Expert Guide - Investment Funds 2013

Expert Guide w w w. c o r p o r a te l i v e w i r e . c o m

Investment Funds

PwC

Isle of Man Funds Association

Morrison & Foerster

January/February 2013

Association of Luxembourg Fund Industry

Ernst & Young

Chief Executive Officer Osmaan Mahmood Managing Director Andrew Walsh

Contents Europe

Editor in Chief James Drakeford Publishing Division Jake Powers, John Hart, Tom Carlton Art Director Adeel Lone

6 - 9

Do Environmental, Social & Governance Issues Matter to PE Houses on Exit?

Senior Designer Natalie Kate Reigel

10 - 13

AIFMD - An Update

14 - 17

The Cases for Change: Is it time to amend the Limited Partnerships Act 1907?

Designer Ben Rogers Staff Writers Sean Mahon Contributing Organizations PwC¦ Slaughter & May ¦ Travers Smith ¦ Isle of Man Funds Association ¦ Dillon Eustace ¦ Association of Luxembourg Fund Industry ¦ Caceis Investor Services ¦ Hassans ¦ Vieira De Almeida ¦ DealMarket ¦ ACOLIN ¦ Kennedy Van der Laan ¦ Camilleri Preziosi Advocates ¦ Sparkasse Bank Malta ¦ Morrison & Foerster ¦ Skadden ¦ Patton Boggs ¦ Ernst& Young ¦ Anderson Mori & Tomotsune ¦ Marketing Manager Sylvia Estrada Research Manager David Bateson Production Manager Sunil Kumar Account Managers Ibrahim Zulfqar, Norman Lee, Sarah Kent, Omar Sadik, Michael Raggett, Vince Draper Competitions Manager Arun Salik Administration Manager Nafisa Safdar Accounts Assistant Jenny Hunter Editorial Enquiries Editor@corporatelivewire.com Advertising Enquiries advertising@corporatelivewire.com General Enquiries info@corporatelivewire.com Corporate LiveWire The Custard Factory Gibb Street Birmingham B9 4AA United Kingdom Tel: +44 (0) 121 270 9468 Fax: +44 (0) 121 345 0834 www.corporatelivewire.com

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18 - 19 ‘Green’ investments – a trend for 2013?

20 - 23

The European Directive on Alternative Investment Fund Managers (AIFMD) and non-EU fund Managers

24 - 25 Happy Birthday UCITS, Happy Birthday ALFI! 26 - 27 Real Estate Fund Industry in

Luxembourg: an evolving market...

28 - 31 Gibraltar: The Key to Unlocking Europe 32 - 35 Portuguese Investment Funds:

Current Market Scenario & Incoming Opportunities 36 - 41

Private Equity’s Shift to Online Platforms: A Progress Report

42 - 43

Distribution in Switzerland: Challenges & Solutions

6

44 - 47 Working Towards AIFMD Readiness in the Netherlands 48 - 49

AIFMD – A Good Deal for Malta

50 - 51

Global - Private Equity Snapshot 2012

The Americas 52 - 55 New Freedoms & Heightened Scrutiny

Complicate the US Private Fund Marketing Environment 56 - 59

Consequences of the Dodd-Frank Act: New Private Fund Reporting Requirements

60 - 63

Fund of One

64 - 67

Private Equity Latin America

68 - 69

Global - Venture Capital Snapshot 2012

56

Asia 70 - 73

Proposed Amendment to the Investment Trust and Investment Corporation Act of Japan

Expert Directory 74 - 77

Expert Directory - Europe

78 - 79

Expert Directory - The Americas

80 - 81

Expert Directory - Asia

64 70

Expert Guide: Investment Funds 2013 - 3

Introduction

By James Drakeford

F

rom a financial markets perspective, 2012 was a year of extreme contrasts.

The first quarter was a rollercoaster ride that aggressively pushed up the valuation of risky assets (equities, corporate bonds, etc.) despite the lack of progress in addressing some of the key underlying risks. This was followed by an aggressive sell off in the second quarter when markets fretted about global growth and worried anew about failure to resolve problems in the eurozone and the risk of a ‘hard landing’ in China.

In spite of all the economic uncertainty, 2012 was a relatively good year for most investment asset classes. The Global Market Index (GMI), a passive benchmark that holds a broad mix of the world’s major asset classes, posted a strong 11.0% total return on 2012. That’s a sharp rebound from 2011’s disappointing 1.1% decline. This can partially be attributed to powerful gains in: emerging market stocks (+18.2% in 2012), REITS (+17.8%), and foreign equities in developed markets (+17.3%). The only loser of any significance in broad terms: commodities overall, which fell slightly (-1.1%), largely due to lesser energy costs.

After a steady start to the year in 2012, panic buttons had already been pressed by the end of Q1 when the PE Index registered activity below its ten-year moving average for the first time since 2010. Falling to 87.1%, the sharp decline was a result of low deal volumes and a continued difficulty in accessing credit. However, volumes picked up to their normal pace throughout the year and by the end of the fourth quarter the aggregate of private equity funds surpassed $3 trillion for the first time ever – an important milestone for the industry at a time of heightened regulatory, political and investor scrutiny.

On the back of this, 2013 offers an increased level of optimism. Global growth is forecast to be 2.7% in 2013 versus an expected out-turn of 2.5% in 2012. In other words, no slippage into global recession, but a world where growth continues

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to be weak relative to prior trend and inflation remains well controlled, particularly in the developed world. While we accept that any kind of growth is certainly a step in the right direction, there is every indication that the thematic issues which clouded 2012 will continue to constrain significant growth throughout 2013. Uncertainty of the eurozone crisis, the US ‘fiscal cliff ’ and China’s slowing rate of sustainable growth provide substantial hurdles for the wary investor. But, the good news is that if and when these issues are rectified, investors will once again be able to focus on the economic fundamentals.

Fiscal adjustment in the US and Europe will come to the foreground. In the US, there is mounting pressure on politicians to deal convincingly with the ‘fiscal cliff ’, debt ceiling and long-term debt dynamics. The progress of the United States will rely heavily upon an agreement between the Democrats and Republicans with the likelihood being that fiscal will be reduced closer to 1-2% of GDP. Meanwhile in Europe, there is great intrigue as to whether European countries have the capacity to increase their productivity and return to growth. This year is very much a ‘make or break’ for the continent in general. Investors will undoubtedly find ample opportunities to benefit from this push as long term investments arise all throughout the region. European shares are shaping up to be one of the real bargains of 2013 with Spain, Greece and many others beginning to rebuild their tattered finances.

In terms of emerging markets, it appears that SubSaharan Africa offers a promising future. The IMF’s October 2012 Regional Economic Outlook for Sub-Saharan Africa found that economic activity in the region has continued generally robust amid the hesitant global recovery. Regional output is projected to expand by about 5.25% in 2012 and 2013, a similar pace to that observed in 2010-11.

Supported by generally prudent policies and improved fundamentals in most countries, domestic demand has provided impetus, helped by public and private investment. Other countries which are on the cusp of a growth-boom include Nigeria, Saudi Arabia, Vietnam, Kazakhstan, Egypt and the Ukraine. Overall, barring a meltdown, 2013 is shaping up to be a year of stability, scattered with interesting opportunities throughout.

Expert Guide: Investment Funds 2013 - 5

Do Environmental, Social & Governance Issu

By Phil Case

E

“

nvironmental, Social and Governance (ESG) factors are increasingly important in M&A activities, and can affect the likelihood of a deal occurring”. That was one of the findings of a recent survey1 of “trade buyers” of private equity (PE) owned assets which was undertaken

by PwC on behalf of the UN-backed Principles of Responsible Investment. So, what are these factors, and why are they so important?

Generally speaking, major blue-chip companies have been engaged in managing their ESG or “sustainability” issues for some time, but for many of the typically SME businesses that are owned by private equity houses, this is less familiar territory. Even so, most are aware of their environmental impacts (e.g. pollution and contamination of land, air and water and eco-efficiency -“doing more with fewer resources”). Some are tackling elements of the social agenda too (which includes the treatment of employees, health & safety, and labour conditions, plus child labour and human rights, especially in supply chains). The governance element - arguably the most important – is, however, often given less focus. In the ESG context, this refers to not only the governance of environmental and social issue management but also the areas of anti-bribery and corruption, business ethics and transparency.

PE Houses use ESG factors to add value Why are PE houses taking heed of the ESG agenda? In our experience of working with a number of clients, PE Houses are often driven a) to improve risk management b) to facilitate fund raising exercises, or c) to drive costs out of portfolio companies through eco-efficiencies.

Indeed the results of our ESG survey of PE Houses2 last year reinforce these messages. This desire to act is increasingly translating into formal PE “Responsible Investment” polices and mission

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statements such as supporting the development of portfolio companies to build long term value and generate superior returns for investors. Or signalling that as a significant owner, a House believes that it also has a responsibility towards society to influence portfolio companies to act in a socially responsible manner. In an ideal world, of course, new policies lead to new procedures and changed practices.

We’re seeing some evidence of a heightened awareness by PE Houses of ESG issues at the point of acquisition. In our view, this trend is set to continue, particularly for deals in sensitive sectors (e.g. manufacturing or extractives), or in developing countries (where ESG regulatory measures or enforcement, are likely to be lacking).

The due diligence focus is rightly on “materiality” of the issues, and the existence of any “red flag” risk issues which might represent liabilities that could affect appetite to complete, price, or terms.

(We’re also seeing an increasing trend for Houses to look back and review their existing portfolios, mindful that due diligence on acquisition some years back is unlikely to have covered the full scope of the current ESG agenda).

But what really happens after purchase?

It’s what happens on ESG issue management postacquisition that arguably counts the most. Here, the picture is more fragmented: Houses that have taken a lead in this area, work with portfolio companies throughout their period of ownership to drive out eco-efficiencies or to develop responsible products. Examples include energy efficient

ues Matter to PE Houses on Exit? products, those that can be readily recycled, or those that generate less waste. Conversely, other Houses are less advanced on ESG issue management. Sometimes, even where ESG issues are correctly identified pre-acquisition, there is little or no integration of action on those issues in the ensuing 100 or 180 day post-acquisition plans. At best, this is an opportunity lost. At worst, there’s a risk that an issue goes unmanaged that subsequently causes problems at exit.

ESG factors impact the deal For the ability to tell a really good “story” on ESG issue management at exit - certainly when selling to a Trade Buyer - is becoming increasingly important. Our Trade Buyer Survey1 found that “two thirds of the interviewees said that poor performance on ESG factors had prevented a deal or affected their willingness to do a deal”. On the other hand, good performance on ESG factors can increase motivation to do a deal, with a third of the companies stating that they “believed good performance on ESG factors adds to the reputation and brand of the company.”

Buyers want to see evidence Presenting a company’s ESG credentials on exit is not simply a matter of making relevant policies or good news “case studies” available in a data room, although that would be a start. What buyers are increasingly expecting is a sound evaluation of material ESG aspects and impacts, how management of these impacts relates to the company’s core business strategy, plus some evidence of ESG performance improvement.

This, in turn, means that Key Performance Indicators need to have been identified (for instance, on energy efficiency), baseline data calculated, targets set, improvement programmes instituted, and tangible results demonstrated. Only then can PE House sellers expect to defend their valuations on sale.

Indeed, our Trade Buyer Survey found that “poor performance on ESG factors can have a significant negative impact on the valuation of a deal and can be used as a lever in negotiating the Sale and Purchase Agreement.

Over half of the companies [surveyed] stated that they would expect a discount for poor performance on ESG factors. However, a number of companies also appreciated that good performance on ESG factors is usually integrated in the valuation of the company, although it was mentioned that this is difficult to quantify.”

Measuring the value of ESG initiatives There is, we believe, a growing interest in identifying and measuring the specific impact of ESG factors on shareholder value.

For example, PwC is working with a number of companies that wish to use ESG valuation to help attract internal or external investment or to inform the prioritisation of future ESG focused investments. PwC applies standard financial valuation techniques to ESG initiatives, including both tangible and intangible benefits.

Moreover, ESG value information is likely to become more widely available in the future as companies experiment with integrated reporting and with ESG valuations.

As a result, the range of ESG issues that are factored into transactions may in future expand beyond pure risk and liability considerations such as poor environmental or health and safety performance and begin to encompass eco-efficiency, employee or customer engagement, brand value and the creation of strategic advantage through management of ESG factors.

