Introduction
The coronavirus (COVID-19) emergency has led to the debt of many companies in private equity portfolios trading at a significant discount. As a result, an increasing number of private equity sponsors are strongly considering whether to purchase portfolio company debt in the secondary market as an investment opportunity. At the same time, the portfolio companies themselves are considering repurchasing their own debt to accomplish the twin goals of increasing equity value by retiring debt at a discounted price and reducing leverage during this volatile period in the global financial markets.
This post highlights several legal issues for private equity sponsors and their portfolio companies to consider in evaluating a potential purchase of portfolio company debt.
Key Issues to Consider
Do fund documents permit private equity funds to make this purchase?
Private equity funds’ partnership agreements, side letters or other fund documents may restrict the ability of the private equity fund to purchase portfolio company debt. For example, these documents may contain concentration limits that limit the percentage of total commitments that may be invested in the debt or equity of a single company, limitations on investing in debt where an affiliated investment fund owns equity in the issuer of the debt and restrictions on the types of instruments that may be acquired by the fund. As such, it is critical that fund documents are reviewed when a private equity sponsor is considering a purchase of portfolio company debt.
