Private Equity Law Report Quotes Fadi Samman on Specific Conflict Issues Among Parallel Funds

Private Equity Law Report has quoted Fadi Samman, partner in Akin Gump’s investment management practice, in the article “Avoiding Parallel Fund Conflicts: Specific PE, Real Estate and Private Credit Issues and Mitigation Tips (Part Two of Two).” The second in a two-part series (click here to read about the first installment), this article describes common examples in which conflicts of interest may arise between parallel funds and near-parallel funds in private equity, real estate and credit funds.

Samman said private equity fund sponsors tend to confront fewer conflicts of interests pertaining to parallel funds than other asset classes. The issues highlighted in a new case study by the Standards Board for Alternative Investments (SBAI), he noted, “are things to which PE investors have always been attuned, and protections are largely built into the contracts to varying degrees to prevent those issues.”

Samman said those risks are partly avoided because a parallel vehicle in the PE context tends to be raised at the same time as a sponsor’s primary PE fund: “It would be unusual in a PE structure to have a side fund with a similar strategy that is investing in the same investments but on a different track.”

Because the vehicles are launched concurrently, Samman added, the parallel vehicle tends to operate in lockstep with the main PE fund in most material respects other than for specified tax, regulatory or other legal reasons.

Credit funds also face conflicts of interest related to parallel funds, Samman said, with risks that tend to be more similar to the hedge fund context than PE. This is driven in part, he said, by the fact that credit funds typically are not subject to the same restrictions on successor funds that exist in the PE context.

“We often see parallel vehicles – usually in the form of separate accounts or funds of one – raised alongside the main private credit fund,” Samman observed. “They aren’t parallel funds in the traditional sense that they are raised at the same time and required to invest in lockstep, so credit managers definitely face the issues highlighted in the [SBAI] Case Study more acutely.”

Private credit managers, though, also have more options for mitigating risks than do PE sponsors, clarified Samman, since private credit funds tend to have more liquidity than traditional PE, real estate or other private funds. As a result, he said, they can turn to third-party valuations to assure investors. “In some ways credit is an easier asset class to deal with because the assets are more straight forward to value where you can look at the loan – it’s got a face value, a coupon, etc.,” he said.