Against a backdrop of credit downgrades and sovereign debt woes in Europe, private equity fund managers should be addressing the potential consequences of the Euro failing to survive in its current form, according to private equity lawyers.
GPs with Euro-denominated funds are being advised to consider whether the fund’s partnership agreements should be amended to change the fund’s functional currency, or at least provide some kind of authorisation to allow the GP to do so in the future.
The first step would usually be to obtain LPs’ consent, said Gus Black, a London-based funds formation lawyer at Dechert – although this is unlikely to be straightforward. “Asking investors for a standing authorisation to change the functional currency could be complicated. Investors may want clarity on the circumstances in which a GP could do that – and agreeing those could be difficult.”
One long-established European private equity house said it would revert back to a weighted basket of EU member state currencies should the common currency fail. “It would help keep things tidy, and was used before the creation of the Euro,” said a spokesperson for the firm, who was speaking on the condition of anonymity.
Restructuring a fund’s currency is not necessarily a seamless process either, adds Bridget Barker, a private equity partner at law firm Macfarlanes. While fund documents vary, some may require 100 percent of LPs to agree to a re-denomination. “It’s not straightforward what a Euro fund could do if one LP held out,” she said.
A note from US law firm Kirkland & Ellis on the matter said managers should also consider what alternative currency would be preferred, and what conversion ratio would be used against the Euro.
“Addressing currency issues in advance of a meltdown situation may mitigate the risks of the uncertain application of various jurisdictions’ governing laws, as well as investor discord over choice of replacement currency,” the memo said.
LP and GP discussions around euro-denominated funds could become more frequent in the coming months. Last week Standard & Poor’s (S&P), one of three major credit rating agencies, issued a mass downgrade of nine EU member states in the single currency area, in response to sluggish growth projections. This week, the ratings agency also reduced the credit score of the Eurozone bailout fund, a €440 billion vehicle designed to boost the financial stability of the single currency area.