Registered Funds Alert

February 2018

Table of Contents
Recent M&A Activity in
Asset Management

2

A look at the recent upward trend in asset
management deal volume.
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Asset Management M&A Transaction
Structures

2

A high-level overview of several types ofmanagement deals.
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Key Considerations in Evaluating
Asset Management Deals

3

A discussion of important considerations
including, among others, due diligence, client
consents and the Section 15(f) safe harbor.
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Protections Against Deal Jumping
For Registered Funds

7

An overview of strategies for protecting
against third-party interlopers in asset
management deals.
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The Portability of Performance in
Asset Management Transactions

8

Considerations to ensure an asset manager
can use its “track record” following an asset
management transaction.
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Notable Transactions: Q4 2017

The latest edition of Simpson Thacher’s Registered Funds Alert focuses
10

A list of notable transactions that occurredin the fourth quarter of 2017, including M&A
transactions and closed-end fund initial public
offerings.
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on a recent and long-anticipated trend in the asset management space:mergers and acquisitions. This edition summarizes recent M&A activity
in asset management, provides a high-level overview of typical asset
management deal structures, discusses certain key considerations inevaluating an asset management deal, reviews certain protections against
deal jumping in the asset management context and summarizes theportability of performance in asset management transactions.

Simpson Thacher & Bartlett LLPRecent M&A Activity in
Asset Management

Asset Management M&A
Transaction Structures

The asset management industry1 experienced anotable increase in M&A activity in the past few
years. According to industry publications, 2015, 2016
and 2017 have shown a sustained increase in thenumber of publicly announced asset management
M&A deals. PwC’s Deal Insights for 2017 reported
that there were 50 asset management deals
announced in each of 2015 and 2016, and 48 in 2017(up from 34 in 2013). Additionally, M&A activity inthe wealth management sector, often with larger
asset managers as the buyers, has surged, with 83
deals announced in 2015, 69 announced in 2016 and80 announced in 2017 (compared to 41 in 2013).

The underlying motivation for an M&A deal
often dictates how the parties will structure thedeal. Broadly speaking, M&A deals in the asset
management space generally involve one of thefollowing five structures:

A variety of factors contribute to the elevated levelsof asset management M&A in recent years. One key
driver of deal activity is the economic recovery in thewake of the 2008/2009 financial crisis. As markets
recover, valuations increase. Those increasing
valuations create favorable conditions for private
equity owners to sell positions in their asset manager
portfolio companies and may prompt other managers
to consider seeking an outside investor or sale.
Another important driver has been the fee pressure
felt by traditional registered active fund managers
due to regulatory incentives and other factorsthat have promoted passive management. Manyof these active fund managers may be motivated
to seek economies of scale—either as buyers or as
sellers—to reduce costs. The importance of scale isalso a significant reason for the dramatic increase intransactions involving smaller wealth managers.
Yet another driver is the desire by alternative asset
managers to establish footholds with retail investors.
Some of those managers have found partners withretail distribution connections and have either
launched joint ventures or entered into adviser/subadviser relationships, both of which often involveor lead to an M&A-type transaction.
In this edition of our Registered Fund Alert, we
take a deep-dive into the legal issues surrounding
M&A activity in asset management. We first discuss
typical asset management deal structures. We thenturn to some of the most important considerations
for evaluating an asset management deal. Next we
review how parties to the transaction can protect
against deal jumping. Finally, we analyze the everimportant topic of preserving the portability of
performance track records for asset managers.

1. An acquisition of a minority, non-controllingstake in an asset manager;
2. An acquisition of a majority or controlling stakein an asset manager by a financial buyer;
3. An acquisition of a majority or controlling stakein an asset manager by a strategic buyer;
4. Fund adoption; and5. A joint venture.

Each of these structures is designed to accomplish a
specific goal, which we discuss in more detail below.
Acquisition of a minority, non-controlling stake
Many investors find value in acquiring a minority,
non-controlling stake in an asset manager. Generally,that type of acquisition does not affect the day-today operations of the asset manager or the services
provided to its clients. In these deals, the investoracquires less than 25% of the voting securities of theasset manager. As discussed in more detail later inthis Alert, the 25% threshold is important because
the Investment Company Act of 1940, Investment
Advisers Act of 1940 and related guidance from the
Securities and Exchange Commission and its staff,
have established a presumption that an investor“controls” an asset manager when its ownershipof that manager exceeds the 25% voting securities
threshold.
Minority deals can be completed quickly, largely
because they do not result in a new control personof the asset manager. As a result, minority stake
deals typically do not require consent from the
manager’s clients (i.e., investors in private funds,
registered funds or owners of separately managed
accounts). Nor do they require any formal action bya board of directors of a registered fund advised by
the asset manager. That manager, however, normally
would inform the fund’s board of the transaction,
particularly where the acquisition is approaching the
25% threshold.