Expert Guide: Investment Funds 2013 - 7

Phil Case is a Director of PwC’s Sustainability and Climate Change team in the UK, specialising in, and leading PwC’s sustainability work in, the private equity sector. Phil has had extensive experience of working with private equity (PE) houses in conducting sustainability assessments and environmental, social and governance due diligence projects for potential acquisitions, and in developing strategy, policy and procedures for implementing a sustainability programme. He has also developed “tools” to facilitate policy implementation, and has designed and run training events for investment professionals. Phil is currently a member of the BVCA’s Responsible Investment Advisory Board, and has co-written Guidelines for BVCA members on sustainability risk management, published in 2012.

Phil can be contacted by phone on +44 (0)20 7212 4166 or alternatively via email at Philip.v.case@uk.pwc.com

1 - The Integration of Environmental, Social and Governance issues in Mergers and Acquisitions Transactions - Trade Buyers Survey Results. (PRI and Pw http://www.pwc.com/gx/en/sustainability/publications/esg-impacts-private-equity.jhtml 2 - Responsible Investment – Creating Value from Environmental, Social and Governance Issues (PwC March 2012) http://www.pwc.com/gx/en/sustainability/publications/private-equity-survey-sustainability.jhtml

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wC 2013)

Expert Guide: Investment Funds 2013 - 9

AIFMD - An Update

By James Cripps & Paul Dickson

S

o much has already been written about the Alternative Investment Managers Directive (the “AIFMD”), with more arriving on a seemingly daily basis, that many may be wondering if there is anything new to be said or written on the subject.

However the extent of the uncertainties that remain – and if anything the list is continuing to expand – does justify a brief review of the options facing investment funds and their managers, as well as an outline of some possible strategies.

The starting point is the observation that the road to a single European market in investment funds has a long way to go – even the UCITS regime, first introduced in 1985 and already subject to numerous supplementary directives, amendment and rulings, continues to be prey to different interpretations across the members states, as recently illustrated by the ESMA ruling of 20 November 2012 that overturned the interpretation that had permitted UCITS based in some member states, but not others, to invest up to 10% of fund assets in non-UCITS compliant hedge and other open-ended investment funds.

In practice, the current disagreements on AIFMD start with the transitional regime, with one view that the one year window for authorisation as an AIFM contained in the Directive does not prevent the other provisions in the Directive applying to all AIF promoted or managed in the EU with effect from 22 July, 2013. Others, including HM Treasury and the FSA, have concluded that a firm that is carrying on portfolio or risk management for an investment fund (that is an AIF) on that date has until authorisation (or 22 July, 2014 if earlier) before the Directive will apply to any AIF that it manages.

At the same time the absence of any transitional regime for depositaries has led some to argue that, regardless of the terms of their appointment, a bank or custodian must comply with the enhanced duties and responsibilities placed on a depositary by the Directive when providing any

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custodian and related services to an AIF from 22 July, 2013 – and charge for the additional, if not necessarily welcome, services accordingly.

ESMA may well settle these interpretational differences by issuing a “Question and Answer” paper on transition - although a conclusion that the HM Treasury or FSA view should be overruled in favour of the Directive applying subject only to the authorisation requirement from 22 July 2013 may well lead to a challenge in the European Court. However such a challenge is permitted only on the limited grounds that ESMA’s interpretation is not in accordance with the language of the Directive or the level 2 Regulation – which would be an uphill struggle given the many interpretations the language could, at last as a matter of English, legitimately be given.

All of which suggests resolution, let alone certainty, may be some way off, leaving investment funds and their managers uncertain quite what they should do, or plan to do - as well as when and where they should do it!

Another topic of uncertainty is the scope and meaning of the “letter box” restriction. The description of the concept in the level 2 regulation is, at best, ambiguous – with the most debated requirement that an AIFM may not delegate performance “to an extent that [the portfolio management delegated] exceeds by a substantial margin the investment management functions performed by the AIFM itself ”. While some consider a typical investment trust or hedge fund can satisfy this test through the Board of Directors carrying out its legally mandated overall super-

visory duties, others point to the language in the Regulation having a wider scope than the equivalent provisions in the UCITS regime (which have not resulted in significant change to the long standing UCITS delegation structures in Ireland and Luxembourg, for example) and reach a different conclusion. Resolution may have to await an ESMA ruling, which seems unlikely until, at earliest after the consultation and review scheduled for 2015 – with regulators in individual Member States seeming likely to interpret the provisions differently in the interim.

Even the welcome news that HM Treasury does not propose to extend the letter-box concept to small AIFM in the UK raises issues, in particular as the lower €100 million limit applies when the AIFM manages AIF that using hedging. However the wide-ranging definition of hedging in the Directive casts doubt whether any investment company with (gross) assets in the €100 million to €500 million range will be able to take advantage of the reduced regime for small AIFM if the fund manages foreign exchange risk using derivatives – or even occasionally uses an overdraft for short-term liquidity purposes.

Despite this sea of uncertainty a number of strategies are beginning to emerge. First a decision by an AIF to be the, or to appoint an external, UK resident AIFM on or before 22 July, 2013 will allow, subject to a potential ESMA ruling overturning the HM Treasury view on transition (which, while possible, is far from a certainty) a further 12 months before the Directive must apply – and thus a further 12 months to decide which choice to make.

It is hoped, hopefully not too optimistically, that at least some of the uncertainties – not least as to the scope of the small AIFM regime and the additional costs the enhanced depositary regime will involve – will be resolved before July 2014. This should enable AIFs and their managers to make a more informed choice as to how to implement the Directive than is possible at this time.

Thus a choice of an external UK based AIFM is probably the best option at present, albeit as part of a “wait and see” strategy. In most cases the appointment need only be confirmed in writing with no need to amend the IMA (assuming the portfolio manager is the appointee). However this decision need not be taken until 22 July, 2013 and developments may yet happen in the interim, suggesting delay until nearer to the deadline remains appropriate.

With the AIFM appointed, the next decision need not be taken until (nearer to) 22 July, 2014 - and will then be between being a self-managed AIF or approving the same, or appointing a different, external AIFM, with that AIFM potentially based outside the UK, whether elsewhere in, or even outside, the EU – the latter meaning, amongst other matters, that the new depositary regime will not apply. In practice, a decision will be needed in advance of the deadline as it is likely that, whatever choice is made, contracts with at least some service providers will have to be renegotiated.

It should be emphasised that the additional costs for a depositary (compulsory once the AIF Directive applies unless the AIFM is outside the EU) may well prove to be very AIF specific: a fund with a portfolio of securities listed on a recognised exchange is likely to face a materially smaller fee and cost increase than a fund with investments in emerging or frontier markets or holding investments whose safe custody regime is less developed, whether as a matter of law and/ or practice, as the depositary will have a much higher level of responsibility (and liability) for local sub-custodians than at present. Similarly a fund that uses derivatives faces considerable uncertainty as the application of the new regime to prime broking relationships remains very unclear - and may depend as much on depositary’s own risk management polices as the proper interpretation of the language in the Directive (whatever that may be!).

Expert Guide: Investment Funds 2013 - 11

For a UK (or other EU) based investment fund the decision may well depend on whether selfmanagement is an option. In part this will depend on how the letter-box prohibition and the definition of hedging (where the portfolio is below €500m and the fund closed-ended) are operated, in practice, in the period until July 2014. Where small AIFM status is not feasible, a significant issue is likely to be whether the additional services necessary to be self-managed will be available at a cost that is less than the fees of an external AIFM. Where the fund has a portfolio manager from a major asset management group with an existing UCITS stable an external appointment will most likely be the commercially beneficial choice. However a fund whose manager has only a small number of AIFs under management may face a more difficult decision – as well as the potential for a greater increase in running costs.

Alternatives could well include the appointment of a different external AIFM, a move off-shore, a merger - or even closure, portfolio realisation and liquidation.

A delay until July 2014 will also allow funds to review their marketing plans and decide whether the search for European investors is worth the additional burdens compliance with the Directive will bring. A fund based outside the EU can still have EU based investors if the fund is initially approached by the investor rather than vice-versa (now called “reverse solicitation”), while the Directive appears to permit an EU based fund to appoint a non-EU AIFM which then delegates portfolio management to London (or elsewhere) – and thereby falls outside the scope of the Directive (relying on reverse solicitation for any European custom).

In short, while strategies to deal with AIFMD are now beginning to emerge there is still much to play for – and time for the rules of the game to become clearer (or at least less unclear). before the (hopefully delayed) kick-off!

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James Cripps joined Slaughter and May in 1978 and has been a partner in the corporate department since 1989. His practice is concentrated on asset management, including the structuring and restructuring of investment funds, the establishment, purchase and sale of businesses that involve asset management and compliance, regulatory and safe custody matters. He is listed as a leading individual in the Investment Funds: Open & Closedended Listed Funds in Chambers UK, 2013 and is a past member of the Technical Committee of the Association of Investment Companies.

James can be contacted via email at James.Cripps@SlaughterandMay.com Paul Dickson has a broad practice covering a range of corporate and corporate finance matters for listed and unlisted clients. His experience includes advising on M&A transactions, private acquisitions and disposals, equity capital markets and asset management transactions, together with partnership and investment fund structures. He is the contributing editor of ‘The Asset Management Review’, a guide to asset management law and practice in 36 of the most significant jurisdictions worldwide.

Paul can be contacted via email at Paul.Dickson@SlaughterandMay.com

Expert Guide: Investment Funds 2013 - 13

The Cases for Change: Is it time to amend the L

By Jeremy Elmore

T

he United Kingdom limited partnership remains the market standard structure for on-shore private equity and venture capital funds, as well as on-shore funds investing in many other sectors. However, the simple fact it that the legislation governing UK limited partnerships, the Limited Partnerships Act 1907 (the “Act”), is over 100 years old and lacks the degree of sophistication required to comprehensively address certain of the issues which are faced by modern investment vehicles. The Department of Business, Enterprise and Regulatory Reform consulted in 2008 on proposed developments to the Act and, whilst certain helpful changes were subsequently made regarding certainty of registration, many of the more challenging proposals unfortunately found their way into the long grass.

This issue is brought sharply into focus by the fact that many other jurisdictions, including Guernsey, Jersey and, most recently, Luxembourg have enacted laws which provide many of the features contemplated by the DBERR consultation and enhance the suitability of the limited partnership in those jurisdictions as a vehicle for the structuring of alternative investment funds. It is therefore arguable that the UK is at a competitive disadvantage in this regard.

Two cases over the last 12 months provide clear examples of circumstances in which certain features of the UK limited partnership were considered by the courts and the inherent uncertainties in the legislation exposed. The findings of the court are likely to have come as something of a surprise to both the GP and LP communities and, on balance, both sides may feel that their position has been somewhat prejudiced.

The Inversiones case (Inversiones Frieira SL and another v. Colyzeo Investors II LP and another – May 2012) considered the level of information an LP is entitled to obtain in relation to a partnership and its underlying investments. The judgment reveals that the potential scope of the informa-

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tion open to inspection as the “partnership books and records” can extend significantly beyond the standard contractual financial reporting obligations (as set out in the LPA and the standards the GP would expect to apply) to operational documents of the limited partnership and, potentially, its investment holding vehicles.

The Inversiones case was brought by two affiliated investors in a European private equity real estate fund who were seeking an order for the GP to make available a vast amount of documentation relating to under-performing investments and their financing structures. The GP contested this went well beyond the scope of what an LP was entitled to review.

In addition to any contractual rights granted to LPs under the terms of the LPA, the court considered an LP’s statutory right “to inspect the books of the firm and examine into the state and prospects of the partnership business” under the Act. This right is specifically framed by what is necessary for the purpose of allowing an LP to examine the state and prospects of the partnership in which they have invested. However, historically neither GPs nor LPs extensively considered the statutory entitlement on the basis that reporting obligations are generally contained in the LPA and it has been assumed that these are the standards with which a GP needs to comply.

While the extent of the “books of the Partnership” which are open to this right of inspection will vary on a case to case basis, the judge in the

Limited Partnerships Act 1907?

Inversiones case stated that: “if it would be necessary or advantageous for the GP or its delegate to rely on a document to establish rights as against a third party or to determine rights as between the members of the partnership themselves, then the document should be available for inspection by the LPs”.

This could potentially mean that, as well as the internal records of the partnership, a wide range of documents such as valuation reports and funding documents of a partnership will in principle be open for inspection. In addition, the judge indicated that if the GP or its delegate had obtained and held documents between third parties and such documents were significant for the partnership, they may also be regarded as part of the partnership books and records. This would mean funding, operational and other transactional documents of underlying investment-level SPVs examined by the GP may also form part of the partnership books.

Whilst an LP’s right to inspect partnership books will always have to be balanced alongside the fiduciary duties of the GP and the contractual confidentiality provisions by which the partnership may be bound, the Inversiones decision does indicate a willingness on the part of the court to extend a GP’s disclosure obligation well beyond that which it has contractually negotiated. Transparency is something which should be applauded and something which has been central to recent regulatory change and developments in operating practice – however, the Inversiones case does serve as a timely reminder to GPs of the importance of agreeing appropriate investor reporting and confidentiality provisions with limited partners and determining the extent to which certain documentation should be retained at the SPV level.

