Co-Investment Relief Lightens Approval Requirements for CEF and BDC Boards

The SEC announced that it intends to provide an asset manager’s requested relief to permit business development companies (“BDCs”), closed-end funds (“CEFs”) and other regulated funds to enter into certain co-investment transactions with each other and with affiliates under simplified conditions. These transactions, which are currently allowed under SEC exemptive relief, are key to the investment programs of BDCs and CEFs that are focused on private assets and are subject to detailed procedural guidelines and board approvals under the current relief.

The new co-investment relief will result in fewer required board approvals, less prescriptive reporting to fund boards and a modernized and more flexible regime for advisers. Among other changes, the new relief will allow a board to approve the BDC or CEF’s participation in co-investments where an affiliate is already invested in an issuer and the BDC or CEF is not. Boards will be required to review the co-investment policies of the adviser (and the policies of other participants in the transaction in some cases) to ensure that these policies are reasonably designed to prevent the BDC or CEF from being disadvantaged by participation in the co-investment program and to approve policies and procedures of the BDC or CEF that are reasonably designed to ensure compliance with the terms of the SEC’s relief.

The new relief also removes restrictions on a BDC or CEF’s participation in follow-on investments if the fund did not participate in the original co-investment. According to the Stradley Ronon alert “the more streamlined board approval process will allow BDCs and CEFs to enter into time-sensitive transactions more efficiently and utilize board oversight more appropriately.”  While the reporting and compliance burdens under the new relief are less prescriptive, boards still must be provided with quarterly summaries, annual and other reports regarding these transactions. The relief does not include co-investment transactions entered into by mutual funds or ETFs, and certain other co-investment transactions remain outside the scope of the relief. 

Additionally, a recent survey of the closed-end fund industry by Seward & Kissel presents trend data on 75 CEFs, including data on investment strategies; target capital raise; management fees; co-investments and recycling of capital, and more.

Click here to view the proposed co-investment relief on the SEC website.
Click here to read the Stradley Ronon client alert covering the changes to co-investment relief.
Click here to view the Seward and Kissel data on the closed-end fund industry.