1. Including investment managers in the retail, private equity, BDC andinstitutional spaces.
2Acquisition of a majority or controlling stakeacquisition by a financial buyer
A financial buyer, such as a private equity firm ora conglomerate, may have an interest in aquiring acontrolling (greater than 25%) or majority stake of anasset manager. A transfer of a controlling block of anasset manager raises special considerations related
to obtaining client consents for assignments ofadvisory contracts. We discuss those considerations
in more detail later in this Alert.
A financial buyer frequently will not seek to change
the day-to-day operations of an asset manager.
The buyer, however, usually obtains significant
governance rights designed to allow the buyer
to protect its economic investment. The mostcommon protective rights are consent rights and/or
representation on the board of the asset manager (orits parent).
Acquisition of majority or controlling stakeacquisition by a strategic buyer
A strategic buyer may be another asset management
firm looking to gain scale or complementary
expertise. Strategic investors, unlike financial
buyers, are likely to take an active role in day-to-day
operations of the acquired asset manager.
An acquisition by a strategic buyer of a majority orcontrolling stake, like that of a financial buyer, raises
special considerations regarding client consent for
assignments of advisory contracts.
Fund adoption
In a fund adoption, two asset managers may reachan agreement pursuant to which one agrees totransfer the management of a fund to the other.
Fund adoptions typically involve registered funds,
but occasionally a private fund may be the subjectof a fund adoption (and may even be converted to aregistered fund in the process).
Joint ventures
Finally, two parties may establish a joint venture
to launch a particular fund (or series of funds).
The joint venture is in essence a structured form ofsubadvisory relationship—the joint venture entity
generally acts as the adviser to the fund, with one
partner providing the investment management andthe other partner providing other functions, such ascompliance, administrative or distribution support tothe endeavor.

Key Considerations
in Evaluating AssetManagement Deals
Below is an overview of some key considerations
for buyers and sellers in an asset management
M&A transaction, including critical regulatory
considerations. Many outside advisers will aid inassessing these considerations. Legal specialists
focus on aspects of deal structure such as tax,
employee benefits and intellectual property. It
is critical in the asset management space to also
involve regulatory specialists who focus on 1940 Act
and Advisers Act issues. Certain deals also involve
regulatory specialists from other areas, such as
antitrust or banking regulations.
Identifying a counterparty
An obvious first step is identifying a seller orbuyer. This does not necessarily need to be aformal process. Some transactions will be privately
negotiated after one party approaches anotherwith a potential deal in mind. In those instances
the target company and the prospective buyer may
reach agreement in principle on the key terms of thedeal before beginning the process of due diligence,
disclosure and drafting the merger agreement. It is
common practice for the parties to have legal counsel
record these terms in writing as a term sheet, whichis also sometimes referred to as a memorandum of
understanding or a letter of intent.
In other circumstances, the seller may opt toengage in an auction process to identify a buyer orinvestor. A public company looking to maximize
the value of the asset or business being sold may
use an auction process. Here, the seller is firmly
in control the auction and will often engage legal
counsel and an investment bank to quarterback
the auction before any level of negotiations with apotential counterparty begin.2 An auction could be
publicly announced, which allows interested parties
to approach the seller, or an auction could be private,in which case the investment bank would approach
potential buyers directly.
An auction begins with the solicitation of initial
indications of interest (IOI) from potential buyers.
Sellers often provide a two-to-five page summary,known as a “teaser,” that describes the target, its
business and the potential transaction. The IOItypically is a simple letter outlining a bidder’sintention to pursue a purchase and often includes
2. Both buyers and sellers often engage investment banks in other contexts
as well.
3

an initial, non-binding proposed purchase price andother key terms and conditions.

For other deal structures, this process can be
more complicated.

The seller typically requires a potential bidder that
submits an IOI to sign a non-disclosure agreement(NDA). After obtaining a bidder’s NDA, the seller
provides a confidential information memorandum(CIM) and a bid process letter to the bidder. The CIM
contains more detailed information about the target
company 3 than the teaser and is intended to elicit
meaningful, well-informed bids. The bid process
letter lays the groundwork for the auction process
and explains the rules and procedures of the auction.