A more difficult case for the limited partner community was the Henderson case (Certain Limited Partners in Henderson PFI Secondary Fund II LLP (A Firm) v. (1) Henderson PFI Second-

ary Fund II LLP (A Firm) (2) Henderson Equity Partners Limited (3) Henderson Equity Partners (GP) Ltd – November 2012).

In the case, a number of investors in an infrastructure fund claimed that the manager had used fund commitments to acquire a project management company which included substantial assets falling outside the scope of the fund’s investment policy. LPs claimed that the allocation of assets and liabilities to the fund was therefore unauthorised.

The key lesson in the context of the interpretation of the Act was the consideration by the court as to whether LPs could bring an action against both the GP and the manager for breach of contract or misrepresentation. The court determined that while a general partner can be sued by any limited partner in respect of liabilities under its governing LPA (without such actions constituting management of the partnership business), any claim against a separate manager is a ‘partnership asset’ and therefore must be brought by the GP, in the name of the partnership.

If LPs pursued a claim against the manager, they would be standing in place of the GP, and would forfeit their limited liability for the period during which such claims were pursued, as this would constitute taking part in the management of the partnership business.

In terms of general principles, the judgment indicates that as soon as there is participation in the decision-making process by requiring notice of individual decisions and commenting upon operational business decisions taken by the general partner, a limited partner will be ‘involved in management’. Legislation in many other jurisdictions provides a number of (non-exhaustive) safe-harbours for activities which may be taken

by LPs without prejudicing their limited liability and thus potentially avoids the issue which arose in the Henderson case.

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There is no doubt that the Act is ripe for review to ensure the UK maintains a suite of competitive and balanced limited partnership legislation. It can only be hoped that these recent cases highlight the importance of this issue and serve to raise it up the agenda of the UK government, as well as both the GP and LP communities.

Jeremy Elmore is a senior solicitor in the Investment Funds Group. He specialises in the structuring, formation and operation of alternative investment funds (with a particular focus on private equity, real estate and infrastructure funds) and advises a wide range of asset management houses and investors on their investment management arrangements, investment programmes and incentivisation structures.

Jeremy can be contacted by phone on +44 (0)20 7295 3453 or alternatively via email at Jeremy.elmore@traverssmith.com

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Expert Guide: Investment Funds 2013 - 17

‘Green’ investments – a trend for 2013?

By Peter Craig

W

ith the weird and wonderful weather we had during 2012 it’s no wonder that we started to hear a lot more about the advantages of clean energy and of trying to future-proof our carbon-fuelled economy. But what about ‘green’ investment?

Let’s start with clean energy, or renewable energy.

It’s fair to say that although the core principles behind clean energy investment – save energy and save the world by doing it - are commendable, what’s really going to drive its expansion is the creation of sustainable profit.

This may not be far off. There are volatilities in the pricing of ‘traditional’ carbon-based energies – oil and gas. There is also the issue of security of supply stemming from the uncertain political situations in certain parts of the world.

However, renewable forms of energy probably have some way to go before they start to become truly commercially attractive. There are also issues in respect of predicting which way the wind is going to blow – excuse the pun – with what form of renewable energy will take the lead. Will it be wind? Here in the middle of the Irish Sea we have plenty! But the arguments put forward against wind energy are well known. Wind isn’t a reliable source of energy and there are issues around siting the turbines with ‘NIMBYism’ and planning problems prevalent.

What about another example – tidal energy?

Well this hasn’t really taken the world by storm yet, even in Britain, where we’re surrounded by sea. So are there examples where ‘green’ investment can be seen to be worthwhile?

In the Isle of Man we have examples of investment funds in sustainable resources and waste recycling, which are showing promise. The Island promotes itself as a successful diverse international business centre with a strong financial services sector and is an ideal location for fund man-

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agement and fund administration. Appropriately it was also the location for the world’s first clean emissions motorcycle Grand Prix, TTXGP, in 2009, and the world-famous TT Races now have its replacement, TT Zero, as an integral part of its programme.

One Isle of Man-based fund aims to provide long term growth by investing directly or indirectly in Recycling Facilities in the United Kingdom, and in the development of such facilities. Recycling Facilities are defined for this purpose as industrial facilities for the processing and treatment of waste, including the recycling of waste, the treatment of waste, the preparation of waste for use in waste to energy and the conversion of waste to energy by any means.

According to fund manager, the fund has benefited from the UK’s commitment to the European Union landfill directive that set reductions in landfill targets for member states. As of December 2012, the fund had seen net growth in excess off 60% since inception.

The same fund management company is also offering an opportunity for qualifying investors to benefit from the profitable development of sustainable resources in a socially responsible manner via a fund launched in October 2012.

These aim to provide investors with long-term growth by investing directly or indirectly in Sus-

tainable Biological Assets. These are defined as biological assets that are grown, managed and harvested in an ecologically sound manner while avoiding depletion of natural resources, and maximising positive social impact through the provision of opportunities for long term employment for the local community and the plantation land on which they are grown.

Initially the fund is investing in sustainably grown bamboo. As the fastest growing land plant on Earth (it can reach full height in 2 to 3 years) it has a swift maturity cycle. Bamboo also has over 500 recognised uses, which include conversion into biomass fuel.

So could the Isle of Man become the home of ‘green’ investments? Well we do enjoy a high quality business friendly environment in a European time zone, which offers several key features.

Peter Craig is the Chairman of the Isle of Man Funds Association. The Isle of Man Funds Association represents the interests of around 60 member firms engaged in the fund management sector, the fund administration industry and supporting services in the Isle of Man. He is an assurance partner in PwC Isle of Man where he leads the Asset Management practice.

Peter Craig can be contacted by phone on +44 (0) 1624 689 689 or alternatively via email at peter.c.craig@iom.pwc.com

As well as being internationally recognised by the likes of the IMF, OECD and FATF recognised we retain a AAA status from Moody’s. With a foundation of a mature and pragmatic regulation, the Island can offer a lower cost base than competitors, a simple but effective tax regime and capacity for business expansion.

Companies have been administering funds in the Isle of Man for almost 30 years and have built an excellent reputation for quality of service at the highest level. All types of funds are administered on the Island, from complex multi- strategy hedge funds and managed accounts through to fund of funds, quoted companies and private equity.

In the Victorian era, the Isle of Man became one of the most popular tourist destinations in Britain due to its green spaces and clean air, a far cry from the dirty industrial landscapes that its tourists were trying to escape for their annual holiday.

How ironic then that it is ‘green and clean’ that may prove to be a pointer for its future success in investment funds.

Expert Guide: Investment Funds 2013 - 19

The European Directive on Alternative Investme Managers (AIFMD) and non-EU fund Managers

J

uly 22, 2013, the transposition deadline for the AIFMD, is a very significant date in the regulatory calendar, not only for EU managers of non-UCITS funds, but also for non-EU fund managers who are raising capital in the EU, or have aspirations to do so.

While the AIFMD applies to EU based fund managers and will subject many of them to mandatory registration with their home regulators under this new law and a plethora of regulatory requirements affecting they way in which they operate, it also applies to non-EU managers which manage any collective investment undertaking that is not a European UCITS fund (“Alternative Investment Funds” or “AIF”) and may ultimately, but not until at least October, 2015, or in most cases, October, 2018, require such managers to register in the EU. The earlier of the two dates will be relevant for AIFM who manage one or more EU domiciled AIF, and the later date for AIFM who only manage non-EU AIF. From July 22, 2013, however, a non-EU fund manager that is considered to be the “Alternative Investment Fund Manager” or “AIFM” of an AIF will be subject to new restrictions on its ability to market such AIF to EU investors, new requirements regarding initial and periodic disclosure to its investors and new regulatory reporting requirements.

Managers will have to rethink their offering materials, the content of their periodic reporting to investors, the content of their funds’ annual financial statements and the managers’ ability to collate and report significant amounts of data in order to meet the technical requirements of the AIFMD. Mandatory periodic reporting to a European regulator will in particular be an entirely new undertaking for most non-EU managers.

Annex IV of the European Commission’s implementing Regulation published on December 18, 2012 introduces a pro-forma reporting template for highly detailed reporting that calls for hundreds of data entry points to be filed with the pertinent EU regulator.

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Non-EU Managers – Marketing AIF in the EU until October 2018 From July 22, 2013 until at least October, 2018, each EU Member State is permitted, but not obliged, to allow a non-EU AIFM to market its AIF to professional investors in that Member State under the Member State’s own national private placement rules (as amended by the AIFMD), without the AIFM having to be authorised and regulated as an AIFM in the EU, provided that:

(i) the AIFM complies with the AIFMD’s transparency requirements (see below) in respect of each AIF marketed by the AIFM in the EU and, though not dealt with in this article, with the AIFMD’s anti-asset stripping requirements in respect of EU registered non-listed companies; (ii) there is a cooperation arrangement for the purpose of systemic risk oversight between the regulator of each EU Member States where the AIF is marketed and the regulator of the home jurisdiction of the AIFM, and between those Member State regulators and the regulator of the home jurisdiction of the AIF; and (iii) the country where the AIFM or the AIF is established is not listed as a non-cooperative country and territory by the OECD’s Financial Action Task Force on anti-money laundering and terrorist financing.

ent Fund s By Donnacha O’Connor Around that time, the European Commission will decide whether non-EU AIF can continue to be marketed in the EU using national private placement rules or whether they can only be marketed

by EU authorised AIFM using the EU marketing passport provided for in the AIFMD. This allows non-EU fund groups five years to decide whether or not to register an AIFM in Europe, however, there are a number of important matters to consider now.

Firstly, the activity of “marketing” is defined under the AIFMD as any direct or indirect offering or placement at the initiative of the manager or on behalf of the manager of units or shares in an AIF it manages to or with investors domiciled in the EU. The AIFMD provides that AIF may only be marketed to professional investors in the EU in two ways, by way of a marketing “passport” or by way of private placement. The AIFMD defines marketing in a way that does not include reverse solicitation/reverse solicitation, which is outside of the AIFMD’s scope.

The AIFMD provides that MiFID investment firms and credit institutions may only market an AIF to EU investors to the extent the AIF can be marketed in accordance with the AIFMD. Secondly, the AIFMD allows, but does not require, Member States to allow private placement, so the marketing of AIF without the marketing passport will need to continue to be looked at on a Member State by Member State basis as is currently the case. There is a popular misconception that until 2018, non-EU AIFMs may continue to privately place their investment funds in the EU as they have always done, and that the “status quo” is being maintained until then. It is also important firstly to realise that the EU is currently a patchwork of different national rules relating to the offer and sale of non-UCITS funds. Some Member States have well defined private placement rules and some significantly restrict or prohibit the offering of foreign non-UCITS funds without the fund registering with the local regu-

latory authority. Germany is one country whose implementation of the AIFMD is set to eliminate the possibility of private placement of AIF in that jurisdiction well in advance of October 2018.

Thirdly, while the AIFMD recognises the private placement rules of each Member State, it only permits Member States to allow non-EU AIFM to market to ‘professional investors’ and may impose stricter requirements on AIFM marketing to retail investors. A “professional investor” is any investor which is considered to be a professional client or may be treated as a professional client on request within the meaning of Annex II of Directive 2004/39/EC (the European Union’s Markets in Financial Instruments Directive).

Fourthly, the AIFMD also explicitly permits Member States to impose stricter rules on nonEU AIFM and non-EU AIF than on EU AIFM and EU AIF marketing in their territories.

Finally, substantial transparency requirements and portfolio level requirements apply as set out below.

Non-EU Managers – Marketing AIF in the EU from July 22, 2013 - Transparency Requirements Annual Report AIFM will be required to cause each AIF which it markets in the EU to be audited annually. These audited financials must be provided to investors upon request and must be made available to the national regulator of each EU country in which the AIF is marketed, in each case no later than six months from the AIF’s financial year end. The accounting information included in those financials must be prepared in accordance with the standards of the third country where the AIF is established.

Expert Guide: Investment Funds 2013 - 21

The audited financials must contain a number of what might be regarded as standard features of annual reports, but must also disclose the total amount of remuneration for the financial year, split into fixed and variable remuneration, paid by the AIFM to its staff, and number of beneficiaries, and, where relevant, carried interest paid by the AIF. Disclosure to Investors AIFM will be required to make available to investors certain information before they invest in the AIF and upon any material change to that information. The disclosure requirements under this heading include many matters which might be regarded as standard but also many matters that it is reasonable to assume will need to be addressed for the first time this year. AIFM must for example make available to investors a description of the circumstances in which the AIF may use leverage, the types and sources of leverage permitted and the associated risks, any restrictions on the use of leverage and any collateral and asset reuse arrangements, and the maximum level of leverage which the AIFM is entitled to employ on behalf of the AIF. This information must also include a description of the AIF’s liquidity risk management, a description of preferential treatment (for example by way of a side letter) or the right to obtain preferential treatment that any investor has obtained. A description of the AIFM’s valuation procedures and pricing methodology must also be made available to investors prior to investing.

