Exemption Sought for Co-Investment by Registered and Un-Registered Funds
A private equity firm has submitted an exemptive application that would allow a registered business development company to co-invest with affiliated 3(c)(1) and 3(c)(7) funds in underlying portfolio companies. The application includes several conditions that ensure that the registered fund is not disadvantaged: (1) the independent directors must approve the transaction; (2) purchases will be done pro rata and on the same terms; (3) the independent directors will have the right to ratify any director nominations for the portfolio companies; (4) the Adviser will submit to the Board for review all investments made by the private funds; and (5) the BDC will have tag-along rights with respect to any portfolio company disposition. The applicant indicated that the SEC should apply the standards of Rule 17d-1.
OUR TAKE: If granted by the SEC, the reasoning of this application should apply equally to portfolio investments by any registered investment company and its affiliated 3(c)(1) and 3(c)(7) funds. However, a firm must always seek exemptive relief under Rule 17d-1.