A majority or controlling stake acquisition—by afinancial or strategic buyer—generally will use oneof two structures: a stock deal or an asset deal. In astock deal, a buyer acquires one or more legal entities
outright, including all of the associated assets andliabilities. In an asset deal, a buyer only acquires
certain assets and usually does not take on someor all of the liabilities associated with the businessbeing sold.

The seller’s investment banker ensures that no bidder
becomes aware of the existence or identity of any
other bidder or the terms of any other bid. In theabsence of information about other bidders, eachbidder must balance its desire to win the bid with its
need for favorable terms.
After providing an initial indication of interest,
the seller will invite some bidders to participate in
the next stage of the process. The next stage could
involve bidders meeting with management of theseller, conducting initial diligence on the seller anddiscussing a term sheet. This stage could go so far
as to involve bidders reviewing and commenting
on a draft of the transaction agreement provided
by the seller. A seller typically will then choose one
bidder and enter into an exclusivity agreement withthat bidder. At this point, robust due diligence andnegotiation of definitive transaction documents
will commence.
Defining the scope of a transaction
Once the parties decide to pursue an M&A
transaction, the next step is to clearly identify what
is being bought, sold or otherwise bargained for. Thisis relatively straightforward for a sale of a minority,
non-controlling stake, a joint venture or a fund“Once the parties decide to pursue an M&A
transaction, the next step is to clearly identify
what is being bought, sold or otherwise
bargained for.

”adoption. The buyer alternatively may consider anacquisition of a stake in one or more general partners
affiliated with the adviser, which typically house anadviser’s carried interest in private funds. Thesetypes of transactions are referred to as GP-stakes
deals, and have grown in number in recent years.

Whether a deal will involve a stock or asset saledepends on a number of factors. A stock sale isgenerally simpler and quicker to accomplish. Thiscan be attractive to parties wishing to move quickly,
with little complication. An asset deal may be more
appealing to a buyer if a seller has pending litigation
or regulatory issues. This is because the liabilities
stay with the seller. It is possible to apportion certainof these liabilities in a stock deal to some extent
through indemnification provisions, but indemnities
are typically limited in scope and dollar amount.
Due diligence
The goal of due diligence is to give a buyer comfort
that it has the key information needed to fully
evaluate and negotiate a transaction. In certain typesof M&A transactions, both parties may engage indue diligence. This would be the case with a mergerof equals, a joint venture, a minority stake deal ora majority stake deal if the seller will maintain aninterest in the company.
Where the merging parties are significant
competitors of one another, there may also be
antitrust-related diligence. Before one party sharessensitive information with the other, often theparties will put particularly sensitive data into a“clean” room available only to certain screened
personnel of the other party. For particularly
sensitive information, such as documents related toan ongoing regulatory examination or investigation,
an exclusivity agreement also may be a prerequisite.
Parties typically provide and review due diligence
information using electronic data rooms. In addition
to, or in lieu of, an electronic data room, a party
with particular security concerns may require thatsensitive documents be reviewed on-site/in-person
in a physical data room. Knowledgeable personnel,
such as a portfolio manager or a chief complianceofficer, may be made available to the other party toparticipate in detailed diligence discussions andanswer questions.

3. Note that non-public information about registered funds managed by anadviser generally cannot be disclosed without permission from the boardsof the funds.
4Naturally, there are limitations on the diligenceprocess. Time, cost and other commercial
considerations require the parties to prioritize some
types of information over others, and may leave
one party feeling unsatisfied with the information
it has received on certain topics. One way toaddress this issue is for the transaction documents
to include representations and indemnities thatserve to provide the unsatisfied party with some
comfort on the topic(s) in question. However, notevery transaction has indemnities for breaches ofrepresentations and warranties.
Negotiating consent rights
In a minority stake deal, an economic investor
typically will seek consent rights over certain
material transactions or decisions that might impact
the value of their economic investment. Partners
in a joint venture, to the extent the governance ofthe joint venture is not split equally between theparties, may agree to give a minority partner similarconsent rights over significant actions. In majority
or controlling stake deals, a buyer usually seeks
similar consent rights over important decisions
for the duration of the post-signing/pre-closing
period (i.e., while seeking approvals/consents fromfunds/investors and/or any required governmental
approvals).
In any scenario, consent rights should not go so far
as to give the consenting party extensive control
over an investment adviser and its day-to-day
operations. If consent rights go too far, those rights
could be deemed to create “control,” resulting in an
inadvertent assignment of an investment adviser’s
advisory contracts without the requisite approvals/consents having been obtained (see discussion below
for assignments of advisory contracts).
The SEC Staff has issued guidance related to thetypes of facts and circumstances that would or would
not be deemed to result in such an assignment.
The most well-known guidance, a no-action letter
issued to American Century Companies, Inc. in
1997, outlined a number of consent rights that the
SEC Staff blessed as not amounting to control for
purposes of determining whether an M&A deal
triggered an assignment. The American Century
consent rights are primarily related to protecting
a party’s economic investment—including consent
rights over material transactions such as mergers,
significant sales of assets, incurring additional debt,
issuing additional equity, initiating bankruptcy, orother material events outside the ordinary course ofbusiness, such as terminating key senior executives.
Having experienced counsel review the proposed
consent rights in any transaction is critical to avoid