The AIFM must periodically disclose to investors the current risk profile of the AIF, the risk system operated by the AIFM, any new arrangements made for the management of liquidity risk in the AIF, the percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid nature (such as side pockets) and the total amount of leverage employed by the AIF and any changes to the maximum level of leverage which the AIF may employ.

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Obligations to Report to EU Regulators The AIFM must regularly report to each Member State in which its AIFs are marketed, on the principal markets and instruments in which it trades on behalf of the relevant AIF, the main instruments in which it is trading, its principal exposures and most important concentrations. The AIFM must provide to each such Member State a quarterly list of the EU AIFs which the AIFM manages and non-EU AIFs which it markets into the EU. Importantly, where necessary for the effective monitoring of systemic risk, each Member State in which the AIF is marketed may require more information on a periodic as well as an ad hoc basis. In addition, in exceptional circumstances, ESMA may request a Member State to impose additional reporting requirements.

Conclusion The transposition deadline for the AIFMD is fast approaching and non-EU managers need to focus their attention on the practical impact of its provisions.

Donnacha O’Connor is a partner in the Irish law firm, Dillon Eustace and advises principally in the area of investment fund regulation. Dillon Eustace is a leading Irish law firm and a well known investment funds specialist.

Donnacha O’Connor can be contacted by phone on +353 1 6731729 or alternatively via email at donnacha.oconnor@dilloneustace.ie

Expert Guide: Investment Funds 2013 - 23

Happy Birthday UCITS, Happy Birthday ALFI!

By Anouk Agnes

25

years ago, in March 1988, Luxembourg was the first country to transpose the European UCITS Directive into national law.

Since then, the country has held a leading position in Europe for the domiciliation, the administration and the distribution of cross-border investment funds. To support this development, ALFI - the Association of the Luxembourg Investment Fund Industry - was created in the same year.

Happy birthday UCITS, happy birthday ALFI! What an extraordinary idea the European Union had at that time, when it introduced the concept of harmonised European retail funds, the socalled ‘UCITS’1. The distinctive feature of that legislation permitted a UCITS fund authorised in one member state to benefit of a ‘passport’ and to be sold freely throughout all other member states.

This extraordinary concept took the vision of an integrated European market for financial services one significant step closer to reality.

Since then, UCITS have been immensely successful: today, accounting for over 70% of assets under management, they are by far the most common investment funds in Europe. Even beyond European borders, UCITS are largely recognised as market-efficient quality products with intrinsic investor protection criteria of the highest standards. Since the creation of UCITS, the European world of investment funds has therefore not only experienced impressive growth, but it has also reached an unprecedented level of internationalisation. UCITS have gone truly global, being offered in more than 70 countries around the world.

The international dimension of the UCITS framework has also been a key factor in the development of the Luxembourg investment fund industry. Indeed, Luxembourg’s market has never been the small local market, but rather the European or even the global markets. Likewise, the Luxembourg financial centre has always been

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very internationally-oriented. It is therefore not surprising that Luxembourg chose to promptly implement the UCITS Directive and established itself as a domicile of choice for cross-border investment funds. The know-how that the financial centre has subsequently built up in the administration, domiciliation and distribution of crossborder investment funds remains unequalled.

As ALFI, we are particularly proud of the ‘made in Luxembourg’ brand, which countless UCITS funds have carried around the world for all these years.

At the same time, while UCITS will continue to boost the competitiveness of the European investment fund industry, the recent AIFM2 Directive has the potential to also significantly foster the development of alternative investment funds.

Alternative investment funds like real estate, hedge and private equity funds, have traditionally have been less common in the European market.

The AIFM Directive however, which creates the first regulated alternative investment fund market in the world, represents a welcome opportunity for Europe to create a brand in the ‘alternatives sphere’ well. With the introduction of the passport for AIFM, the European market for alternatives is now opening up its full potential to EU and non EU actors. ALFI has been looking forward to this for a while now. The Luxembourg fund distribution platform, which has become an inevitable hub for fund managers around the world, will surely be of major benefit in this context. In order to exploit the full potential of the

Directive, the draft law transposing the Directive into Luxembourg law, furthermore foresees a number of provisions to facilitate and frame the development of this ascending industry as a whole.

Besides these two pillars of the European investment funds world - UCITS and AIF - a third pillar focusing on responsible investing, including the environment, microfinance and social businesses, is emerging. Within 25 years from now, the European investment fund world is thus likely to be the most complete and diversified… and hopefully just as successful in all three areas as it has come to be for UCITS. Ms Agnes currently works as an Advisor at the Ministry of Finance, with her main responsibilities related to the Government’s policy in favour of the development of the financial sector. As such, Ms Agnes acts as the Secretary of the High-level Committee for the Financial Centre and as Director of Strategy of Luxembourg for Finance, the Agency for the development of the financial centre.

She has furthermore been in charge of monitoring a number of projects in favour of microfinance, socially responsible investments and Islamic finance.

Before joining the Ministry of Finance, Ms Agnes worked in the field of development cooperation, i.e. for the Asian Development Bank and for LuxDevelopment.

Ms Agnes holds Master’s degrees in law and political science. She will join ALFI in April and is looking forward to contributing to the association’s major efforts in promoting Luxembourg as a leading international investment fund centre.

1 - Undertakings of Collective Investment in Transferable Securities 2 - Alternative Investment Fund Manager

Expert Guide: Investment Funds 2013 - 25

Real Estate Fund Industry in Luxembourg: an e

By Pascal Hernalsteen & Nicolas Palate

H

aving attracted fund initiators from all over the world, Luxembourg is Europe’s leading centre for the incorporation of investment funds. The Luxembourg Specialised Investment Fund (SIF) was launched in 2007 and is regulated

by Luxembourg’s financial authority, the CSSF. Over the years, due to its flexible regime, the Fonds de Commun de Placement (FCP) - SIF has proved to be an ideal vehicle for acquiring real estate in Europe, and especially for property in Germany, but also in areas as diverse as the rest of Europe, USA, Asia or North-Africa. As an unincorporated co-proprietorship of assets with no legal personality, the FCP-SIF is not subject to the requirements of Luxembourg Company Law or any specific statutory regime. In certain respects, the FCP is similar to the unit trust in the United Kingdom.

The real estate industry in Luxembourg has grown rapidly since 2006, when real estate assets under management in the Grand Duchy totaled around €8bn. The figures for 2011 show that Luxembourg’s real estate industry has reached some €23bn, largely thanks to its ability to attract investors and investment managers from all over the world. Many types of traditional real estate strategy are managed in Luxembourg, from core or value-added to opportunistic, which offers investors a large choice in terms of risk category (low, medium or high). Often categorised as real estate investments, some of the main European infrastructure on-shore investment vehicles have elected to domicile in Luxembourg. These finance important Brownfield or Greenfield projects such as Private Public Partnerships for transportation infrastructure (including road and rail networks and their operating companies), telecommunications infrastructure and renewable energy developments.

In the coming months, AIFMD (the Alternative Investment Fund Manager Directive), published on 19 December 2012, will have a profound structural impact on the alternative fund indus-

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try, both in Europe and beyond. As a key European jurisdiction for real estate, Luxembourg is monitoring closely the provisions of AIFMD, and has already made a number of modifications to the domestic SIF law, mainly in relation to compliance with provisions on risk management and conflicts of interest, which have been applicable to all SIFs since 30 June 2012.

Besides AIFMD, there are several other major pieces of European legislation currently being implemented that will serve to further modify the real estate landscape in Luxembourg. Following the dislocation in the credit markets due to the liquidity crisis we have been facing since 2007, two of the most significant are Basel III (applicable to banks and financial institutions) and Solvency II (for insurance and re-insurance companies). In light of these new regulations and as banks retreated from providing real estate debt, investment funds investing in subordinated debt financing secured against higher quality properties are increasingly sought after by institutional investors.

They may indeed channel a higher percentage of their financial resources to investment in real estate via debt rather than equity. This trend will obviously be confirmed by the €550bn in European commercial property debt that will mature in 2012 and 2013, of which some 35% is secured against real estate assets in the UK and Germany.

The ongoing financial crisis sees Europe facing a dramatic debt funding shortage, and Luxem-

evolving market... bourg investment vehicles have a key role to play in providing re-financing to these real estate asset owners with a view to bridging the gap between traditional senior debt and borrower equity.

CACEIS Investor Services is a leading securities services provider, 85% owned by CrÊdit Agricole Group and 15% by BPCE Group, with a top ranking position in the investment fund servicing business in Europe and worldwide, in which CACEIS has been active for over 25 years. The CACEIS Group has developed extensive expertise in the real estate industry since 2006, providing support for real estate managers who invest directly or indirectly, via local SPVs (Special Purpose Vehicles). The group’s dedicated real estate servicing team is composed of real estate custody, administration and transfer agency specialists, and is able to offer fully outsourced or modular solutions to real estate managers. CACEIS can offer advice on establishing a regulated vehicle in Luxembourg as well as providing services spanning from company secretary and domiciliation, to investor services, accounting, financial reporting, depository and custody.

Pascal Hernalsteen is Head of Private Equity, Real Estate, Infrastructure Servicing and can be contacted by phone on +352 47 67 23 90 or alternatively via email at pascal.hernalsteen@caceis.com

Nicolas Palate is Senior Relationship Manager for Private Equity, Real Estate, Infrastructure Servicing and can be contacted by phone on +352 47 67 23 56 or alternatively via email at nicolas.palate@caceis.com

Expert Guide: Investment Funds 2013 - 27

Gibraltar: The Key to Unlocking Europe

By James Lasry & Anthony Jimenez

A

New Era for European Funds

The global funds industry is currently in a state of transformation; world-wide regulatory and legislative changes are leading the global fund sector into a new era of increased regulation and enhanced investor protection. Gibraltar has emerged from the reshaped regulatory landscape as a serious option for fund businesses wishing to re-domicile into Europe, or as a domicile for firms re-positioning themselves within Europe.

Industry experts suggest that in order to successfully continue to operate in a global industry committed to fuller regulation and oversight, non-EU domiciled funds which operate and raise capital within the EU will seriously need to consider moving at least some operations into an EU domicile. On one hand, Gibraltar’s unique position as a European fund hub means it will be one of only a handful of jurisdictions able to offer effective and efficient fund solutions to fund managers that wish to comply with the Alternative Fund Managers Directive (AIMFD) and access to its marketing passport provisions. On the other, it is unlikely Gibraltar will discriminate against fund managers that want remain outside the scope of AIFMD, but wish to domicile themselves or their fund products in a well regulated, tax efficient EU jurisdiction. For many fund managers, Gibraltar could indeed be the key to unlocking Europe’s markets.

The Alternative Investment Fund Managers Directive

AIFMD is causing sweeping changes throughout Europe’s fund sector to the way fund managers are regulated and how they distribute the funds they manage. The concept behind AIFMD is to create a harmonised regulatory regime across Europe for fund managers (termed “Alternative Investment Fund Managers” and/or “AIFMs”) that manage a group of non-retail fund products (termed “Alternative Investment Funds” and/or “AIFs”). AIFMD will operate alongside and cre-

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ate a separate European regulatory regime from UCITS IV and MiFID. All EU member states must implement AIFMD into their national laws by 22 July 2013 and existing fund managers which fall within the scope of AIFMD have until 22 July 2014 to bring their operations in-line with the directive.

Article 2 of AIFMD applies the scope of the provisions of AIFMD to all EU domiciled AIFMs which manage one or more EU domiciled AIFs, non-EU domiciled AIFMs which manage one or more EU domiciled AIFs, and non-EU domiciled AIFMs which market one or more AIFs in the EU irrespective of whether such AIFs are EU domiciled AIFs or non-EU domiciled AIFs.

Article 2 applies irrespective of whether the AIF is considered “open-ended” or “close-ended” or whether the AIF is constituted under law of contract, under trust law, under statute or has any other legal form. Article 3 provides that AIFMs which manage AIFs with assets under management (AUM) which do not exceed a threshold EUR 100m (leveraged) or EUR 500m (unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment) will be exempt from the full provisions of AIFMD, and will only need to register with the competent authorities in their member state, identify the AIFs they manage and their subsequent investment strategies and regularly provide the competent authorities with information on the main instruments in which they

are trading and the principle exposures. However, article 4 allows for these exempted AIFMs to “opt-in” and be regulated by the AIFMD in its entirety.

