September 26, 2020

Volume X, Number 270

September 25, 2020

Subscribe to Latest Legal News and Analysis

September 24, 2020

Subscribe to Latest Legal News and Analysis

September 23, 2020

Subscribe to Latest Legal News and Analysis

COVID-19 Considerations for Private Investment Funds


The recent coronavirus (“COVID-19″) pandemic presents significant challenges for private investment fund sponsors (“Sponsors”). Navigating these challenges requires proactively addressing risks and thoughtfully considering the following issues.

Operational Considerations

Business Continuity Plans

Sponsors should carefully review existing business continuity plans to ensure they are operating in compliance with their internal policies and procedures. Further, Sponsors should stress test their IT systems to ensure business operations will continue without interruption if employees are required to continue to work remotely for extended periods of time, including by providing backup options to employees to the extent available. A written reminder should be distributed to Sponsor employees regarding confidentiality, recordkeeping and data privacy requirements applicable to investor information and Sponsor operations during periods of remote work.

Sponsors should also proactively reach out to their portfolio companies, as well as to key third-party service providers (including accountants, lawyers and administrators), to help mitigate any interruption to their operations.

Regulatory Reporting

Sponsors should review the status of their regulatory filing obligations to determine if the outbreak of COVID-19 will cause them to be unable to meet such obligations in a timely fashion. In light of the outbreak, many regulators are granting extensions to assist Sponsors in meeting their obligations. For example, the US Securities and Exchange Commission announced on March 13, 2020, that subject to certain conditions, Form ADV and Form PF filing extensions will be granted.

Increased Disclosures

Sponsors should review existing disclosures in their fund offering documents, as well as their Form ADV, related to COVID-19 and other force majeure events. Sponsors, and especially those planning to close on commitments and/or contributions this year, should consider updating such disclosures to reflect the particular risks posed by events such as COVID-19. In particular, sector or geographic-focused funds should provide disclosure of specific risks related to such sectors or geographic areas.


Sponsors should review their insurance policies and consult with counsel to confirm potential coverage for liabilities arising from issues caused by the outbreak and consequences of COVID-19.

Investment Considerations

Additional and/or Follow-On Investments

Sponsors should carefully review their fund operating documents to determine whether they permit the contribution of additional capital, whether in the form of equity and/or debt, by the fund(s) to portfolio companies. Key issues include follow-on investment restrictions, investment concentration limits and the expiration of a fund’s commitment period.


In view of deteriorating economic conditions, Sponsors may be reluctant to sell portfolio investments at this time. Sponsors of closed-end funds nearing the end of their term should review their fund operating documents to determine the process by which a fund’s term can be extended and, if necessary, consider requesting consent from investors to an amendment permitting additional extensions if conditions warrant.

Investment Purpose and Limitations

In light of evolving market conditions, it’s likely that compelling investment opportunities will arise for a fund that may differ from the types of investments the Sponsor had historically made on behalf of such fund and/or those that are permitted by such fund’s operating documents. Sponsors should carefully review the disclosures and investment limitations included in their funds’ offering and operating documents to determine whether a particular fund is permitted to participate in such new investment opportunities. If the outbreak of COVID-19 has materially affected a fund’s investment strategy that was previously disclosed to investors, the Sponsor should consider whether to seek the consent of its investors to modify such fund’s investment objectives and/or limitations, or alternatively, raise a new fund designed to pursue such new opportunities.


Sponsors should consult with their counsel, and if appropriate, proactively reach out to lenders, both on behalf of their funds as well as portfolio companies, to discuss and/or renegotiate existing borrowing agreements and/or credit facilities, to the extent necessary to provide working capital over the next several months. In order to limit the number of defaulting borrowers, certain lenders may be willing to provide flexibility with respect to loan repayment terms, anti-hoarding provisions and financial covenants previously negotiated in existing borrowing agreements.

Investor Defaults

Sponsors should prepare for the possibility of an increase in potential investor defaults as a result of the COVID-19 outbreak, which may require Sponsors to work creatively with defaulting investors (or investors anticipating a possible default) in order to permit the affected funds to continue to operate without significant interruption.

Time and Attention Obligations

Sponsors should review fund offering and operating documents to prepare for any potential breaches of time and attention obligations included in those agreements, in the event that one or more Sponsor investment professionals contract COVID-19.

Fundraising & Redemption Considerations

Extending Offering Periods

In view of the deteriorating economic climate, as well as the logistical challenges in meeting with prospective investors, Sponsors of closed-end funds should prepare for a potential slowdown in fundraising activity. Accordingly, such Sponsors should review their fund offering and operating documents to determine whether to extend a particular fund’s offering period and/or seek consent from existing investors for an amendment in order to do so.