a premature pre-closing assignment or if the parties
are trying to avoid trigging an assignment and therelated approval/consent process altogether.
Assignments and client consent requirements underthe 1940 Act and Advisers Act
The 1940 Act and Advisers Act impose certain
requirements for investment advisory clients toapprove or consent when an M&A transaction
will result in an “assignment” of an investment
adviser’s advisory contracts. These client consent
requirements are particularly important for amajority or control stake transaction.
The definition of an “assignment” is similar underthe 1940 Act and Advisers Act, and includes a
direct or indirect transfer of a contract, or of acontrolling block of the assignor’s outstanding
voting securities of the assignor. Under the 1940 Act
definition of “control” and related SEC guidance,
there is a presumption that transferring more than
25% of an adviser’s voting securities constitutes
a transfer of a controlling block and would resultin an assignment.4 Under the Advisers Act, many
practitioners take the view that the threshold isslightly lower, and that a transfer of exactly 25% of
the adviser’s voting securities is sufficient to trigger
an assignment, based on the definition of “control”
in Form ADV. These definitions and interpretations
mean that an assignment could occur under the 1940
Act or Advisers Act even if there is no transfer of anadvisory contract to an assignee. Again, there is a
substantial body of SEC guidance regarding whether
a given set of facts results in an assignment, but the
25% thresholds are significant guideposts.
Registered Funds
Under the 1940 Act, a registered fund’s contract
with its investment adviser is required to terminate
automatically upon its assignment. This requirement
makes it technically impossible for an investment
adviser to transfer an advisory contract for aregistered fund. Therefore, instead of a buyer
acquiring the existing contract for a registered fund,the buyer pays a seller for their efforts in obtaining
approval from the fund’s board and shareholders fora new advisory contract.
A registered fund’s board must fulfill its obligations
under Section 15 of the 1940 Act in connection with
its consideration of a new advisory contract, which
include requesting information from the buyer (and4. This presumption can be rebutted. For example, SEC guidance has
permitted a merger of two widely held public company advisers toproceed without deeming it to be an assignment as, among other factors,
no person controlled either adviser before the transaction and no person
would control the combined adviser after the transaction.
5

seller) as may reasonably be necessary to evaluate
the terms of a new advisory contract. Typically, aboard’s independent legal counsel assists in the
preparation of an information request letter andreviews the adviser’s responses with the board.
Information request letters typically focus on thepotential impact of the transaction on the services
provided to the registered fund, and may inquire
about possible changes in personnel, resources,
compliance infrastructure and other day-to-day
implications of the M&A deal.

Affirmative consent may be required depending
on how the assignment provision of an advisory
contract is worded. An example of where affirmative
consent from a client would be required is if anagreement requires the client’s prior written consent
to an assignment. Many advisory contracts, however,are silent as to the form of consent required foran assignment. If that is the case, the investment
adviser typically will provide a client with notice ofan assignment and state that if the client does not
object, the client will be viewed as having consented
to the assignment.
As a result of the 1940 Act and Advisers Act
assignment requirements, asset management M&A
deals (other than non-controlling minority stakes
deals) are unable to sign and close on the same day.
Instead, there is a post-signing/pre-closing period
in which the required approvals and consents aresought.5 For further discussion regarding consents,
a recent article written by our practitioners can befound here.

Section 15(c) of the 1940 Act also requires that theboard meet in person to approve the new contract,
and that the independent board members separately
approve the new contract. The board also needs tocall a meeting of the registered fund’s shareholders
and approve the filing of a proxy statement. The
default 1940 Act voting standard requires that a“majority of the outstanding voting securities” ofa fund approve the new advisory contract, whichmeans the lesser of (a) 67% of shares present at theshareholder meeting if more than 50% of the sharesare voted or (b) more than 50% of all outstanding
shares. This standard essentially imposes a quorum
requirement of 50% of shares for a shareholder
meeting to vote on a new advisory contract. It
is possible for a particular fund’s organizational
documents to impose a higher quorum orvoting requirement.
Non-Registered Funds
For advisory clients other than registered funds,
the Advisers Act requires that an advisory contract
include a provision that the investment adviser
cannot assign the contract without the consent of theclient. The Advisers Act does not specify the formof consent that an investment adviser is required toseek from clients. As a result, there are two ways inwhich a client could consent to an assignment of anadvisory contract, affirmative consent or “negative”
consent.