The AIFMD Delegated Regulations (the “Level 2 Measures”) were adopted on 19 December 2012 by the European Commission by way of regulation after six months of political debate and negotiation. The Level 2 Measures are directly effective and will not require local implementation by member states. The Level 2 Measures endeavour to provide guidance and clarity on AIFMD and issues such as the delegation arrangements and the prevention of an AIFM becoming a “letter box entity”; the issue of depositary liability for the loss of financial instruments held in custody; the requirements of the co-operation agreements between third-country regulators and regulators in EU member states; clarification on the method of calculating of assets under management with regards AIFMs coming under the €100m EUR or €500m EUR threshold exemptions, as mentioned previously in reference to article 2; the calculation of leverage limits for AIFs which employ leverage on a substantial basis and the additional reporting requirements; risk management procedures and policies and how they should be documented; liquidity management; and organisational requirements.

The Gibraltar Solution – Experienced Investor Fund Regime The national laws of member states under which funds are established will continue to play an important part in the European fund industry in light of AIFMD. Gibraltar introduced the Financial Services (Experienced Investor Fund) Regulations 2012 (EIF Regs 2012) (an amended version of the Financial Services (Experienced Investor Fund) Regulations 2005) in order to keep up to date with current EU fund laws. It is accepted that an Experienced Investor Fund (EIF) is likely to be considered an AIF in all circumstances. Gibraltar’s EIF regime is a regulated

yet flexible fund product for investment by “experienced investors”. Some significant features of the EIF Regs 2012 include permitted investment from a participant who has a current aggregate of EUR €100,000 invested in one or more EIFs, or a participant who invests a minimum of EUR €50,000 in an EIF and is advised by a professional adviser. One of the principle attractions of Gibraltar as a fund domicile is the fact that no regulatory approval is needed before an EIF can begin to raise capital and commence with its investment activity. In addition, an EIF can appoint a foreign non-Gibraltar based fund administrator in certain circumstances. A foreign depositary/ banker would only need to be local to Gibraltar if the AIF is AIFMD compliant.

The Gibraltar Funds and Investment Association (GFIA), the representative body of Gibraltar’s fund industry, have made recommendations to the Gibraltar Government regarding the implementation of AIFMD into Gibraltar law, and most importantly how it should maintain the benefits of the EIF regime. For example, the industry feels it is important to retain the possibility of having pre-authorisation launch provisions, even for those AIFs which are AIFMD compliant, and also for self-managed AIFs (which would be considered as AIFMs). GFIA also wish to avoid any “gold-plating” of AIFMD with regards its implementation into local Gibraltar law; for example, AIFMD makes provisions for member states to permit AIFMs, at their discretion, to carry out portfolio management services so long as it is incidental to their AIF management business. However, some member states, including the United Kingdom, have resolved not to allow this when adopting AIFMD into their national law. However, GFIA have put forward their desire for Gibraltar’s transposition of AIFMD to be as permissive as possible, and as such would allow AIFMs, who occasionally do portfolio management for individual clients, not to require further licencing under the Markets in Financial Instruments Directive (MiFID) to carry out this service.

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Passporting vs. Private Placement One major benefit for a fund manager complying with AIFMD will be the pan-EU marketing passport bestowed on them under article 31-32.

The passport allows authorised AIFMs, which include Gibraltar AIFMs, to offer their AIFs freely throughout EU member states to professional investors. If AIFMD is able to establish itself as a “brand product”, the same way UCITS has been able to do in the retail market, smaller fund managers may have an additional incentive to optin and become part of a gold-standard product which will be more attractive in terms of capital raising. The AIFMD passport could effectively open up some EU markets, such as Spain and France, for the first time.

Fund managers outside the ambit of AIFMD and who do not wish to opt-in, will be able to continue to be domiciled in an EU member state if the national laws of that jurisdiction allow. An additional GFIA recommendation is that all Gibraltar non-AIFMD regimes should be preserved. NonAIFM compliant managers will be able continue to offer their funds throughout the EU under the national marketing laws of each member state (normally under private placement regimes).

Fund managers will find that being established in Gibraltar is a tactical advantage since the decision to opt-in to AIFMD can be delayed until a later date once the passporting provisions have been tested, and other member states reveal their cards as to how their national laws will deal with nonAIFMD fund offerings and private placements.

Although it was initially thought that the AIFMD passport and national private placement regimes would operate together during implementation, the future of national placement regimes remains unknown. For example, Germany has recently issued its draft act transposing AIFMD into German national law; the Kapitalanlagegesetzbuch (“Company Investment Act”) has banned private placements in Germany along with implementing other strong restrictions on fund promotions.

Therefore, fund managers wishing to raise capi-

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tal in Germany, will either need to register their fund products with the German regulator, BaFin, or comply with AIFMD in order to sell their product in Germany.

As mentioned earlier, AIFMD does provide that after 2015, non-EU fund managers managing non-EU funds will also be able to take advantage of the AIMFD passport; however this is on condition that the regulatory regime of the non-EU domicile is on level with the one provided under AIFMD and there are co-operation agreements between the respective jurisdictions. There is still much uncertainty surrounding this “third country passport” at the moment and fund managers are taking the more careful approach of domiciling their funds within EU jurisdictions. The Level 2 Measures clarify the scope, form and objectives of the co-operation agreements and provide that “mechanisms, instruments and procedures as are necessary” should be in place in the agreements for EU regulators to be able to perform their duties under AIFMD. James Lasry is a partner and the head of the funds team at Hassans International Law Firm in Gibraltar. He currently serves as Chairman of the Gibraltar Funds & Investments Association. James advised the Government of Gibraltar on its funds legislation and was involved in the drafting of the Financial Services (Experienced Investor Funds) Regulations 2005 and their subsequent amendments in 2012.

He is fluent in English, French, Spanish and Hebrew and he read literature, music and law at John Hopkins and Bar-Ilan Universities. James is a member of the Israel Bar Association, the Law Society of England & Wales and the Gibraltar Bar. James also serves as chairman of the Gibraltar Philharmonic Society.

James Lasry can be contacted by email at james.lasry@hassans.gi Anthony Jimenez is a senior associate of the Hassans funds department and focuses on the establishment of both private funds and professional funds in Gibraltar.

Anthony has advised on and structured a variety of funds including hedge funds, property funds, private equity funds, funds of funds, venture capital funds and alternative investment funds.

He is an active member of the Gibraltar Funds and Investment Association (GFIA) and helps promote Gibraltar as a fund domicile through his involvement in Gibraltar Fund’s and Investments Association, the representative body of the Gibraltar funds industry. Anthony is licenced by the Gibraltar Financial Services Commission (FSC) to provide directorships to Gibraltar Experienced Investor Funds. Anthony was also elected by the legal community to serve on the FSC’s fund panel for a two year period.

Anthony was educated in England and completed a four-year double honours degree in Law and Chemistry (BSc) at the University of Exeter before completing the Bar Vocational Course at the Inns of Court School of Law. Anthony is a member of the Honourable Society of Middle Temple and was called to the Bar of England and Wales in July 2007.

He was called to the Bar in Gibraltar in 2009.

Anthony Jimenez can be contacted by email at anthony.jimenez@hassans.gi

Expert Guide: Investment Funds 2013 - 31

Portuguese Investment Funds: Current Market & Incoming Opportunities By Pedro SimĂľes Coelho & Pedro Biza

T

hese days, articles about Portugal in the international economic press are often packed with references to austerity measures, economic downturn and the international assistance programme.

The authors of this article agree that any realistic assessment of the Portuguese economy must acknowledge that the decaying economic conditions have taken their toll. However, they will adopt a more optimistic tone in the current article, attempting to expose some opportunities which, in their view, may exist for investment funds operating in Portugal.

In accordance with data from the Portuguese Securities Commission (“CMVM�), since June 2011 (around the time the IMF/ECB/EC assistance programme became public), the Portuguese market has witnessed one significant trend: an apparent flight from more traditional funds (which in Portugal usually means regular funds investing in plain vanilla assets, notably securities or indexes) to special investment funds, namely hedge funds and funds investing in riskier and less liquid assets. Investment in these two types of funds put together amounts roughly to the amount invested in real estate investment funds, which remained mostly stable throughout the last 18 months. In addition to being a tool for applying capital in the securities market, many real estate investment funds were used by small groups of investors (sometimes just one) as SPVs for developing and operating real estate projects. This has greatly contributed both to the high amount reflected in the graph above and to the relative stability of such amount.

As for the number of investment funds in the market, the last year and a half has witnessed a decrease in each of the above categories. In keeping with what was said in the previous paragraph about real estate investment funds frequently being used as SPVs, the reduction in the number of such funds was only slightly over 3 percent, against 10 percent. for special investment funds and 11 percent. for more traditional funds.

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From a legal and regulatory perspective, the last 18 months have not been a period of change for Portuguese investment funds. We believe this may be due to the entities which are usually involved in bringing about new laws and regulations affecting this industry having shifted to other priorities. The Portuguese government, particularly the Ministry of Finance, has been very active in enforcing the conditions of the international assistance programme. As for the CMVM, it is now, more than ever, actively supervising the activities of financial intermediaries, including fund managers, with plenty of onsite inspections and information requests.

In any case, Portugal is yet to implement UCITS IV Directive (let alone the AIFM Directive), and some amendments to the real estate funds legal framework (which is separate from the law regarding collective investment schemes in general), first proposed in 2010, are on hold. However, in order to protect foreign funds from the adverse consequences of the non-implementation of UCITS IV, the CMVM has put in place the procedure resulting from Regulation (EU) no.

584/2010, of 1st July, which allows foreign funds to be marketed in Portugal pursuant to a simple notification process made under UCITS IV rules.

So far, this seems to be working well for everyone, as foreign management companies are spared a number of requirements which were applicable under UCITS III (namely, the need to provide Portuguese translations of fund documents).

Scenario

arro In 2013, it may be worth looking into the implementation of both (the rest of) UCITS IV and the AIFM Directive, which together with other long awaited changes is likely to lead to a complete overhaul of Portuguese collective investment schemes law. We also expect the amendment process in relation to the real estate funds framework to be resumed, which could lead to relevant changes, notably concerning the rules applicable to the way in which real estate is valued and accounted for by funds. Finally, an important development from abroad may prove relevant: if US regulators enact the regulations implementing the Volcker Rule, Portuguese fund managers and marketing entities should also look at how the limitations on investment in funds by financial entities may object to the placement in the US market of certain structures, notably in the venture capital sector.

As for market trends to watch in 2013, the economic downturn and a recent liberalisation of the real estate lease framework may come together to expand the residential lease market in Portugal, especially in and around major cities. Portugal has been one of the countries in Europe with the highest home ownership rates. If, as it now seems inevitable, this is to change, an opportunity may come for residential special real estate investment funds (known as FIIAH, their Portuguese acronym). These funds were created in 2009 to assist families unable to pay their mortgage installments. The idea was for these families to sell the houses to the relevant FIIAH, use the proceeds from the sale to pay their mortgage loan and then rent the house back from the fund, with a repurchase option exercisable later on. Although some FIIAH have been created since 2009, their use has fallen short of original expectations.

However, the aggregate portfolio of FIIAHs in Portugal grew 41.3 percent in 2012 (equivalent to a â‚Ź133.9M increase) more than any other category of real estate investment funds. With the economy pressuring homeowners, demand for the type of solution provided by FIIAHs is expected to grow even further. Naturally, the fact

that they enjoy a very favourable tax regime when compared to other alternatives to hold real estate (including other real estate investment funds) is also relevant.

Another possible source for value in 2013 in Portugal is the securities market. Share prices are deemed to be relatively low (although slowly rallying), but certain shares have risen significantly since mid-2011 and early 2012. The general opinion is that there is still room for recovery in 2013, which may represent an opportunity for funds investing in equity. On the debt side, some Portuguese companies issued high-yield (or almost high-yield) bonds in 2012. With the downward trend of secondary market interest rates for Portuguese public debt (which is generally expected to continue in the near future), there may be an opening for investment funds buying fixed-income bonds on the secondary market.

Venture capital may also prove an interesting field to explore. The Portuguese government has vowed to change its budget balancing focus from tax increases to spending cuts. Recently, there was even talk of selective corporate tax cuts which could lead to Portugal (or, at least, some companies established in Portugal) having one of the lowest corporate income tax rates in the European Union. If spending cuts are applied and a buffer is gained which allows for such tax cuts, it will be interesting to see the extent to which these will impact small-to-medium projects.