Investment Performance Reporting

Given the material effect that the current market environment is likely to have on portfolio company valuations, Sponsors that plan on holding closings prior to when annual and/or quarterly valuations are available should provide appropriate disclosures to investors.

Electronic Documentation

The ongoing transition toward the widespread use of electronic documentation, including electronic subscription agreements, in the investment funds space is likely to accelerate during COVID-19. Sponsors should work with their outside counsel to further develop electronic fund documentation to ensure that investors can continue to make commitments and/or contributions and execute agreements with Sponsors, including, where permitted, via the use of DocuSign and electronic notaries.

Subsequent Closings

Portfolio investments and other assets acquired by a closed-end fund prior to a fund’s final closing date may have materially decreased in value since the Sponsor acquired such portfolio investments and/or assets. Sponsors should review their fund offering and operating documents to determine whether they provide the Sponsor with any flexibility with respect to prospective investors coming into the fund at subsequent closings, such as by excluding such prospective investors from existing investments, adjusting interest payments required of prospective investors to existing investors and/or adjusting capital contributions amounts required of prospective investors at such subsequent closings.


Sponsors of open-end funds should review fund offering and operating agreements to pre-emptively determine downside risks to their funds as a consequence of an increase in redemption requests from investors, as well as to explore all potential options to help mitigate the impact of such redemption requests. Sponsors should consider proactively reaching out to investors, and in particular key investors, in order to help mitigate investor concerns, including over-exposure of certain investors to particular asset classes or industries within their overall portfolios in view of material valuation adjustments over the past few weeks.

© 2020 McDermott Will & EmeryNational Law Review, Volume X, Number 91


About this Author

Ian M. Schwartz Investment Lawyer McDermott

Ian M. Schwartz focuses on the formation and operation of private equity funds. As head of the Firm’s Investment Funds Group, Ian is highly skilled in counseling private fund clients in connection with the structuring of fund investments and provides advice on legal and regulatory compliance matters for funds and their investment advisers. He also assists fund sponsors in connection with the organization and documentation of their internal firm arrangements.

He has served as legal counsel in numerous multimillion-dollar and middle-market private investment fundraisings for...

212 547 5435
Rami Turayhi Private Equity Attorney McDermott Will & Emery New York, NY

Rami Turayhi represents private equity sponsors and investors in the structuring, formation and operation of private equity funds, real estate joint ventures and other private investment vehicles, as well as in connection with their acquisition and divestiture of portfolio companies and assets. He advises private investment funds on issues relating to tax, employment and regulatory matters, as well as ongoing compliance with the Securities Act of 1933, the Investment Company Act of 1940 and the Investment Advisers Act of 1940.

Prior to his career in law, Rami was a foreign affairs officer at the US Department of State, and an energy and power investment banker in New York.

Rami maintains an active pro bono practice counseling local small businesses and previously served as a pro bono legal fellow to the Board of Trustees of a public charter school in Washington, DC.

Erica Moscarello Private Investment Attorney McDermott Will & Emery New York, NY

Erica Moscarello focuses her practice on the formation and operation of domestic and offshore private investment funds, including hedge, private equity, credit, hybrid and single investor funds. Erica also advises investment managers on regulatory compliance, federal and state registration, reporting obligations, operational issues, separate accounts and other related transactional matters. Erica is experienced in counseling institutional investors in connection with their investments into private funds. She also advises private fund managers in connection with their internal firm...

David Nestler Investment Funds Attorney McDermott Will & Emery New York, NY

David Nestler is a member of the Firm’s Investment Funds Group. He counsels private fund clients in connection with the formation and operation of private investment funds as well as legal, regulatory and compliance issues faced by their sponsors. He has served as legal counsel to numerous institutional and boutique sponsors across a spectrum of investment strategies, including buyout, real estate, credit, growth equity and venture capital, co-investment, fund-of-funds, and secondaries. He also represents clients in connection with the formation of managed accounts, funds-of-one, joint...

Philip Feffer Corporate & Transactional Attorney McDermott Will & Emery San Francisco, CA

Philip Feffer focuses his practice on mergers and acquisitions, private equity fund formation and general corporate representation. He also has experience in capital markets and strategic finance and lending matters.

Philip represents strategic and private equity clients in leveraged buyout, merger, and stock and asset purchase and sale transactions across multiple jurisdictions. His experience spans a wide range of industries, including chemicals, food and beverage, and manufacturing.

Philip also has a background in fund formation, representing private fund clients in...