In the midst of European doom and gloom private equity fund managers should be attending to the potential impact of the single currency failing, warned law firm Dechert in a client memo.
One way of covering yourself from some of these effects is by updating funds' risk disclosures, the memo states. The law firm is advising fund managers to consider adding in-depth disclosures relating to the impact of countries leaving the euro.
For example US managers should update their Form ADV, the document used by investment advisors to register with both the Securities and Exchange Commission and state securities authorities. GPs should explicitly update Item 8B of Form ADV Part 2a which requires managers to detail the material risks associated with particular strategies, advises Dechert.
Another area for fund managers to consider is the fund’s valuation procedures. If the euro currency was to be abandoned it may be difficult to subsequently value investments denominated in euros or a replacement currency.
Dechert advised that valuation procedures should contain detailed provisions determining not only how the fund should be valued in extraordinary circumstances but also who is responsible for determining this valuation, for example the fund manager or administrator.
Moreover managers may be forced to deal with more redemption requests, and of greater value, in the wake of a eurozone crisis. To effectively combat this, managers could use gates, which permit managers to limit the amount of redemptions allowed on a particular redemption date, or suspend redemptions and redemption payments, according to lawyer briefs seen by PE Manager.
As PE Manager mentioned earlier this year currency denomination is also at risk. GPs with euro-denominated funds are being advised to consider amending a fund’s currency or at least provide authorisation that permits them to do so in the future.