In conclusion, 2013 will definitely be a challenging year. However, a timid optimistic trend may be sensed in the air, as demonstrated by Portugal’s return to the public debt market, which resulted in a ₏2.5 billion 5-year issue at a 4.89 percent. interest rate, of which 93 percent. was placed abroad, with demand far exceeding supply.

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Pedro Simþes Coelho joined Vieira de Almeida & Associados in 1998 and is currently head of the firm’s investment funds practice and a partner in the Banking & Finance Group. He is also responsible for the Agency & Trust practice and member of the firm’s aviation finance team. He has been actively involved in several transactions, in Portugal and abroad, mainly focused on the advising, structuring and setting up of collective investment schemes such as mutual funds and real estate investment funds, infrastructure vehicles, venture capital funds and private equity structures. He has also been actively working in advising fund managers, venture capitalists, brokers, banks and other investment firms on a wide range of regulatory and related matters. He is admitted to the Portuguese Bar Association and admitted as specialist in financial law.

Pedro Simoes Coelho can be contacted by phone on +351 21 311 3447 or alternatively via email at psc@vda.pt Pedro Bizarro joined Vieira de Almeida & Associados in 2008. He is an associate at the Banking & Finance area of practice where he has been actively involved in several transactions, namely in several transactions involving the issue and placement of asset-backed and other debt securities.

He also accompanies the setting-up and operation of collective investment schemes (either in real estate, transferable securities or other assets) and venture capital funds, having been seconded to a real estate fund management company, and advises clients on behavioural issues in relation to the rendering of banking and financial intermediation services. He is admitted to the Portuguese Bar Association.

Pedro Bizarro can be contacted by phone on +351 21 311 3628 or alternatively via email at prb@vda.pt

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Private Equity’s Shift to Online Platforms: A Pro

By Urs Haeusler

A

lthough still in its early days, it is clear that private equity professionals and their companies are increasing their use of Internet tools and online services. Finance is not a sector known to be a leader in the uptake of new technologies because of its need for security, reliability and access, and yet even now changes are underway. For example, it would have been hard to believe seven years ago that several peer-to-peer moneylending sites in the UK, including Zopa and Funding Circle, would enable more than a billion dollars in loans todate, according to www.p2pmoney.co.uk, or that more than 100,000 business world-wide would entrust their revenue-critical invoicing and payments processes to a startup that emerged from Denmark just a little over two years ago (Tradeshift Network).

corporate professionals to securely share large volumes of sensitive documents outside the corporate firewall. Such solutions are experiencing double digit growth in revenues. After generating more than USD 600 million last year, as reported

by IBIS, VDR revenues are expected to continue to expand at 15% over the next five years. (See Figure 1)

Trust in Internet cloud services, social networking, and digital processes is growing. A recent survey by Grant Thornton reveals that cloudbased software as a service (SaaS) is highly desirable. SaaS is catching on in areas such as human resources and customer relationship management, across all application segments, company sizes, geographies and industries. Uptake in finance is, however, going to be slower compared to other sectors, according to Forrester in another study.

It may be slower but the trends are not bypassing the private equity industry. The easiest evidence to spot is in the use of online business information for due diligence support and in the growth of the use of Virtual Data Rooms (VDRs) for transaction support. Growth is evident in the number of employees and geographical expansion amongst the leading business information providers such as Dealogic, Zephyr, mergermarket, and Dun&Bradstreet (See Figure 2). Also notable is that FT Group has a higher circulation of digital subscribers than print in the US market.

VDR providers are used by finance, legal and

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Private Equity’s Adoption Path Venture capitalists are also adopting web services.

For example, more than two dozen well-known venture funds are integrating VentureLoop, a recruiting platform, into their corporate websites to run online executive searches for portfolio companies. It is remarkable because recruitment of top management is conventionally thought of as

ogress Report a core value-add provided by the PE industry beyond cash, and they trust the cloud-based whitelabel platform from VentureLoop to do the job.

Another group of early adopters is seed, or early stage investors, especially business angel networks. It is not that surprising, since they do not typically have the same kind of in-house resources of large funds. For example, a good number of US-based business angels are apparently using AngelList, a website where startups can make profiles and interact with accredited investors.

The site says its alumni (companies that created a profile at some point in their existence) have gone on to raise USD 1.1 billion, both on and off the site.

One of the interesting aspects of the AngelList service is that most of its users live in Silicon Valley and New York, as do the entrepreneurs, so it is an enhancement to the existing offline ecosystem, not a replacement.

manage their incoming deal flow more efficiently and share the screened deal flow in a convenient and easy way with clients and collaborators, such as other business angels. DealMarket’s OFFICE is a cloud-based white-label service that reinforces our clients’ own brands and reputations enabling our customers to receive investment opportunities via their website with a “Deal Submit Button”.

Further evidence that the private equity industry is looking online to increase efficiency with digital processes is seen in the user data on DealMarket. There are profiles of over 950 service providers, advisors and a range of traditional PE firms from more than 150 countries and regions currently listed on DealMarket.

More than 600 investment opportunities have been profiled to-date, with a current listing of 350 opportunities from a wide range of industries and sectors (See Figure 4).

There are 20 information products and productivity tools in our integrated store to support private equity transactions. Our weekly industry newsletter with curated news and research result summaries has 20,000 readers.

I see an uptake in a wider range of online services gaining momentum in the next one to two years. It is not only angel and venture capital investors, but also private equity professionals who are starting to go online. The best evidence for us is the usage data of our DealMarket platform (see Figure 3), as well as platforms that compete with us in various geographies or segments of private equity. For example, we have an increasing number of companies, especially investor and business angel networks, using our dealflow management tool, ”OFFICE”, to capture, store and

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We have potential customers in private equity that are on the way to using online platforms but are not yet ready to make the internal changes.

They have approached us to invest in our equity because they strongly believe the industry is going to migrate in our direction, that it is just a matter of time.

Smaller funds or smaller teams are already willing to change their behavior due to resource constraints, and a desire to reduce costs and gain access to our on demand services available without a subscription fee. It makes sense for such teams to use DealMarket’s services because they can boost the effort of the existing team and level the playing field with larger players who might have a lot more resources in house.

Large private equity fund managers and limited partners are probably going to be the last group to shift. Mainly because they have legacy IT investments and are able to afford fixed costs of subscription fees and customised locally run software and applications. Nevertheless, we see evidence that even this group is motivated to utilise a platform such as ours. Funds greater than USD 250 million are listing 125 investment opportunities compared to 50 open deals from funds in the USD 10 million to USD 50 million dollar range.

Conclusion At its core, private equity is a people business, relationship-based, and a good number of activities must be done offline, such as pitch meetings, legal advisory, investment analysis, and decisionmaking.

In that sense, a global private equity platform coexists with and complements offline activity.

It is comparable to how the top real estate platforms like Realtor.com, Trulia, Zillow, and Yahoo Home affect how homes are bought and sold, or in a similar way to how LinkedIn affects career change and executive searches.

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Online platforms help to enable private equity buyers, sellers and service providers to maximise opportunities. If it is a global one, like DealMarket, the platform can improve access to the world-wide deal marketplace and facilitate due diligence in private equity and corporate finance.

This is especially important in an industry where time is scarce, pressure to deliver high, information plentiful but not always easily accessible, and pricing of services and information expensive and complicated by subscription licenses.

With DealMarket.com, we provide access, choice and control across private equity professionals’

daily business practices. Private equity will always need a personal touch - there will probably never be a “Buy-The-Company” button, like the “Buy-it-now” button on eBay. But many, if not all, pre-investment and post-investment tasks can already be expedited using online tools and platforms.

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Urs Haeusler - CEO of DealMarket Since 1 February 2012, Urs Haeusler has been appointed as new CEO of the Swiss-based global Private Equity Platform DealMarket. Urs studied Business at the University of St. Gallen and has many years of experience in building and leading online companies.

He was previously employed at amiando GmbH, Europe’s leading online event registration and ticketing platform based in Munich.

As Chief Sales & Customer Officer at amiando he was primarily responsible for building up and internationalising the company from a small German start-up to an international company with 75 employees and offices in London, Paris and Hong Kong. He was also deeply involved in the successful trade sale of the company to XING.

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Prior to amiando, he was the CEO of Ticket Online AG Schweiz in St. Gallen and Country Manager Switzerland for Jamba!. one of the world’s leading mobile entertainment brands. He also is the owner of Haeusler Management & Ventures, an internet business consulting firm, since 2008.

Urs Haeusler can be contacted by phone on +41 43 888 75 35 or alternatively via email at urs@dealmarket.com

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Distribution in Switzerland: Challenges & Solut

By Daniel Haefele

D

istribution to Swiss Investors becomes more difficult and more expensive in the light of the new regulations.

Outsourcing legal representation to a high-quality local service provider and access to an extensive distribution network are key.

Still unclear is whether or not distribution agreements between the fund manager and the qualified investor have to be signed by the legal representative and whether fund documents may also be made available in English to qualified investors. However, adapting most of AIFMD, the new Swiss regulation will add cost and complexity.

Currently Swiss (financial) intermediaries are being affected by a wave of new regulations which create new challenges for the internal organisation and are linked to higher costs. As a result of the financial market crisis Swiss Government reacted as did all their colleagues in Europe, asking for more stringent supervision, more substance and more transparency on financial intermediaries. In the same time the Swiss Federal Court judged in a landmark case that banks have to pay back part of the trailer fees received from product providers in the last 10 years to investors. It is hard to gauge in advance what the Financial Services Law planned for 2015 will cover in the end; however it is clear that the leeway asset managers have enjoyed in previous years will become very limited.

FINMA authorisation will now be needed for all Swiss domiciled asset managers managing foreign collective investment schemes. This new ruling, entirely copied from AIFMD, will have a major impact on the hundreds of small entities managing EU-based or offshore CIS. By outsourcing the fund management to fully regulated asset managers at the domicile of the fund and acting as investment adviser only, they can delay the problem. But two years down the road, the new Swiss Financial Service Law will end all non-regulated financial services. Therefore, the wiser decision would be to go for FINMA asset manager authorisation. This will secure the asset manager‘s existence in the long run.

With the entry into force of the new CISA and its ordinances on 1 March 2013, the good old private placement rule more or less disappears and becomes regulated as “Distribution to qualified investors”. Collective Investment Schemes (CIS), whether UCITS or AIF, distributed to qualified investors domiciled in Switzerland, will have to appoint a legal representative and a paying agent.

At the time of writing, it’s still not absolutely clear what tasks the Legal Representative has to execute and what his responsibilities will be.

We know today that under the new regime, funds only distributed to qualified investors will have to be notified to FINMA and that all fund documents have to be amended with the information for Swiss investors. Banks won’t qualify any longer automatically as representatives and will need special authorisation from FINMA.

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All of these points create a more competitive environment and will lead to shrinking margins, particularly for the “professional investors” who are the targets of foreign asset managers. Adapting to the above challenges with fewer staff and adapting at the same time to AIFMD, MIFID II, RDR, FATCA and at least two bilateral tax agreements, will keep Swiss financial intermediaries busy.

tions As retrocessions are being phased out, the classical B2B-distribution channels will introduce new fix access and/or services fees, fund research will try to select from a smaller universe of providers introducing “guided architecture” or “preferred provider” offerings, giving distributors a chance at least to comply with new suitability and appropriateness requirements.

For 2013 it’s therefore important for asset managers looking to distribute into Switzerland to understand that in fact nobody has time or is really keen to speak to them. Everything which helps the Swiss financial intermediary to use his time efficient will benefit the fund provider. Having all legal documents ready, factsheets and other information translated in the language of the investor and the funds available at banks and platforms becomes an important competitive advantage.

High quality service and communication to distributors and qualified investors will become the key to successfully keeping up existing or building new distribution. Since there is such a high amount of foreign assets managed in Switzerland many providers are also obliged to observe various foreign regulations (RDR, FATCA, MIFID II). This makes the setup and maintenance of a distribution network very expensive.

Daniel Haefele is CEO of ACOLIN Fund Services.

ACOLIN’s service range includes fund registration, legal representation in Switzerland, and access to a network of European distributors. Daniel was founder of Fondvest AG, a fund-based asset management company which he sold to UBS in 2001.

Daniel can be contacted by email at Daniel.haefele@acolin.ch

From a business perspective it is therefore advisable to start giving serious thought to which activities can be executed by in-house, additional staff and which functions should be outsourced to specialised companies.

This will be true for the legal representation and the distribution of collective investments in Switzerland. Doing everything in-house does probably not pay off any longer. The core competence of asset managers is the management of the entrusted client assets. Most of the operative and regulatory responsibilities can confidently be outsourced to a specialised provider.

