September 21, 2023
National Security: CFIUS “Pressure Testing” Passive Investor Claims
Dechert recently posted highlights from Treasury’s 2nd Annual CFIUS Conference. There are plenty of interesting nuggets to be found there, but one that caught my eye was this commentary about CFIUS “pressure testing” claims that foreign LP investors in private equity funds are truly passive investors:
Private equity investors have long made use of exceptions under the CFIUS regulations that allow for passive non-U.S. limited partners to invest alongside U.S. general partners without triggering CFIUS jurisdiction. Officials at the Conference made clear that CFIUS is pressure testing these structures to ensure that non-U.S. limited partners truly are passive – for example, by requiring disclosure of side letters with non-U.S. limited partners.
While certain transaction structures may offer non-U.S. investors passivity from a tax (or other) perspective, this does not mean that passivity exists from CFIUS’ perspective. CFIUS recently clarified in its Frequently Asked Questions (FAQs) that it may request follow-up information in respect of all foreign investors involved in a transaction, regardless of any arrangements made to limit disclosure (which we discuss here). Going forward, greater CFIUS scrutiny of non-U.S. investors should be expected.
– John Jenkins