Section 15(f) of the 1940 Act—a critical safe harborfor sellers
Under common law, it is illegal for a person to sell afiduciary office for compensation (e.g., a trustee of atrust cannot sell their position to another person).
Because an investment adviser is a fiduciary to its
clients, this prohibition poses an issue for an adviser
seeking to sell its business for a profit. Congressaddressed this problem for advisers to registeredfunds when it adopted Section 15(f) of the 1940 Act
as part of the 1975 amendments to the statute, but
imposed certain conditions. Compliance with these
conditions is critical because failure to do so opens
up the possibility that compensation received by anadviser for selling its business could be clawed backby a registered fund.
Section 15(f) imposes two requirements:
1. For a period of three years from the date of anassignment, at least 75% of the board members fora registered fund must not be “interested persons”(i.e., independent) of either the prior or thencurrent investment adviser, and
2. There is no “unfair burden” imposed on aregistered fund as a result of the assignment.
Compliance with these conditions requires
cooperation from a buyer, and usually requires a
5. In addition to client approvals/consents, governmental filings may
be required for an M&A transaction. These could include seeking
approval from the Federal Trade Commission under the Hart-ScottRodino Antitrust Improvements Act or filing a Continuing Membership
Application with the Financial Industry Regulatory Authority if atransaction involves a broker-dealer.
6buyer to provide assurances that it will not takeany action to cause non-compliance with these
conditions.
A word on unfair burdens—the 1940 Act does notprovide a definitive definition of the term “unfair
burden,” but it does state that that term includes any
arrangement during the two-year period after anassignment that results in the new or old investment
adviser receiving compensation other than bona fide
underwriting or advisory fees. Many practitioners
take the view that this means that the registeredfund should not bear the costs of any proxysolicitations resulting from an M&A transaction by
the investment adviser and that, notwithstanding
the express language of 15 (f), advisory fees for theregistered fund should not increase for two years
after an assignment occurs.

Protections Against
Deal Jumping For
Registered Funds
As M&A activity in the asset management spacecontinues to grow and evolve, so too does the concernthat third-party interlopers will make a play for thefunds involved in a deal after a definitive agreement
has been agreed to and announced, but before thetransaction can be completed. While this so-called“deal jumping” is a concern in M&A transactions
generally, it is of particular concern with respect tocontrol and majority stake transactions involving
asset managers because the regulatory requirements
discussed above necessitate the approval or consent
of advisory clients. The nature of the adviserfund relationship creates a unique opportunity forinterlopers and heightened risk for the selling adviser
because an interloper can approach the board of aregistered fund directly with an alternate proposal(e.g., they will manage the fund for a lower advisoryfee) and could cause litigation or cut out the parties
to the M&A deal entirely.
In a prior Alert, we provided a detailed breakdown
of an M&A deal gone awry when the adviser to TICC
Capital Corp., a publicly traded BDC, announced thatit had reached a deal to be acquired by Benefit Street
Partners (BSP), and two other parties attempted tojump the deal. First, NexPoint Advisors (NexPoint)
submitted a rival management proposal to the board
of TICC, offering to reduce the BDC’s current basemanagement fee for the next three years. Although
NexPoint’s offer was rejected by TICC, BSP lowered
its proposed management fee to be comparable
to what NexPoint had offered. Shortly after the

NexPoint proposal, another interested party, TPG
Specialty Lending (TSLX), offered to buy TICC in a
stock-for-stock transaction at a 20% premium andoffering similar reductions in management fees going
forward. TICC rejected that deal as well.
Ultimately, when the BSP agreement was put to ashareholder vote at a special meeting, despite having
the full support of management and the BDC’s
largest shareholder, the agreement did not receive
the requisite approval required by the 1940 Act
and thus BSP’s acquisition of the TICC adviser wasnever consummated. Since the TICC deal, several
other M&A transactions have involved deal jumping
attempts, and negotiating protections againstinterlopers has become an increasingly important
point in negotiation of M&A transactions.

“

So how can the parties to an M&A
transaction limit the impact of deal jumpers?

