsor’s proprietary accounts
being taken advantage of to prop up a BDC’s
investments, presumably relying on the fact thatinvestment advisers have an overarching fiduciary
duty to those clients that should prevent such
misconduct. This principle applies to regulated funds
as well, and underpins the approach taken in the
new form of co-investment relief that a FS Global
Credit Opportunities Fund applied for last year (the“FS Application”).
Under the conditions of the FS Application, any
follow-on co-investment that involved a new fundwould require approval of a regulated fund’s board.
The FS Application also fixes several other problems
that arise under existing co-investment orders,
including reducing the burden on regulated fundboards, reducing the administrative and complianceburden on sponsors to track and report to the board
investment opportunities that fall outside a regulated
fund’s strategy and would permit joint venturesubsidiaries to participate in co-investments.
We continue to believe that the SEC should
adopt co-investment relief in the form of the FS
Application, and have been advocating for a moreprinciples-based approach to co-investment relief
for nearly two years. Absent broader reform toco-investment relief, a helpful first step would be tocorrect permanently the misguided restriction on
new funds participating in follow-on investments.

Expanding Retail Access to
Private Markets ThroughRegulated Funds: A Response
to a Comment Letter From
Securities Law Professors
In June 2019, the SEC issued a concept releaseseeking comments “on possible ways to simplify,
harmonize, and improve the exempt offering
framework to promote capital formation andexpand investment opportunities while maintaining
appropriate investor protections.”
To date, the SEC has received over 170 comment
letters from a wide range of industry participants,
including a letter from a group of 15 securities
law professors. The law professor letter questions
whether expanding access to private markets will5

raise investor protection concerns and argues
that existing proposals to increase retail investor
participation through pooled investment vehicles
suffer from misconceptions about the private
markets.
We agree with the law professors that any expansionof retail access to private markets must be careful
to preserve core investor protections; however, we
believe pooled investment vehicles, specificallyregistered investment companies and BDCs, arethe best way to increase investor access to private
markets investment strategies, as significant
investor protections are fundamental elements ofthe existing regulatory framework for these types offund structures. This Alert responds to some of the“misconceptions” raised in the law professor letter
regarding retail access to private markets throughpooled investment vehicles. Some of the arguments
raised in the law professor letter relate to businessissues, including the relative performance of private
markets investments. This Alert focuses on the legal
issues raised in the letter but we note that there is asignificant body of research offering rebuttals to thelaw professors’ business points.2*****
Existing Retail Structures Are Not a Direct
Substitute; Only Offer Limited Exposure to Private
Markets
The law professor letter notes that retail investors
can already access private markets indirectly
through mutual funds and BDCs. Unfortunately,
these existing channels are not true substitutes for
direct access to private markets or only offer limited
exposure to private markets.
According to a 2018 report from Morningstar, alow percentage of mutual funds have any exposure
to private company equity. Even among large-cap
equity funds, the subset of the mutual fund industry
that has embraced private-company investment themost, only 5.8% of the 1,204 large-cap equity funds
in Morningstar’s database as of December 2017 had
any level of investment in private companies. And2.

even among mutual funds that hold equity in privatecompanies, total exposure is typically modest andthe resulting impact for fund investors is likely
to be minimal. The median mutual fund in theMorningstar report invested in three privately heldcompanies, totaling just 0.71% of overall fund assets.

“

While BDCs originally were intended to be
venture capital vehicles, Sections 17 and 57 andrelated rules under the 1940 Act make it difficult
for a BDC or other closed-end fund to pursue
a private equity strategy by taking significant
equity stakes in portfolio companies, particularly
for those sponsors who might manage retailvehicles alongside institutional ones.

”

These small position sizes should not come as asurprise–a registered open-end fund is prohibited
under Rule 22e-4 of the 1940 Act from investing
more than 15% of its net assets in illiquid securities,
thereby limiting the extent to which it may invest in
private companies and private funds. In responseto the Concept Release, a number of commenters,
including the Institutional Limited Partners
Association, recommended that the SEC easeliquidity constraints for target date funds with longer
investment horizons, to provide greater flexibility toinvest in illiquid assets, including private companies.
In contrast to equity mutual funds, closed-end
investment company structures are better suited topursue illiquid investment strategies as they do notprovide daily redemption rights for investors andtherefore are not subject to Rule 22e-4. However,few private equity-style closed-end regulated funds
exist. While BDCs originally were intended to be
venture capital vehicles, Sections 17 and 57 andrelated rules under the 1940 Act make it difficult
for a BDC or other closed-end fund to pursue a
private equity strategy by taking significant equity

