In our paper, Financing Through Asset Sales, which was recently made publicly available on SSRN, we analyze a source of financing that is first-order in reality but relatively unexplored in the literature — selling non-core assets such as a division or a plant. Asset sales are substantial in practice: in 2010, there were $133bn of asset sales in the U.S., versus $130bn in seasoned equity issuance. In contrast, most existing research on a firm’s financing decisions studies the choice between debt and equity and ignores asset sales. We build a model that allows asset sales to be undertaken not only to raise capital, but also for operational reasons (dissynergies). We study the conditions under which asset sales are preferable to equity issuance and vice-versa, how financing and operational motives interact, and how firm boundaries are affected by financial constraints.

The firm comprises a core asset and a non-core asset. The firm must raise financing to meet a liquidity need, and can sell either equity or part of the non-core asset. Following Myers and Majluf (1984) (MM), we model information asymmetry as the principal driver of this choice. The firm’s type is privately known to its manager and comprises two dimensions. The first is quality, which determines the assets’ standalone (common) values. The value of the core asset is higher for high-quality firms. The value of the non-core asset depends on how we specify the correlation between the core and non-core assets. With a positive (negative) correlation, the value of the non-core asset is higher (lower) for high-quality firms. The second dimension is synergy — the additional value that the non-core asset is worth to its current owner.

…continue reading: Financing Through Asset Sales

As a result of the Dodd-Frank Act, the over-the-counter derivatives markets have become subject to significant new regulatory oversight. As the markets respond to these new regulations, the menu of derivatives instruments available to asset managers, and the costs associated with those instruments, will change significantly. As the first new swap rules have come into effect in the past several months, market participants have started to identify risks and costs, as well as new opportunities, arising from this new regulatory landscape.

This memorandum and the accompanying timeline is designed to provide asset managers, and those interested in the activities of asset managers, with background information on key aspects of the swap regulatory regime that may impact their derivatives trading activities. The memorandum highlights practical considerations and potential opportunities for asset managers, as they assess the impact these regulations will have on their trading activities.

In the short term, asset managers should be sure to:

…continue reading: Swap Trading in the New Regulatory World

I plan to speak about the Enforcement Division’s and in particular the Asset Management Unit’s priorities in the hedge fund space. I’ll discuss the importance of specialization and expertise to this effort; the risks for investors; how these risks are informed by the hedge fund operating model; and how a hedge fund manager’s business may be at odds with the manager’s fiduciary duty to the fund. I’ll also discuss the types of misconduct we’ve seen crossing our desks in the Asset Management Unit, and I’ll conclude with certain best practices to avoid the specter of an enforcement referral or inquiry.

…continue reading: Enforcement Priorities in the Alternative Space

The EU Alternative Investment Fund Managers Directive (the “Directive”) came into force on 21 July 2011. The Directive promises to reshape the regulation of managers of alternative investment funds in the EU and beyond, and is required to be implemented across the EU by 22 July 2013. Yet the Directive requires significant rulemaking in the form of so-called Level 2 implementing measures in order to put flesh on its bones. The body tasked with bringing forth those implementing measures, the European Commission (the “Commission”), has now received final advice from the European Securities and Markets Authority (“ESMA”). That advice, upon which the Commission is expected to rely heavily in its own rulemaking, has been the subject of fierce debate during consultation. This note analyses ESMA’s Final Advice and the possible consequences for the fund management industry going forward.

Introduction

After two years of development, argument and fine-tuning, the Directive was finally published in the Official Journal of the European Union on 1 July 2011 and entered into force for European law purposes on 21 July 2011. EU Member States are required to implement the Directive by 22 July 2013.

…continue reading: European Regulation of Fund Managers

The “Volcker Rule” – first introduced in the context of current financial reform legislation by the President in January – looms large in the financial regulatory reform package approved by the Senate on May 20, 2010 (the “Senate Bill”). As highlighted in this publication, fundamental questions remain regarding how the Volcker Rule would function in practice.

As addressed in greater detail below, if it becomes law, the Volcker Rule would:

• redraw existing boundaries on the types of trading activities that U.S. depository institution holding companies and non-U.S. banks with U.S. operations may conduct,
• significantly limit the fund-related activities that U.S. depository institution holding companies and non-U.S. banks with U.S. operations may conduct, and
• place a cap on M&A-related growth of large financial groups operating in the United States. [1]

…continue reading: Volcker Rule Looms Over Asset Management and Fund Activities of Financial Institutions