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Working Towards AIFMD Readiness in the Neth

By Floor Veltman, Joris van Horzen & Joost Achterberg

B

ackground

The events of the financial crisis have demonstrated the impact of alternative investment fund managers (“AIFM(s)”) on the European financial market and the shortfall of adequate regulations. As a result in 2009 finance ministers from the G20 countries agreed to oversee and regulate hedge funds and their managers in order to assess potential financial systemic risks and to make sure that risks are adequately managed. This resulted in the Alternative Investment Fund Managers Directive (“AIFMD”) which has entered into force as of 21 July 2011. The AIFMD aims to establish a regulatory and supervisory framework for entities involved in the management of alternative investment funds (“AIF(s)”) which are active in the EU. The AIFMD needs to be implemented into Dutch law ultimately on 22 July 2013. Currently a draft bill hereto is pending approval by the Dutch Senate (the “Bill”).

The AIFMD is a maximum harmonising directive leaving minimum room for national rules insofar as it relates to the supervision of AIFMs that manage AIF which offer units or shares solely to professional investors. With respect to the supervision of AIFMs that manage AIF which also offer units or shares to retail investors (i.e. non professional investors), the AIFMD is a minimum harmonising directive. As a result, EU member states are free to adopt a stricter regime. The Dutch legislator has subjected AIFMs that manage AIF targeted at retail investors to a regime similar to the Undertakings for Collective Investment in Transferable Securities (“UCITS”) scheme.

It is expected that, as a result of the implementation of the AIFMD, a large number of funds (currently estimated at 100 funds) who are currently not subject to supervision will require a license from the Dutch supervisory authority (“AFM”).

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The Bill also applies to a small number of firms authorised as depositaries.

Hereunder we will highlight the most significant implications the implementation of the AIFMD in the Netherlands is likely to have. However, the exact scope of the AIFMD is yet to be determined and will depend on further technical standards which still need to be developed.

Scope The Bill applies to AIFMs and firms authorised as depositaries.

AIFMs are legal entities which are (i) established in a member state of the EU whose regular business is managing one or more AIFs and, or (ii) established outside of the EU if they manage AIFs established within a member state of the EU, or market AIFs to investors in the EU. Each AIF managed within the scope of the AIFMD must have a single AIFM. This can either be an external manager appointed by the AIF or the AIF may elect to be self-managed (internal AIF).

An AIF is a collective investment undertaking that (i) raises capital from a number of investors, (ii) with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and (iii) are not UCITS. AIF’s therefore include a wide range of funds such

herlands as private equity funds, venture capital funds, hedge funds but also real estate funds regardless of whether or not the fund is open-ended or closed-ended, listed or unlisted.

The Bill however does not apply to, amongst others: • AIFM that manage AIF in which only pension funds invest; • family offices; and • holding companies.

Under the AFMD there are also exceptions for AIFMs whose collective assets under management fall below the following de minimis thresholds: (i) EUR 100 million; or (ii) EUR 500 million, if the AIFs are unleveraged and no redemption rights have been granted to the investors that can be exercises within a five year period following the date of the initial investment.

The Dutch legislator has however imposed an additional threshold. AIFs which fall below either threshold, and which offer participations exclusively (a) to retail investors, (b) to fewer than 150 persons or (c) in denominations of at least EUR 100.000 are not required to obtain a license either.

AIFMs that are exempt on the basis of the above de minimis exemption must however (i) still be registered with the AFM, (ii) notify the AFM of the AIFs they manage and provide information on the investment strategies of such AIF, (iii) periodically provide the AFM with information on the main instruments in which they are trading, on the principal exposures and concentrations of the AIF they manage and (iv) notify the AFM if they cross the de minimis thresholds.

The AIFMD License The most relevant change under the Bill is the introduction of a license requirement for AIFMs

(that cannot make use of an exemption) which manage AIFs that offer units or shares solely to professional investors. Currently, those AIFMs do not require a license. The key benefit of this license is the opportunity for an AIFM to have a passport to market AIFs to professional investors located in any EU Member State. However, AIFMs that are relying on the de minimis exemption cannot benefit from this passporting right.

Requirements The Bill introduces, amongst others, the following requirements: • General principles and conduct of business: The Bill contains a broad set of general principles that the AIFM must comply with. These include (amongst others) the obligation to act honestly and with due skill, in the best interests of the AIF and the investors and to avoid conflict of interests. In addition, AIFMs must have remuneration policies in place in order to avoid inappropriate risk taking, proper liquidity and risk management and segregation of assets and impose limits on investment in securitisations.

• Organisational requirements: AIFMs at all times need to use appropriate human resources necessary for the proper management of the AIF and make sure there are adequate internal control and reporting mechanisms in place. Furthermore, the Bill contains rules regarding limitations on the manager’s activities, obligations relating to the treatment of participants and various obligations relating to supervision by the authorities.

• Capital Requirements: An internally-managed AIF must have an initial capital of at least € 300,000 upon authorisation and an initial capital of at least € 125,000 for an external manager.

In addition to the initial capital, the AIFMs must retain ‘own funds’ equal to 0.02% of the assets under management in excess of € 250 million but with a cap of € 10 million.

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• Valuation: An AIFM needs to have appropriate and consistent procedures so that a proper and independent valuation of the assets can be performed. The Bill also dictates who can value the assets, how and when they should be valued and the AIFMs’ liability towards the investors for valuations.

• Depositaries: An AIFM must appoint a single independent depositary in respect of each AIF it manages. The depositary must monitor the cash flows of the AIF, hold financial instruments of the AIF in custody, ensure that the value of the shares or units of the AIF are calculated in accordance with the applicable law and ensure that the assets are correctly administered.

• Transparency: The Bill includes information obligations towards supervisory authorities, employees and investors. This includes the obligation to provide an annual report in relation to each AIF to be made available to investors and the Dutch central bank, the obligation to disclose certain information prior to making an investment decision and whenever a material change occurs and information to be disclosed to investor periodically.

• Leverage: The Bill requires disclosure to investors and a reporting obligation to the regulator in case of use of leverage. An AIFM is obliged to set up leverage limits, to be disclosed to investors.

Transitional Measures The Bill allows firms that were authorised to manage AIFs before 22 July 2013 a period of 12 months to comply with the Bill and to apply for a license (therefore ultimately 21 July 2014). However, in the period between the implementation of the AIFMD and the actual authorisation, measures must be taken by the AIFM to prepare for AIFMD-readiness.

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A firm that wishes to begin managing an AIF for the first time after 22 July 2013 will not benefit from any transitional provision.

The same applies if a firm wishes to begin marketing AIFs in an EU Member State.

There are no general transitional provisions relating to depositaries.

A manager of a closed-end AIF which makes no additional investments after 22 July 2012 may continue to manage the AIF without a license.

The same applies to a manager of a closed-end AIF which has not admitted any new investors after 22 July 2011 and was formed for a period ending no later than 22 July 2016.

For more information regarding the Bill, please contact Kennedy Van der Laan, who are more than happy to assist you in helping you to become AIFMD compliant.

Floor Veltman is a senior associate in the Corporate Group of Kennedy Van der Laan and specialises in guiding (cross-border) acquisitions and investments for national and international clients, including strategic buyers, private equity funds and venture capital investors.

Floor also has broad experience in drafting, assessing and negotiating various kinds of agreements such as shareholders’ agreements, cooperation agreements and service agreements.

Floor can be contacted by phone on +31 20 5506 842 or alternatively via email at floor.veltman@kvdl.nl

Joris van Horzen is a senior associate in the Banking & Finance Group of Kennedy Van der Laan and specialises in cross border finance transactions and financial regulatory laws.

Joris works a wide range of financial institutions, including banks, payment institutions and investment funds. In the period 2007-2009, Joris was seconded to the legal departments of ABN Amro and The Royal Bank of Scotland.

Joris can be contacted by phone on +31 20 5506 655 or alternatively via email at joris.van.horzen@kvdl.nl Joost Achterberg is a senior associate in the Banking & Finance Group of Kennedy Van der Laan and specialises in banking litigation and represents banks in legal proceedings concerning credits, securities and other bank-related subjects.

Besides, Joost regularly advises clients on implications of Dutch and European law with an emphasis on the funds practice.

Joost can be contacted by phone on +31 20 5506 826 or alternatively via email at joost.achterberg@kvdl.nl

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AIFMD – A Good Deal for Malta

By Laragh Cassar

M

alta has been, for the past number of years, an attractive fund domicile, particularly due to the Professional Investor Fund (PIF) regime, which regulates most forms of collective investment undertakings, including hedge funds and private equity funds.

Indeed, Malta has emerged as a jurisdiction for funds, complementary to traditional European fund domiciles, such as Luxembourg and Ireland.

Malta, coupled with it being a cost-efficient jurisdiction, offers a sound but flexible regulatory environment. Such PIFs are targeted at financially professionals, high net-worth individuals and are primarily regulated by the rules issued by the Malta Financial Services Authority (MFSA).

The Maltese legal system is a reflection of the cross-currents which have influenced Malta’s history and also European history as a whole. The Roman Civil Law and English Common Law systems have, together with the more recent European Union legislative influence, interacted to shape the Maltese legal system. One of the most hotly debated European directives affecting the non-retail fund industry has been the Alternative Investment Fund Managers Directive (AIFMD), an area which had been left in a pan-European regulatory void. The proposed AIFMD was aimed at providing harmonised regulatory standards for all managers of such alternative investment funds (AIFs) within scope, although the rules now introduced by virtue of the Directive will impact the AIFs themselves. The Directive must be transposed into national legislation by the 22 July 2013. As a result of the directive, all investment funds in the EU can be categorised as falling in two sectors: either UCITS already regulated by the UCITS directive or AIFs regulated by the AIFMD. On the 19 December 2012 the EU Commission issued the much awaited Level II Implementing measures of the AIFMD by virtue of a delegated regulation, which, being a regulation, shall have direct effect in all EU Member States.

The AIFMD shall introduce an EU marketing

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passport for AIF managers to market their funds in all 27 Member States of the EU through a single authorisation process, similar to that under the UCITS Directive. However, the EU marketing passport will, at first, only be available to EU managers in the course of marketing EU funds.

During the first two years post national transposition of the AIFMD, that is between 2013-2015, EU marketing by non-EU managers and of nonEU funds would be regulated by national private placement regimes.

Such managers are thus faced with the choice of either establishing an EU base and complying with the AIFMD in order to access the European market, or not to market their funds in the EU. As from 2015, the EU marketing passport shall then be available to non-EU managers and their funds, although such opportunity will only exist if they comply with the AIFMD. This has sparked interest from a number of offshore managers to establish a base in European jurisdictions, such as Malta, in order for them to benefit from the EU passport from an earlier date. Furthermore, various rules introduced by the Directive and the Implementing Regulation appear to elaborate the rules already imposed on managers under the Markets in Financial Instruments Directive (Directive 2004/39/EC) (MiFID) – this ought to ensure a smoother process of implementation and compliance.

One may ask; does Malta stand to gain in a legislatively harmonised fund industry? Will Malta retain its competitive edge? The answers to these questions are, in my view, quite simply, yes. The benefits which the Maltese jurisdiction affords

are the result of having an innovative and responsive regulator and a skilled workforce. The legislative framework offering a wide range of vehicular-type solutions will continue to give Malta a competitive edge - Malta offers a wide range of fund structures, ranging from open-ended and closed-ended corporate entities, trusts, limited partnerships, contractual structures, incorporated cell companies to recognised ICCs. These structures thus allow fund platforms, private equity firms and any other structure to be set up at ease, many of them also reaping the full benefit of Malta’ extensive network of approximately 60 double tax treaties. Advantages also accrue in favour of investment services license holders, including those arising out of Malta’s full imputation system of tax which provides a tax efficient system. Malta’s place within the context of the AIFMD will also stand out in terms of the de minimis fund managers. The Directive exempts managers of smaller type sized from the requirements of the AIFMD, and grants them the right to opt-in should they wish. Such exemption is applicable to managers having assets under management, including assets acquired through leverage, which do not exceed one of two thresholds: (i) €100 million; (ii) €500 million where the portfolio consists of AIFs that are not leveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF. Malta may thus, continue to benefit from applying an ad hoc regulatory regime for such managers falling within this de minimis exemption. This opening has yet to be formalised through regulation however the industry is confident that the MFSA will, as it always has, ensure that Malta’s opportunities in this area continue to be maximised to the full. Furthermore, the local industry had, in the past, identified a required area of growth for Malta and that is the increase of internationally known depositaries in Malta – this matter has been addressed through the passport created by the AIFMD for EU based depositaries (up until 2017) and will ensure that Malta’s presence is the international sphere is maintained.