See e.g., Robert S. Harris, Tim Jenkinson & Steven N. Kaplan, How Do
Private Equity Investments Perform Compared to Public Equity?, 14 J.
INV. MGMT. 14, 15 (2016) (finding that returns to investors in private
equity funds with post-2005 vintage years have been roughly equal toreturns in the public markets but acknowledging “[t]hat performance
will improve if the historical J-curve pattern of private equity funds—in
which fund multiples increase over a fund’s life—continues to hold.”);Committee on Capital Markets Regulation, Expanding Opportunity for
Investors and Retirees: Private Equity at 19 (November 2018) (notingthat adding a private equity component to an investment portfolio
can provide protection in times of market stress); Georgetown Center
for Retirement Initiatives, The Evolution of Target Date Funds: Using
Alternatives to Improve Retirement Plan Outcomes (June 2018),(finding that allocating just 20% of a target date fund’s portfolio toprivate equity funds increased median annual retirement income
by 13%, as compared to a baseline portfolio without private equity
investments).
6

stakes in portfolio companies, particularly for
those sponsors who might manage retail vehicles
alongside institutional ones. For example, if aregistered fund or BDC buys more than 5% of theequity of a company together with a private fund,following the initial investment, the 1940 Act
would prohibit any follow-on transaction with theportfolio company (such as contributing additional
capital in a subsequent financing round) on thebasis that the portfolio company is an affiliatedperson of the registered fund or BDC. The 1940 Act
regulatory restrictions also significantly constrain
regulated funds from co-investing alongside private
equity funds that take controlling equity stakes incompanies. As a result, most closed-end funds and
BDCs pursue an income-oriented strategy and focus
on investments in the debt of small and mid-sizedcompanies and are unlikely to provide exposure to
private equity investments.

to provide shareholders with limited periodic(often quarterly) liquidity through an intervalfund or tender offer fund structure (for example, afund might repurchase up to 5% of its shares eachquarter). An unlisted private markets regulated fundwould likely allocate a modest portion of its portfolio
to a more liquid strategy to facilitate the fund’s
periodic liquidity, or could choose to do less frequent
repurchases for a larger portion of the fund’s sharesto align with the liquidity events of its underlying
portfolio companies.

For all of these reasons, the claim that retailinvestors already have access to private markets
strategies is a gross mischaracterization of thepresent investment landscape.
Private Markets Regulated Funds Provide Accessto Experienced Managers, Liquidity and a Diverse
Portfolio
The law professor letter also argues that current
proposals for pooled vehicles structures include
features that cannot coexist in practice, including
investor liquidity, illiquid investment exposure,broad diversification, and the lack of a need forretail investors to monitor the fund manager andthe fund’s investments. Below we discuss why these
attributes actually can exist in a properly structured
regulated fund (if the SEC provides appropriate relief
from certain regulatory restrictions, including those
discussed above).
Various Liquidity Options Are Available forRegulated Funds With Illiquid Strategies
Regulated fund pursuing a private markets strategy
can offer investors several different types of liquidity
options. A regulated fund pursuing a private markets
strategy would likely be structured as a closed-end
fund due to the illiquid nature of its investments.
Closed-end funds are not required to provide
shareholders with daily redemption opportunities
like open-end mutual funds, allowing a closed-end
fund to manage liquidity with more predictability.
Closed-end funds can list their shares on anational securities exchange, providing liquidity toinvestors using the most elegant liquidity system forinvestments ever devised—the U.S. stock markets.
For unlisted closed-end funds, it is quite common

Diversification Is Achievable Through Fund-ofFunds Structures and Required for Pass-ThroughTax Treatment
We agree with the law professor letter that holding
an interest in a single private equity fund may notprovide the average retail investor with meaningful
diversification, and that a regulated fund of private
funds structure is one alternative that addresses
these diversification concerns. It is worth noting thata current SEC staff position would preclude most
retail investors from investing in any such regulated
fund of private funds. As a result of the liquidity rule
discussed above, any regulated fund of private funds
would need to be structured as a closed-end fund.
However, that SEC staff has historically requiredthat offerings of registered closed-end funds thatinvest more than 15% of their assets in private funds
be limited to accredited investors only. A numberof industry commenters, including the Committeeof the Business Law Section of the American Bar
Association, encouraged the SEC staff to change its
informal policy imposing the 15% limitation, and the
Director of the Division of Investment Management
recently suggested that the Staff was reconsideringthat limitation. The law professor letter also fails to
acknowledge that regulated funds are required toprovide significant diversification to qualify for passthrough tax treatment.