”

So how can the parties to an M&A transaction limit
the impact of deal jumpers? As with other types ofacquisitions, the acquirer can negotiate the inclusionof certain protections in the merger documents,
which are specifically included to deter competingbidders and/or make it costly for the target to walkaway from the original deal. While this fundamental
component of M&A practice is too nuanced andcomplex to completely survey in this article, somecommon deal protections include:• some variation of “no-shop” provisions, which
may grant the buyer the right to be notified ofsuperior proposals that the seller receives andthe ability to make a matching offer;• break-up fee provisions, which provide for apayment to a buyer should the agreed upontransaction fail;• voting agreements with significant owners of thetarget adviser (or fund shareholders who will
vote on advisory contract approvals that would
be triggered by the transaction), although theamount of stock subject to the voting agreement
may be limited to an amount that does notprevent another suitor from winning; and• carefully structuring a registered fund’s proxyso that the proposal shareholders vote on iscontingent upon the M&A deal closing.
Another way to avoid deal jumpers involves
structuring transactions in such ways that they do
not immediately trigger an assignment under the1940 Act and the associated shareholder votes. A
7buyer looking to acquire control of an investment
adviser eventually, for example, may structure its
initial investment such that it is acquiring only aminority non-controlling (i.e., less than 25%) shareof the target’s outstanding voting securities, together
with the right to receive a higher proportion of
the profits from the seller’s investment advisorybusiness. If structured properly, such a transaction
would not be subject to approval by the seller’s
advisory clients and sponsored registered funds, andthus would be not be vulnerable to deal jumping.
Later, the buyer can move to take a controlling stakein the adviser when conditions are more favorable.

as the “anti-fraud” provision of the statute, andprovides that it is unlawful for an investment adviser“to engage in any act, practice or course of business
which is fraudulent, deceptive, or manipulative.”
In the context of advertising performance, what
investment advisers include in their advertising
is just as important as what they do not include,
and they must ensure that all of the relevantfacts concerning performance are included in an
advertisement.

The Portability of
Performance in AssetManagement Transactions

Specific due diligence issues involving the use of
performance track records

When investment advisers pursue an M&A
transaction, or an adviser seeks to hire new portfolio
managers, the portability of advisory performance,or the “track record,” is a key topic for the adviser
and/or portfolio managers to consider. “Portability”
of performance refers to the ability of an investment
adviser to reference its own historical performancerecord in its investment performance presentation
once it has combined with another investment
adviser or the ability of individual portfolio
managers to use and access their performance record
achieved while at another firm. In this portion of
the Alert, we explore the regulatory considerations
related to the portability of an investment adviser’sand portfolio manager’s track record as they relate
to M&A transactions, particularly with respect
to common diligence issues and negotiation of anindividual’s ability to use their track record.

For decades after Congress enacted the Advisers
Act, the SEC Staff treated advertisements of past
performance as fraudulent by default. The SEC’s
position evolved in the late 1970s to a facts andcircumstances test. The general guidelines forwhen the SEC Staff would deem an advertisement
to be misleading have been developed throughmultiple pieces of SEC guidance. In this guidance,
the SEC Staff has stated that determining whether
a communication is misleading is a facts andcircumstances analysis, and includes evaluationof: (i) the form and content of the communication;(ii) the implications or inferences arising out of
the content of a communication; and (iii) thesophistication of the prospective client.6

Generally, a thorough review of an adviser’s
advertisements is not high on the priority list for
M&A diligence. A buyer can usually take significant
comfort from representations that a seller makeson this point and, if the seller has been examinedrecently by the SEC, from the regulator not
raising any issues regarding the advertisements it
reviewed. There are, however, some issues that abuyer should keep in mind as it reviews a seller’s
advertising materials.
• “Cherry picking” accounts to be used inadvertisements in order to portray higher
performance is prohibited—all accounts thathave substantially the same investment strategy
should be included in any prior performance
presented.
• Advertising accounts where the individuals
responsible for achieving the prior performance
have changed could be construed to be materiallymisleading.

Legal background regarding use of performancetrack records• While SEC guidance has permitted the useof hypothetical or “model” performance if astrategy had been utilized over a given time

All investment advisers are subject to Section 206of the Advisers Act, which is generally referred to

