Private debt, a complementary and alternative financing solution to bank debt, is increasingly favored by very small businesses. Less dilutive than an equity investment by a minority shareholder, the absence of amortization and partial or total capitalization of interest are particularly well-suited to strengthening the borrower’s cash position and financing a buy-and-build strategy.

Read the full article written by Pierre-Arnoux Mayoly, Shirin Deyhim and Stanislas Chenu and published in Entreprendre magazine.

Paul N. Roth is a founding partner of Schulte Roth & Zabel and former chair of the Investment Management Group. Considered the “dean of the hedge fund bar,” he set the framework for the industry and led its emergence as a practice within New York City and beyond. He recently announced his transition within the firm from partner to of counsel, which marks a tenure where he has carved out a remarkable and influential niche in the legal profession and private capital markets, while accelerating the success of the clients he continues to serve.

Paul’s distinction was celebrated at the 2023 New York Legal Awards.  

Read more about Paul’s career in the New York Law Journal. 

In his latest article for The Bankruptcy Strategist, titled “DIP Financing and Liens On Avoidance Actions,” Schulte Roth & Zabel of counsel Michael L. Cook discusses the Eighth Circuit’s recent decision in In re Simply Essentials, LLC. 

The Eighth Circuit held that “avoidance actions [e.g., preferences, fraudulent transfers] can be sold as property of the [Chapter 7 debtor’s] estate.” In re Simply Essentials, LLC, 2023 WL 5341506, *1 (8th Cir. Aug. 21, 2023). On a direct appeal from the bankruptcy court, the court affirmed the bankruptcy court’s granting of the trustee’s motions to compromise and sell property under Bankruptcy Code §363(f). A creditor had objected, arguing unsuccessfully that “avoidance actions… are not part of the bankruptcy estate ….” Id. As shown below, the Eighth Circuit’s holding and reasoning are consistent with the reasoning of other circuits in the asset sale context. More important, the decision has practical significance for Chapter 11 debtor in possession (DIP) lenders. U.S. Trustees and unsecured creditors regularly object to the granting of liens on avoidance actions, but Simply Essentials and other appellate rulings should now eliminate the purported legal obstacle.

In an article for the New York Law Journal titled “Eastern District Holds That Exclusion Bars Defense Obligation,” Schulte Roth & Zabel of counsel Howard B. Epstein and special counsel Theodore A. Keyes discuss the Eastern District of New York’s decision in Clear Blue Specialty Insurance v. TFS NY, d/b/a Sugar Daddy’s et al.

New York courts recognize the well-settled principle that the duty to defend in an insurance policy is broader than the duty to indemnify. They also construe policy exclusions narrowly and place the burden on the insurer to prove that an exclusion applies.

Nevertheless, that does not mean the courts will not enforce a clearly-drafted exclusion when the facts plainly fall within the scope of the exclusion. Just recently, the US District Court for the Eastern District of New York granted summary judgment to an insurer, holding that the insurer had no duty to defend, based on the terms of an exclusion in the policy.

Schulte Roth & Zabel partners Allison Scher Bernbach and Jennifer Dunn were recently quoted in Rorie A. Norton and Vincent Pitaro’s Private Equity Law Report article, “Final Private Fund Reforms: Overview of the New Rules and Analysis of the Restricted Activity Requirements (Part One of Three),” where they discussed the SEC’s Private Fund Advisers Rules, adopted last month.

One change that comes with the rules is that they may force managers to disclose an examination sooner than they would have otherwise so that they can pass along the expenses to investors. “Managers do not usually run to tell investors when they are being examined,” Jennifer explained. “Managers typically want to figure out what’s going on, the scope of the examination and whether it is targeting any actual misconduct by the manager before notifying investors,” facts that are not always apparent early on in an examination.

“Some examinations are ordinary course efforts by the SEC to gain general information about industry practices (e.g., sweep exams), and everyone gets caught up in those at one point,” Jennifer said. Noting that many examinations have a way of evolving over time, she explained, “For example, the SEC might start an examination looking into a particular instrument a manager has traded, but then discover a books-and-records violation under the Advisers Act. Once the investigation results in a sanction for violation of the Advisers Act, a manager cannot charge the fees and expenses of such investigation to the fund (even if they have already received investor consent to do so).”

Additionally, when multiple private funds or clients advised by an adviser have invested in the same portfolio investment, the adviser may not allocate fees or expenses related to that investment on a non-pro rata basis unless:

• the allocation is “fair and equitable under the circumstances”; and
• before making the allocation, the adviser distributes written notice to investors of the allocation and an explanation of why it is fair and equitable.

To be fair and equitable, an allocation does not have to treat all investors identically, however. Whether the allocation is fair and equitable will depend on factors relevant to the expense in question. “The fair and equitable standard is in keeping with an adviser’s existing fiduciary duties, so that element of the Rule should not meaningfully alter industry practices,” noted Allison.

Read the article.

Schulte Roth & Zabel partners Allison Scher Bernbach and Jennifer Dunn were recently quoted in Rorie A. Norton and Vincent Pitaro’s Private Equity Law Report article, “Final Private Fund Reforms: Overview of the New Rules and Analysis of the Restricted Activity Requirements (Part One of Three),” where they discussed the SEC’s Private Fund Advisers Rules, adopted last month.

One change that comes with the rules is that they may force managers to disclose an examination sooner than they would have otherwise so that they can pass along the expenses to investors. “Managers do not usually run to tell investors when they are being examined,” Jennifer explained. “Managers typically want to figure out what’s going on, the scope of the examination and whether it is targeting any actual misconduct by the manager before notifying investors,” facts that are not always apparent early on in an examination.

“Some examinations are ordinary course efforts by the SEC to gain general information about industry practices (e.g., sweep exams), and everyone gets caught up in those at one point,” Jennifer said. Noting that many examinations have a way of evolving over time, she explained, “For example, the SEC might start an examination looking into a particular instrument a manager has traded, but then discover a books-and-records violation under the Advisers Act. Once the investigation results in a sanction for violation of the Advisers Act, a manager cannot charge the fees and expenses of such investigation to the fund (even if they have already received investor consent to do so).”

Additionally, when multiple private funds or clients advised by an adviser have invested in the same portfolio investment, the adviser may not allocate fees or expenses related to that investment on a non-pro rata basis unless:

1. the allocation is “fair and equitable under the circumstances”; and

2. before making the allocation, the adviser distributes written notice to investors of the allocation and an explanation of why it is fair and equitable.

To be fair and equitable, an allocation does not have to treat all investors identically, however. Whether the allocation is fair and equitable will depend on factors relevant to the expense in question. “The fair and equitable standard is in keeping with an adviser’s existing fiduciary duties, so that element of the Rule should not meaningfully alter industry practices,” noted Allison.

Read the article.

Schulte partner Stephanie Breslow recently spoke with 9fin reporter Shubham Saharan for her article “Investors love music rights almost as much as Taylor Swift,” on the subject of music rights as an investment. Stephanie commented on the different tax implications based on how music catalogs are managed. If managed passively the investment is not considered a US trade or business and is a more tax-advantaged structure for foreign investors. If the portfolio is actively managed by a US entity, foreign investors may have to worry about trade or business income and pay tax on the investment. “There is some tax hair, depending on what the [firm] says they’re going to do with the catalog.”

Read more here. (subscription required)