7

We disagree with the law professor letter thata regulated fund of private funds could not be
structured to ensure retail investors have access only
to experienced asset managers and address layeringof fees. As one industry participant commented,
the Commission could consider limiting retailaccess to managers with a significant institutional
investor base to ensure that investors are exposed
to experienced managers only. As a result, retailinvestors in a regulated fund of private funds would
have the ability to invest alongside institutional
investors in the underlying private funds, allowing
retail investors to achieve incentive alignment
with institutional investors, and to benefit fromthe negotiation of terms of the private funds by
sophisticated investors.

“

We disagree with the law professor letter thata regulated fund of private funds could not be
structured to ensure retail investors have accessonly to experienced asset managers and address
layering of fees.

”

And as discussed in our comment letter on theconcept release, if the SEC were to allow for thecreation of regulated funds of affiliated private funds,
where the regulated fund invests in a multiple private
funds affiliated with the regulated fund’s investment
adviser, the SEC could also impose certain
restrictions to address duplicative fees, including
a requirement that the regulated fund’s board of
directors only approve fund-level fees for services

that are in addition to and not duplicative of services
at the underlying affiliated private fund level. This
structure is common in the mutual fund of funds
context. In addition to reduced fees, a regulated fundof affiliated private funds may also offer investors
certain benefits unavailable to a fund that invests in
unaffiliated private funds, including better alignmentof interests between management of the regulated
fund and underlying private funds and access to thebest possible terms in respect of each investment (ifthe SEC conditioned any such relief on most-favorednation status on key terms).
Public Reporting and Independent Oversight Are
Inherent Features of Regulated Funds
The legal framework of a regulated fund guarantees
certain core investor protections and is designed toprovide investors investment management services
by a registered investment adviser who owes afiduciary duty to its funds (including, notably, afiduciary duty not to charge excessive compensation),subject to the oversight of an independent board of
directors and, ultimately, the SEC. Regulated funds
also are public reporting companies that publish
quarterly reports that include a schedule of every
investment held by the fund, along with the value
attributed to each investment. Publicly tradedregulated funds are further covered by the analyst
community, who scrutinize these vehicles similar to
the manner in which they analyze public operatingcompanies.
Regulatory Restrictions Should Be Lifted to Enable
Optimal Regulated Fund Structures
The law professor letter fails to appreciate that there
are regulatory restrictions that currently prevent
regulated funds that focus on private markets
investments from being structured in the optimal
way for retail investors. If the applicable regulatory
restrictions were lifted, a regulated closed-end fundcould offer all of the features that the law professor
letter claims “cannot coexist in practice.” Liquidity
could be offered through a stock exchange listingor periodic repurchase offers. Diversification could
be offered through fund of funds structures, andwould be necessary to meet relevant requirementsfor pass-through tax treatment. The investing
public would have significant transparency into theportfolio and performance of a fund managed by aregistered investment adviser with oversight fromindependent directors. The SEC could also condition
certain aspects of necessary relief to ensure thatretail investors benefit from the negotiation of terms
by institutional investors. It is difficult to imagine abetter structure for retail investors to access private
markets than through a regulated fund.
8

M&A Transactions
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Anchorage Capital Group, an RIA
with approximately $13.2 billion in
assets under management

Garrison Investment Group,
a middle market credit, distressed
and asset based investor withapproximately $1.2 billion in assets
under management

Acquisition(terms not disclosed)

City of London Investment GroupPLC (“CLIG”), with approximately $5
billion in funds under management

Karpus Management, Inc., an
RIA with approximately $3.5 billion
in funds under management

Merger agreement under which CLIG will
acquire the issued share capital of Karpus.
The consideration will consist of up to
24,118,400 CLIG ordinary shares, which
equates to $99.6 million. The purchase will
be structured as a merger of a wholly-owned
subsidiary of CLIG into Karpus, with Karpus
becoming a wholly owned subsidiary of CLIG.
(further terms not disclosed)