6. See, e.g., Anametrics Investment Management, SEC No-Action Letter(May 5, 1977).

8

period in advertisements (as opposed to actual
performance of client accounts), it is critical toevaluate the disclosure that accompanies such
performance advertisements—extra diligenceshould be done regarding any advertisementsthat show model performance.7• The portability of performance history infund adoptions turns on the same factors as
in investment advisory firm combinations,
therefore managers should examine thesimilarity of the accounts and continuity ofmanagement.
• As discussed in more detail below, a buyer
should make sure that a seller has all of the
supporting information needed regarding
the seller’s performance history to meet therequirements of the Advisers Act and related
SEC guidance.
Specific negotiation considerations related to use of
performance track records
To use a seller’s track record, the investment
personnel managing accounts post-closing should
also be those primarily responsible for achieving
the prior performance results before the M&A
deal. Advertising accounts where the managers
responsible for achieving the prior performance
have changed or did not join the lift out could beconstrued as materially misleading. Accordingly,
negotiation of retention arrangements with key
investment personnel is a critical point in structuring
an M&A transaction, as a loss of key personnel could
result in the inability to use a performance recordin advertisements.
The Advisers Act also requires that advisers
maintain “all accounts, books, internal working
papers, and any other records or documents that arenecessary to form the basis for or demonstrate thecalculation of the performance or rate of return.”
Accordingly, a buyer seeking to use a seller’s trackrecord should ensure that it has negotiated to receive
all necessary documentation to utilize the trackrecord, such as advisory business financial andaccounting records, including newsletters, articles,
and computational worksheets demonstrating
performance returns, records that document theadviser’s authority to conduct business in client
accounts, client account statements, and otherrelevant records.
7. The SEC has been particularly focused on use of model performance inadvertisements, especially in light of an enforcement action against aquantitative investment manager, F-Squared, in 2014. Buyers should
beware of deficiencies related to advertisements that include model
performance, as an SEC enforcement action in this area can poseheightened business and reputational risks (e.g., F-Squared has since
filed for bankruptcy).

Some firms seek to comply with the Global
Investment Performance Standards (GIPS), whichis akin to a “gold star” certification for performanceadvertisements and indicates that an adviser
adheres to a certain methodology for calculating
its performance record. GIPS allows investors
to compare more easily the performance of two
GIPS-compliant advisers. GIPS has different
requirements regarding calculation, presentation
and recordkeeping, which should be separately
evaluated in the event that a buyer/seller seek toclaim GIPS compliance.
Performance track record of individuals
In some M&A deals, an individual portfolio manager
employed by the seller (or a founder) may leave thefirm in connection with the transaction. Similarly,
sometimes individual portfolio managers or theirteams are “lifted out” of an adviser by a rival adviser.
When an individual (or team) leaves an investment
adviser, the portability of their track record is a
critical consideration.
All of the individuals who played a primary rolein achieving the performance results shown in a
track record should continue to be part of that teamin order to use it in advertisements at their new
advisory firm. To compare two scenarios, when aportfolio manager was the sole decision maker for afund, the analysis of whether that individual’s trackrecord is portable is fairly straightforward. When
additional variables are added to the mix, such as
co-portfolio managers, analyst teams or investmentcommittees, it is a “facts and circumstances” analysis
that likely requires input from experienced counsel.
The ability of an individual (or team) to continue
to use a track record if they leave an adviser inconnection with an M&A transaction can be a tricky
point of negotiation in an M&A deal, as a buyer isusually interested in retaining the exclusive right touse a track record. If a departing individual or teamis granted the ability to use their track record, it isadvisable for the parties to carefully define accessrights regarding the records and materials that fromthe basis of the track record.
In many M&A deals, diligence and negotiations
around the use of an adviser’s track record are
uneventful. However, it is useful to keep in mind
some traps for the unwary so that parties andtheir counsel are able to spot potential advertising
issues to avoid future limitations on use of priorperformance or, in worst case scenarios, an SEC
enforcement action.

9

M&A
Transactions
Acquiror

Acquired or
Target Company

Type of Transactionand Status

BlackRock, Inc., with $5.977 trillion
AUM

Citibanamex, a subsidiary of
Citigroup Inc.

Acquisition of the asset managementbusiness of Citibanamex (terms notdisclosed).

Brookfield Investment
Management Inc., the public
securities platform of Brookfield AssetManagement Inc., with $15 billion
AUM

Center Coast Capital Holdings,
LLC, a Houston-based SECregistered investment adviser
focusing on energy infrastructure
investments, including master
limited partnerships, with over $4
billion in AUM

Acquisition (terms not disclosed).

First Eagle Investment
Management, an independent,
privately-owned investment
management firm headquartered in
New York with approximately $116
billion AUM

NewStar Financial Inc., aninternally-managed, commercial
finance company with $7.3 billion
AUM

Acquisition. First Eagle to pay $11.44
per NewStar share in cash plus
contingent value rights worth up toan estimated additional $0.88-1.00
per share. NewStar to concurrently
sell portfolio of investment assets,
including approximately $2.4
billion in middle-market loans andother credit investments, to a fundsponsored by GSO Capital Partners.

