New Pension Law Pinches Funds-of-Funds

Following passage of pension legislation last summer, some fund-of-funds managersare finding their money isnt quite as welcome as it used to be.

David Watson, a partner at law firm Goodwin Procter LLP, said that a ticklish regulatory issue related to the legislation has popped up in three funds that he has negotiated on behalf of buyout shops in recent months. In one case, a fund-of-funds manager failed to secure a spot in a partnership after becoming a less desirable limited partner due to the legislation; in a second case, a funds-of-funds manager overcame the issue to secure a spot in a partnership; and in a third case, a fund-of-funds manager is still in negotiations over the issue.

At first blush, the Pension Protection Act of 2006, signed into law last August, seemed to provide only good news for the buyout market, including funds of funds.

Prior to enactment, buyout firms that wished to avoid the onerous rules of ERISA (Employment Retirement Income Security Act of 1974) had two main choices. The less viable one: Ensure that less than 25 percent of their money came from employee benefit plans, whether or not those plans were governed by ERISA. Many firms chose instead to become venture capital operating companies. The VCOC designation shelters them from having to comply with ERISA.