Clearlake Capital Group, L.P.,
a private investment firm withapproximately $24 billion in assets
under management post-acquisition

WhiteStar Asset Management,
an investment management firmwith approximately $6 billion of fee
generating assets, from Pine Brook
Capital Partners, an investment
services firm that has approximately$3.6 billion in assets undermanagement

Acquisition of majority interest(terms not disclosed)

Emigrant Partners, LLC, a capitaland advisory services partner that,with an affiliate, is partnered with 16
firms that oversee approximately $50
billion in assets under advisement

Parallel Advisors, LLC, a financial
planning and investment firm withapproximately $3 billion in assets
under management

Acquisition of minority interest(terms not disclosed)

Management team at Evanston
Capital, an alternative investment
management firm with approximately$3 billion in assets under management

TA Associates, a private equity firmthat has raised approximately $33.5
billion in capital since inception

Management team acquired minority equity
stake owned by private investment funds
affiliated with TA Associates(terms not disclosed)

Franklin Resources, Inc.
(“Franklin Templeton”), an
investment management organization
with approximately $580 billion in
assets under management

AdvisorEngine, Inc., a digital
wealth platform and provider oftechnology and consulting services tomore than 1,200 wealth management
firms that manage over than $600
billion in assets

Acquisition(terms not disclosed)

J.P. Morgan Asset Management,a global asset manager for individuals,
advisors, and institutions with $1.7
trillion in assets under management

China International FundManagement Co. Ltd., a fundmanagement company joint venturewith $21.1 billion) in assets undermanagement

Acquisition of majority stake. JPMAM to
become the first foreign manager to takea majority stake in a fund management
joint venture on mainland China, winningapproval to take an additional 2% stake in
CIFM, lifting its share to 51%.
(terms not disclosed)

9M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

LPL Financial LLC, a retailinvestment advisory firm andindependent broker/dealer that has
approximately $670 billion in advisoryand brokerage assets

E.I. Riley, a broker-dealer and RIA
with approximately $2 billion in
assets under management

Acquisition structured as an asset purchaseagreement that provides for both a payment
at closing and potential contingent payments.
LPL estimates a transaction multiple of ~6x
post-synergy EBITDA.

LPL Financial LLC, a retailinvestment advisory firm andindependent broker/dealer that has
approximately $670 billion in advisoryand brokerage assets

Lucia Securities, a brokerdealer and RIA with approximately$1.5 billion of client assets undermanagement

Acquisition structured as an asset purchaseagreement that provides for both a payment
at closing and potential contingent payments.
LPL estimates a transaction multiple of ~6x
post-synergy EBITDA.

Management of Mariner Investment
Group, LLC, an investment manager
with approximately $10.8 billion in
assets under management

ORIX Corporation USA, adiversified financial company anda subsidiary of ORIX Corporation,
based in Japan. ORIX Corporation
has more than $365 billion in assets
under management.

Acquisition(terms not disclosed)

Mount Logan Capital Inc., anasset manager based in Canada thatspecializes in credit investment
opportunities with a focus onopportunities in North America,and Sierra Crest Investment
Management LLC, an affiliate of
BC Partners Advisors L.P., withapproximately $4.5 billion in assets
under management, as of December
31, 2019

Resource America, Inc., anasset management company withapproximately $4.3 billion in assets
under management, as of May 18,
2020

Acquisition of certain assets financed with a
combination of cash, equity and debt
(further terms not disclosed)

NFP Corp., an insurance broker andconsultant

Fiduciary Investment Advisors,
an investment management firmthat advises more than $95 billion in
assetsAcquisition(terms not disclosed)

Portman Ridge FinanceCorporation (“Portman Ridge”),
an externally managed, non-diversified
closed-end investment company
that has elected to be regulated as abusiness development company

Garrison Capital Inc. (“GARS”),
an externally managed, nondiversified closed-end investmentcompany that has elected to be
regulated as a business development
company

Merger agreement under which Portman
Ridge will deliver to GARS stockholders a
combination of (i) newly issued Portman
Ridge shares valued at 100% of Portman
Ridge’s net asset value per share and (ii) $19.1
million in cash. Additionally, Sierra Crest
Investment Management LLC, Portman
Ridge’s investment manager, agreed to pay$5.0 million in cash to GARS stockholders.
GARS stockholders are expected to receive
approximately 105% of GARS’ net asset
value per share based on the March 31,
2020 net asset value per share of GARS’ andPortman Ridge’s stock and aggregate cash
consideration.

