Tag: AIFMD

What is Pre-Marketing?

In establishing a new investment vehicle, a sponsor needs to find a pool of interested investors. Given the varying rules around fundraising in different jurisdictions, the sponsor may chose to look for support in one place over another. The big problem is the time and cost it takes to get a proposed investment registered in a jurisdiction may not be worth that time and money if no investor from that jurisdiction ends up being interested.

This is a particular problem with private equity funds when the terms of the fund may still be fluid in the early days of the fundraising process. The terms of a private placement are more often negotiated with prospective investors than a registered offering.

The question in many jurisdictions is what constitutes activities that amounts to marketing, triggering the registration process.

In the US the activities are fairly clear. You need to only direct the discussions to accredited investors and it can’t be so broadly distributed that it could be considered general marketing or general solicitation. Generally, for a private fund sponsor’s formation efforts, the sponsor wants to keep the number or prospective investors small to get a sense that the terms are right and that there is market for the product.

The European Union had been more difficult under the AIFMD rules. As much as the EU is trying to standardize the AIFMD rules across its member countries, the requirements still vary widely from member country to member country.

Last month the EU indicated that it’s looking at defining pre-marketing under the AIFMD rules. Currently, AIFMD regulates “marketing” to investors. It does not specifically regulated “pre-marketing”. Without any specific rule to base it on, member country to member country has been setting general framework on where the line is between marketing and pre-marketing.

The new regulatory regime could be good or bad for fund sponsors. If it’s drawn too narrowly, it will keep fund sponsors away from. It will disproportionately affect smaller sponsors who are not prepared to spend the money with uncertainty of potential investors. Larger sponsors will have more time and money to comply.

Sources:

International Regulatory Landscape For Private Funds

private fund compliance forum

These are my live notes from PEI’s Private Fund Compliance Forum.

They are likely to be incoherent and full of typos.

AIFMD is a difficult topic.

Transitional regime. It’s just about over; it expires at the end of July 2014. They don’t work in France. They work well in the UK. Germany is in the middle. For an upcoming fund, it may be better to start marketing now to take advantage of the transitional rules.

The rules are different for non-EU funds and managers than for EU-based ones.

How does co-investment work in the “marketing” definition for AIFMD. It’s possible to set up a co-investment policy and procedure that shoehorns it into reverse solicitation.

One panelists view on the criteria to make reverse solicitation work:

  1. Talking to institutional investors
  2. Talking to investors that you have some previous relationship with
  3. Keep to a minimum number of investors. (A handful of investors)
  4. Don’t do it in France

After the transition period, you may still have a runway to close. Don’t let it go beyond the end of the summer. Get contact and some communication during the transition period.

Soft marketing. You don’t want to register if you won’t have any investors in that country. Pitchbooks may not be marketing. It’s better if you have not completed the PPM or have not yet had a first closing. You need a fund to be in existence before you can register.

Depositories in Germany and Denmark is more than a custodian. It is intrusive and will check the investments. The marketplace for depositories is still developing.

Registration is expensive; Who will pay for it? Management company? All investors? Just EU investors? Country by country allocation?

There is no single solution for all EU countries. It is a patchwork.

AIFMD enforcement is coming from a country’s regulatory authority. Failure to register is a criminal offense. If you need a legal opinion on compliance, a fund’s legal counsel may force registration or stricter compliance.

Not AIFMD:

  • Joint venture
  • Managed account – single investor fund
  • Co-investments- The UK has specifically stated as such (other countries may take a different view)

The panel moved on to corruption and compared the FCPA to the UK’s Bribery Act. The UK’s version is stricter so it’s better to set any anti-corruption policies to the stricter UK requirements.

For private equity firms, it is possible that the bribery actions in a portfolio company could be passed through, putting liability on the fund manager. The UK enforcers are prepared to bring an action even where the nexus to the UK is tenuous.

 

AIFMD in the UK

british_flag

HM Treasury has published its response to its first consultation on the transposition of the Alternative Investment Fund Managers Directive (“AIFMD”) in the United Kingdom. The main thrust of the AIFMD will not hit Europe for a few years, but in the meantime there will be more uniform limitations on private placements in the European Union starting on July 22, 2013. Unfortunately, all of the EU countries are scrambling to get the new regulatory regimes in place. “Scrambling” may imply more activity than is really happening.

The United Kingdom has moved a step closer and published revised draft regulations under the AIFMD (.pdf). The good news is that the UK is proposing to provide a year of transition so that the requirements under the AIFMD for private placements won’t come into full effect until July 2014.

The draft regulations propose replacing the registration process for non-EU managers seeking to market their funds under the U.K. private placement regime with a simple notification procedure. You certify your compliance with the AIFMD. That way the fund manager does not have to wait for the approval of the Financial Conduct Authority before undertaking marketing.

That registration requirement is trouble under the AIFMD. Effectively, you need to go through the registration process and wait for approval before marketing in that EU country. There is no private placement passport. Of course, it may turn out that you end up with no investors in that country.

Now we need the other member countries of the EU to move forward so that European investors don’t get excluded from investment opportunities when the end of July comes around.

Sources:

Impact of Foreign Regulations on Private Equity Firms Doing Business Abroad

PEI PFC Forum 2013

These are my notes from the Private Fund Compliance Forum 2013. They are live from the forum, so please excuse my typos.

James V. Gaven, Senior Compliance Counsel,Welsh, Carson, Anderson & Stowe
Alan K. Halfenger, Chief Compliance Officer, Bain Capital LLC
Greg Pusch, SVP, Director of Global Regulatory Compliance & CCO, HarbourVest Partners, LLC

The US loaded up funds with the new regulatory framework imposed by Dodd-Frank. Foreign jurisdictions have also imposed tough new regulations.

There is a July deadline for dealing with the AIFMD in the EU that imposes restrictions on private placements.

EU is a mess. The regulations are not in place, so you can’t register yet and don’t know exactly what you need to do to register. It’s going to be a county by country analysis, requiring county by country registration.

You will also need to specifically address how advice is given and where the investment decisions are being made. You need to focus on the granting of discretionary decision making.

It’s not just the EU, other countries have restrictions on marketing within the country to investors in the country.

The EU AIFMD comes into full force in 2018. There is a political overlay that may affect things. There is a lot of uncertainty. The UK has not created the application form yet to apply for private placement clearance.

Know Your Customer and AML procedures become important when marketing to overseas investors. You don’t want “bad guys” as investors. Foreign investors will be a red flag for examiners. It’s okay to use a risk-based approach to investor diligence. The standard is disclosure of significant ownership, ranging from 10% to 25% of the ownership.

The Middle East is a problem. Their regulations make it very difficult to market in Saudi Arabia. Korea has some tough regulations affecting private fund marketing.

You need to be concerned about placement agents from the perspective of FCPA and supervision. You need to audit periodically about any changes they are making to the marketing materials.

There is some thought about setting up parallel funds for EU investors. However, the EU regs tie back to the main fund and still requires registration.