Debevoise Releases 2022 Private Equity Fall Review and Outlook

NEW YORK, Dec. 2, 2022 /PRNewswire/ -- Debevoise & Plimpton LLP released its 2022 Debevoise Private Equity Fall Review and Outlook.  In the face of both the current economic environment and regulatory developments, private equity sponsors are exploring new structures and strategies, and reexamining previously existing approaches in a new light. This issue reviews some of the notable developments the firm's practitioners are observing in the field, a useful guide during this dynamic time.

The report notes that market conditions have made preferred equity an increasingly popular liquidity and financing alternative to traditional GP-led secondaries, NAV financings and GP financings. Sponsors using this strategy need to navigate several issues, including whether the terms more closely resemble equity or debt, obtaining LP consent and managing conflicts of interest and disclosure requirements.

The report's authors explain that the Inflation Reduction Act's 1% excise tax doesn't just cover garden-variety stock buybacks—it can also extend to the portion of the purchase price of a U.S. public corporation that is treated as a redemption for U.S. income tax purposes. Affected private equity buyers should consider an alternative financing structure in which the acquisition debt is undertaken by the parent holding company.

The Inflation Reduction Act includes provisions that constitute some of the most significant healthcare reform since the Affordable Care Act—most notably, by requiring HHS to negotiate the price of many of the drugs that account for the highest Medicare spending. Private equity investors in this space will need to factor this and other changes into their investment calculus.

Another key topic is that most agreements contain language requiring amendments to be made in writing. But such clauses aren't the last word on the matter. A Delaware Chancery Court decision in June is only the most recent reminder that—as paradoxical as it may seem—provisions requiring written modification can be undone by oral agreement.

Regarding cross-border activities, many acquisitions and exits by international sponsors involving Brazilian targets are governed by Brazilian law but use agreements modelled on New York or Delaware forms. However, limited disclosures have made it difficult for sponsors to see how these imported provisions have held up in disputes. Research findings presented at this summer's M&A Conference of the Americas in São Paulo shed light on this question.

The report discusses Restriction Notices that play an important role in the enforcement arsenal of Hong Kong's Securities and Futures Commission, which recently survived a constitutional challenge. Private equity sponsors are well advised to understand how Restriction Notices give the SFC a broad basis to freeze an entity's assets—and the assets of the entity's clients—pending an investigation.

About the Debevoise Private Equity GroupDebevoise is a trusted partner and legal advisor to a majority of the world's largest private equity firms, and has been a market leader in the Private Equity industry for over 40 years. The firm's Private Equity Group brings together the diverse skills and capabilities of more than 400 lawyers around the world from a multitude of practice areas, working together to advise our clients across the entire private equity life cycle. The Group's strong track record, leading-edge insights, deep bench and commitment to unified, agile teams are why, year after year, clients quoted in Chambers Global, Chambers USA, The Legal 500 and PEI cite Debevoise for our close-knit partnership, breadth of resources and relentless focus on results.

Debevoise & Plimpton LLP is a premier law firm with market-leading practices, a global perspective and strong New York roots. We deliver effective solutions to our clients' most important legal challenges, applying clear commercial judgment and a distinctively collaborative approach.

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SOURCE Debevoise & Plimpton LLP