Sumitomo Mitsui Banking,a financial institution withapproximately ¥ 212.4 trillion in assets

Ares Management, an alternative
investment manager withapproximately $149 billion in assets
under management

Acquisition of minority stake, 4.9%, for $384
million. Sumitomo will purchase 12.1 million
common shares at $31.64 from Ares
(further terms not disclosed)
10

2nd Quarter 2020
Listed Closed-End Fund Initial Public Offerings
First Trust High Yield Opportunities 2027 Term Fund
Structure:

Diversified, closed-end management investment company

Investment
Objectives/Policies:

The Fund’s investment objective is to provide current income. Under normal market conditions, theFund will seek to achieve its investment objective by investing at least 80% of its Managed Assets (asdefined in the prospectus) in high yield debt securities of any maturity that are rated below investment
grade at the time of purchase or unrated securities determined by the Advisor to be of comparable
quality. Such securities include U.S. and non-U.S. corporate debt obligations and senior, secured
floating rate loans. The Fund’s investments may include securities of issuers located in countries
considered to be emerging markets.

Investment Adviser:First Trust Advisors L.P.

Lead Underwriter(s):Morgan Stanley & Co. LLC

Angel Oak Dynamic Financial Strategies Income Term Trust
Structure:

Diversified, closed-end management investment company

Investment
Objectives/Policies:

The Fund seeks current income with a secondary objective of total return. Under normal circumstances,
the Fund will invest at least 80% of the value of its net assets plus the amount of any borrowings forinvestment purposes in securities of U.S. and non-U.S. financial institutions, which may include, but
are not limited to, banks, thrifts, finance companies, BDCs that invest primarily in loans, commercial
mortgage and REITs, brokerage and advisory firms, insurance companies and financial holding
companies. In pursuing its investment objective, the Fund invests primarily in debt issued by financial
institutions, including subordinated debt, unrated debt, senior debt and high yield securities. The Fund
may also invest in common equity, preferred equity, convertible securities and warrants and trustpreferred securities of these institutions. The Fund will target investing at least 80% of the Fund’s net
assets plus the amount of any borrowings for investment purposes in debt issued by U.S. community
banks and U.S. and non-U.S. non-bank financial institutions. Under normal circumstances, the Fund
will invest at least 80% of the value of its net assets plus the amount of any borrowings for investment
purposes in investments that are rated investment grade or, if unrated, judged to be of investment grade
quality by the Fund’s investment adviser.

Investment Adviser:

Angel Oak Capital Advisors, LLC

Lead Underwriters:

UBS Securities LLC, Wells Fargo Securities, LLC, Keefe, Bruyette & Woods, Inc., Oppenheimer & Co. Inc.
and RBC Capital Markets, LLC

11

David W. Blass
Partner+1-202-636-5863
david.blass@stblaw.com

Simpson Thacher’s
dynamic, long-standing
Registered Funds Practiceencompasses all aspects of the investment

Rajib Chanda
Partner+1-202-636-5543
rajib.chanda@stblaw.com

management business. Our practice focuseson alternative asset managers seeking to accessretail investor channels, asset management
mergers and acquisitions, and advising on
cutting-edge regulatory policy and

Benjamin Wells
Partner+1-212-455-2516
bwells@stblaw.com

Allison Scher Bernbach
Senior Counsel+1-212-455-3833
allison.bernbach@stblaw.com

Ryan Brizek
Counsel+1-202-636-5806
ryan.brizek@stblaw.com

strategy matters.

Steven Grigoriou
Counsel+1-202-636-5592
steven.grigoriou@stblaw.com

The contents of this publication are for informational purposes only. Neither this publication nor the
lawyers who authored it are rendering legal or other professional advice or opinions on specific facts
or matters, nor does the distribution of this publication to any person constitute the establishment of
an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection
with the use of this publication. Please contact your relationship partner if we can be of assistanceregarding these important developments. The names and office locations of all of our partners, as wellas our recent memoranda, can be obtained from our website, www.simpsonthacher.com.
12SimpsonThacherWorldwide

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13