COVID-19: Considerations for Alternative Investment Funds: Private Equity Portfolio Companies in Distress & Technology Tips for Funds

It is no secret that the global alternative investment fund industry has felt the impact of the coronavirus (COVID-19) pandemic. To help hedge funds, private equity funds and their portfolio companies navigate some of the challenges they face, EisnerAmper will publish a series of blogs to assist them in areas they might need to address.

This inaugural blog will discuss:

• Private equity portfolio companies in distress and/or crisis and what they should keep in mind.
• Technology tips for alternative investment funds to fend themselves against any cybersecurity breach.

Private Equity Portfolio Companies in Distress and/or Crisis

Although portfolio companies of private equity funds might start feeling the financial pressure, during times of distress, leadership is key, according to Allen Wilen, Partner-in-Charge of the Bankruptcy and Restructuring Service Practice at EisnerAmper.

“Private equity firms need to lead management teams and instill confidence in them during this time”,” he said. “The certainty is this will end. Whether it is 4, 6, 8, or 12 weeks or longer, we have to start focusing on getting the businesses and supply chains up and running in a sufficient matter. This is a temporary issue. It is just a diversion on the road of your business plan.”

EisnerAmper previously reported that companies who do mass layoffs have to comply with certain federal and state guidelines. On a federal level, the Worker Adjustment and Retraining Notification Act (“WARN”) (29 U.S.C. § 2101 et seq.) is a federal statute that requires employers with more than 100 employees to give a 60-day notice of any plant closing or mass layoff. A mass layoff is defined as one involving more than 50 employees at a location. In addition, many states have adopted their own WARN Act regulations and employers must abide by both federal and state guidelines. 

Additionally, companies also need to avoid certain temptations in these challenging times, for example, the temptation to forgo paying their taxes. 

“When companies find themselves in a cash crunch, they may be tempted to forego paying their payroll taxes and/or sales taxes, and instead use these funds as a quick source of funding for operations,” said Gary Bingel, Partner-In-Charge of the State and Local Tax team at EisnerAmper.  “However, sales taxes and payroll taxes are trust fund taxes, for which officers and other responsible parties have personal liability.  Thus, individuals at companies that take this path may find their situations going from bad to worse.  If the funds aren’t available now, they most likely won’t be available in several months.  When this is the case, company officers and other responsible parties may find themselves on the hook personally for all such unpaid taxes – putting their personal homes and other assets in jeopardy.”

Technology Tips for Financial Services Firms

The disruption the pandemic has caused to the financial services industry has created an opening for malicious cyber actors to use to their advantage and, historically, hedge funds and private equity funds have been amongst the most prone industries to such attacks.

“When working with our clients in this area we emphasize to keep focused on the 3 Cs: Computers, Connectivity and Communicate,” said Rahul Mahna, Managing Director of Managed IT Security Services, EisnerAmper’s Process Risk & Technology Solutions (PRTS).

• Computers – Funds need to make sure their personnel are working on company-issued computers. If team members are working on a home computer, it is important to have all patches updated for the operating system and have a strong endpoint security software that is running.
• Connectivity – Try to always use company VPN so there is a secure connection to your office network and out.
• Communicate – There will be an increase in phishing attacks and new fraudulent attempts that have not been encountered before. If there is any doubt, it is suggested to call the vendor or office directly to ensure it’s legitimate.

“This is a new dynamic and unchartered territory for all of us,” Mahna added. “We recommend to be vigilant, keep security in mind and if you have any questions, refer to the 3 Cs as a framework.”