Stifel Financial Corp., a financial
services holding company

Ziegler Wealth Management,
the wealth management business of
B.C. Ziegler & Company, with $4.8
billion AUM

Acquisition (terms not disclosed).

Tiedemann Wealth Management,a New York-based independent
national wealth advisor withapproximately $12 billion AUM

Threshold Group, a wealthadvisory firm and family office with
$3.4 billion AUM

Acquisition (terms not disclosed).

WisdomTree Investments,
Inc., an exchange-traded fund andexchange-traded product sponsor andasset manager with $48.4 billion

ETF Securities, the largest
provider of commodity exchangetraded products (“ETPs”) in Europe,with $17.6 billion AUM

Acquisition. WisdomTree will
exchange $253 million of cash
and stock consideration of 30
million WisdomTree shares forthe acquisition of the European
exchange-traded commodity,
currency and short-and-leveraged
business of ETF Securities.

10

4th Quarter 2017
Closed-End Fund Initial Public Offerings
Dreyfus Alcentra Global Credit Income 2024 Target Term Fund, Inc.
Amount raised:$140 million (July 26, 2017)

Investment Objectives/Policies:

The Fund’s investment objectives are to seek high current income and to return at least$9.835 per common share (the public offering price per common share after deducting
a sales load of $0.165 per common share but before deducting offering costs of $0.02
per common share) to holders of record of common shares on or about December 1,
2024 (subject to certain extensions described in the prospectus). Under normal market
conditions, the Fund will invest at least 80% of its managed assets in credit instruments
and other investments with similar economic characteristics. Such credit instruments
include: first lien secured floating rate loans, as well as investments in participations
and assignments of such loans; second lien, senior unsecured, mezzanine and othercollateralized and uncollateralized subordinated loans; corporate debt obligations otherthan loans; and structured products, including collateralized bond, loan and other debt
obligations, structured notes and credit-linked notes.

Manager:

The Dreyfus Corporation is the Fund’s investment manager, and has engaged its affiliate,
Alcentra NY, LLC, to serve as the Fund’s sub-investment adviser

Book-runners:

Wells Fargo Securities, LLC, Morgan Stanley & Co. LLC, UBS Securities LLC

11

Simpson Thacher’s dynamic, long-standing Registered Funds Practice encompasses all
aspects of the investment management business. Our practice focuses on alternative asset
managers seeking to access retail investor channels, asset management mergers andacquisitions, and advising on cutting-edge regulatory policy and strategy matters.
David W. Blass • 1-202-636-5863 • david.blass@stblaw.com
David Blass is a Partner in Simpson Thacher & Bartlett LLP’s Investment Funds Practice. David is a leading
regulatory lawyer in the funds industry and has advised on matters involving innovative registered funds
products, Investment Advisers Act compliance, SEC examination and enforcement matters, and broker-dealer
regulatory compliance. Prior to joining Simpson Thacher, David served as General Counsel of the Investment
Company Institute (ICI), where he was responsible for the full range of legal and regulatory matters affecting
the asset management industry, including investment company, capital markets, pension and tax issues. He alsopreviously was Chief Counsel of the SEC’s Division of Trading and Markets.

Rajib Chanda • +1-202-636-5543 • rajib.chanda@stblaw.com
Rajib Chanda is a Partner in the Washington, D.C. and New York offices of Simpson Thacher & Bartlett LLP,
and is the Head of the Firm’s Registered Funds Practice. Rajib’s practice focuses on all aspects of issues facing
registered investment advisers and sponsors of registered funds. Rajib has particular experience working withalternative asset managers seeking to access retail investor channels through mutual funds, business development
companies, closed-end funds, exchange-traded funds and permanent capital vehicles. He also works extensively
with more traditional registered fund sponsors and works closely with the firm’s asset management M&Agroup on transactions involving registered advisers and funds. In addition, Rajib provides counsel to boardsof registered funds, and has substantial experience advising companies on issues relating to social media andcybersecurity.

Sarah E. Cogan • +1-212-455-3575 • scogan@stblaw.com
Sarah Cogan is a Partner in the New York office of Simpson Thacher & Bartlett LLP. Sarah’s practiceencompasses all aspects of the registered funds industry and she represents closed-end investment companies,
open-end mutual funds, investment advisers and independent directors of investment companies. She has aparticular expertise in advising underwriters and sponsors in offerings by closed-end funds and businessdevelopment companies. In addition, Sarah advises fund clients on corporate and securities law, including
investment management, regulatory, compliance and M&A matters.

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