This new legislation was fraught with uncertainties, mainly due to the fact that so far regulation of investment funds has been scarce, if at all – though this uncertainty has been mitigated to a great extent by the publication of the level II measures. Certainly, anything new in the legislative and regulatory sphere is always met with fear of the unknown, although this may not lead to terrible consequences. Indeed, the sound legal framework, coupled with the easy passporting of management and marketing of the AIF’s managers will certainly create a strong EU market, where investors, no matter how professional they deem themselves to be, are well protected.

As for Malta, there are enough indications to show that it shall continue to be a leading domicile of choice for the establishment of funds and for fund managers alike. The local fund industry, starting from the service providers themselves to the regulatory MFSA, shall certainly strive to maintain Malta’s stable and endearing reputation as a jurisdiction of choice.

Laragh Cassar is a partner at Camilleri Preziosi, one of Malta’s leading law firms. She specialises in investment funds, asset management, banking and corporate finance. Laragh has advised both local and foreign entities in the provision of investment services in Malta, ranging from the fund management, investment advice and fund administration to the incorporation and/or domiciliation of funds in Malta, together with the licensing of collective investment schemes in Malta both as retail and non-retail funds as well as open-ended and closedended schemes. In addition, she acts as retained counsel to a number of banking, financial institutions and funds in Malta.

Laragh Cassar can be contacted by phone on +356 2567 8113 or alternatively via email at laragh.cassar@camilleripreziosi.com

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Private Equity

Q1

The PE Index registered private equity activity at 87.1 percent, below its tenyear moving average, but still above index levels in late 2008 and early 2009.

There were 669 deals announced in Q1 2012 comparable to the average of 663 deals per quarter seen during 2010-11.

Stand-out Deal

Affiliates of Apollo Global Management, LLC (“Apollo”) announced in February 2012 that they, along with Riverstone Holdings LLC, Access Industries, Inc. and other investors, have signed an agreement to acquire all of the oil and gas exploration and production assets of El Paso Corporation for approximately $7.15 billion.

Apollo announced total assets under management (“AUM”) of $113 billion as of 31 December 2012. Their annual report also declared a total economic net income (“EMI”) of $1,634 million for the year, compared to $301 million for the year ending 31 December 2011.

Q4

The PE Index registered at 123.9, reaching its highest level since Q3-2008. This trend was driven by increases in private equity investment, fundraising and exit volumes.

Stand-out Deal

When Terra Firma agreed to the £3.2 billion acquisition of Annington Homes in November 2012, it became the largest European leveraged buyout since the start of the recession and the seventh largest LBO globally since 2008.

Guy Hands, Chairman and Chief Investment Officer of Terra Firma, said: “Annington is an outstanding success story. It is a pure play UK residential property company with a blue chip tenant on a lease of over 180 years and with the ability to benefit from the strength of the property market.

We look forward to working with Annington’s management as it moves on to the next stage in its development.”

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Snapshot 2012

Q2

A total of 705 private equity-backed buyout deals were announced globally in Q2 2012, with an aggregate value of $60.4 billion. This represents a 37% increase from the $56.8 billion worth of transactions that occurred in Q4 2011, as private equity deals rebounded from the steep declines of Q1 2012.

Stand-out Deal

Thomas H. Lee Partners LP agreed to buy a 66 percent majority stake in Party City Corp from its private-equity owners in a transaction valued at $2.69 billion including debt. Party City’s existing owners – Advent International Corp., Berkshire Partners LLC, Weston Presidio and management – will hold minority stakes.

Of the private equity funds that closed in Q2 2012, a total of $35.7 billion was raised by 75 vehicles of fund types other than buyout and venture capital. This accounted for 55% of all private equity capital raised by funds that closed in this period.

Q3

A total of 681 private-equity backed buyout deals were announced globally in Q3 2012, with an aggregate value of $71.6 billion. This rise has been characterised by an increase in large-cap deals which saw 20 deals completed with a value of more than $1 billion.

Stand-out Deal

Out of the 20 billion-dollar-deals, the most significant involved the acquisition of Cequel Communications In July 2012. Cequel Communications Holdings LLC, which does business as Suddenlink Communications reached an agreement under which BC Partners and CPP Investment Board (“CPPIB”) partner Suddenlink’s management team, led by Chariman and CEO Jerry Kent, to purchase the Company for $6.6 billion. Suddenlink is the seventhlargest cable system operator in the United States and the leading television and internet service provider in its market.

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New Freedoms & Heightened Scrutiny Complic US Private Fund Marketing Environment By Thomas

T

he last few years have witnessed tectonic shifts in U.S. laws and regulations that effect the management and operations of hedge funds, private equity funds and other forms of private funds.

In one instance (in 2010) the U.S. Congress forced a huge swath of the private funds industry into a regulatory bear hug, and in another instance (in 2012) the U.S. Congress ostensibly granted the private funds industry heretofore unimaginable maneuverability in their fundraising activities in the U.S. by permitting general solicitation of investors via public advertising. Although these changes developed contemporaneous with even more significant changes to the regulatory landscape of the financial sector at large following the 2007 financial crisis, for the private funds industry these changes are unprecedented in nature and disorientating in effect.

The excited tone of more recent headlines heralding the Congress’s voiding the prohibition of general solicitations for private issuers, however, may create a trap for the unwary. Not only does the Securities and Exchange Commission (SEC) appear reluctant to usher in a new era of unfettered advertising for private funds, the SEC staff has grown increasingly critical of valuation practices of managers of private funds, which directly impacts their most important marketing attribute: investment performance. The SEC staff, by word and deed, is targeting valuations and performance presentation in exams of investment advisory firms at a heightened rate. In this brave new world of U.S. regulation of private funds, investment managers should be vigilant, in particular, about the valuation of illiquid securities.

The JOBS Act Revolution: General Advertising for US Private Funds In April of 2012, President Obama signed into law the Jumpstart Our Business Startups Act of 2012 (JOBS Act). The culmination of a heated political process, the JOBS Act aims to simplify U.S. securities laws and regulations to promote U.S.

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businesses. Among other things, the JOBS Act specifies that any offering made pursuant to Rule 506 (of the “Reg D safe harbor” under the Securities Act of 1933) that uses general advertising or general solicitation will not be deemed a “public offering,” when sales are only to accredited investors. Rule 506 is the most popular means for conducting private offerings in the U.S., because it permits issuers to raise an unlimited amount of money and preempts state securities laws. While still subject to SEC rulemaking, this provision of the JOBS Act implies private funds may be able to engage in general solicitation through public advertising.

The JOBS Act directs the SEC to amend its rules to repeal the ban on general solicitation and general advertising in securities offerings conducted under Rule 506. On 29 August 2012, the SEC proposed new rules to this effect and requested comments from the public on the proposals within 30 days. The proposed rules presented new issues, however, due to the SEC’s inclusion of vague technical requirements that undermine the certainty of the protections of the improved “safe harbor.” Regardless of the merits of the proposed rule, as of the date of this writing, the SEC has delayed implementing the proposed rules complying with the JOBS Act, leaving issuers and their legal advisers in regulatory limbo (despite the Congress’ clear intent). As a result, until the SEC adopts final rules, market participants relying on the Rule 506 safe harbor should continue comply with the existing requirements of this ex-

cate the

s Devaney emption, and continue to implement customary procedures for these offerings.

Marketing Considerations under the Advisers Act

Dodd-Frank Fall-Out: Swelling Ranks of SEC-Registered Investment Advisers

The recent surge in the pool of registered investment advisers will undoubtedly lead to increased friction between the regulator and regulated, coinciding as it does with the changes to advertising rules brought about by the JOBS Act and the SEC staff ’s heavy focus on valuation and performance presentation in recent examinations of investment advisers.

The revolutionary develops under the JOBS Act come on the tail of equally historic changes resulting from the vastly broader Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Among many other things, the Dodd-Frank Act eliminated the “private advisers” exemption in Section 203(b)(3) of the Investment Advisers Act of 1940 (Advisers Act), on which many advisers to private funds historically relied to remain exempt from registration with the SEC. This particular change has had a major impact on the private funds community in the US. In late 2012, the SEC staff reported that approximately 1,500 advisers to private funds have registered with it since the passage of the Dodd-Frank Act, with the total number of SEC-registered private fund advisers exceeding 4,000 (approximately 2,300 of those manage hedge funds).

In addition to casting a wider net, Dodd-Frank also ushered in new regulatory burdens for investment advisers, including among other things requiring detailed disclosure on the private funds that they manage.

These new rules join a slew of existing obligations, such as fulsome codes of ethics and compliance programs, related party transaction rules, client fee restrictions and custody rules, many of which (it is increasingly evident) require some modification to suit the different operational context of various types of private funds. Significantly, many advisers to private funds have newly registered with the SEC and now find themselves subject to the advertising restrictions under the Advisers Act.

In order to help the uninitiated issue spot, albeit from a high altitude, to follow is a brief overview of relevant regulatory rules and some other considerations that affect the ability of a SEC-registered investment adviser to market their firms and present to current and prospective investors their prior investment performance data, whether to the public or targeted private audiences.

Advisers Act Anti-fraud Provisions: Section 206(4) of the Advisers Act broadly prohibits an investment adviser (whether registered or not) from engaging in “fraudulent, deceptive, or manipulative” activities. Rule 206(4)-1 under the Advisers Act enumerates general advertising practices that the SEC deems to violate Section 206(4), including publishing an advertisement “which contains an untrue statement of fact, or which is otherwise false or misleading.”

Rule 206(4)-1(b) defines “advertisement” as any written communication addressed to more than one person that offers any investment advisory services regarding securities, including websites.

Importantly, the SEC broadly interprets “advertisement” to include any “materials designed to maintain existing clients or solicit new clients for the adviser,” and as such covers even monthly or quarterly investor reports.

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Past Performance Data: While the SEC does not object to an adviser advertising its past performance (whether in the form of actual performance or hypothetical or model results), the SEC staff has identified a number of practices that they deem to violate the Advisers Act prohibition on distributing “false or misleading” statements.

Such “bad practices” include: • failing to reflect the deduction of fees, brokerage commissions and other expenses that a fund or client account paid • failing to disclose whether and to what extent the results portrayed reflect the reinvestment of dividends or proceeds • suggesting or making claims about the potential for profit without also disclosing the possibility of loss • failing to disclose the effect of material market or economic conditions on the results advertised • comparing results to an index without disclosing the basis on which the index was selected (i.e., the relevancy of the comparison) Gross and Net Performance Data: SEC staff has stated that an adviser generally may not include gross performance data in advertising (i.e., performance data that does not reflect the deduction of fees, commissions and expenses that a client would pay), unless the adviser also presents net performance information. For private funds, net performance data would need to reflect the deduction of advisory fees, including incentive fees.

Model or Hypothetical Performance: In the context of the presentation of model or hypothetical performance, SEC staff has identified prohibited practices, such as the failure to note the limitations inherent in model results, in particular the lack of actual trading.

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Prohibition of Testimonials: Rule 206(4)-1 under the Advisers Act prohibits advisers from using investor or client testimonial about the adviser.

“Testimonial” is not defined in the rule, but the SEC staff has interpreted it to include a statement of a client’s experience with or endorsement of the investment adviser. For example, the SEC has indicated that in their view the use of “social plug-ins” (such as the ‘like’ button on Facebook) could be determined to constitute a testimonial.

FINRA: Investment advisers that are dually registered as broker-dealers are also subject to Financial Industry Regulatory Authority (“FINRA”) rules that apply to advertisements, including the filing of certain advertisements prior to use. More generally, FINRA’s (new) Rule 5123 requires FINRA members acting as placement agent for a private placement to file a copy of the private placement offering documents with FINRA within 15 days of the date of the first sale of securities.

Global Investment Performance Standards (“GIPS”): GIPS standards are a set of industrywide ethical principles that provide investment firms with guidance on how to calculate and report their investment results to prospective clients. The GIPS statement provides practical guidance for private fund advisers, including with respect to valuation in the context of illiquidity.

To satisfy the demand of institutional investors for more transparency and comparability of private fund advisers’ performance figures, private fund advisers are increasingly using GIPS standards. GIPS recently adopted a Guidance Statement on Alternative Investment Strategies and Structures, which took effect on 1 October 2012.

SEC Staff Examination Priorities Ever since the unraveling of the Madoff Ponzi scheme (as well as a number of large but comparatively less notable frauds against private investors), a re-invigorated SEC Enforcement Division has set its sights on conducting more thorough and frequent on-site examinations of invest-

ment advisers, particularly to private funds. In a speech given on 18 December 2012, Bruce Karpati, Chief, SEC Enforcement Division’s Asset Management Unit, acknowledged that “[I]n a new initiative, OCIE is conducting focused, riskbased examinations of investment advisers to private funds, so-called “presence exams,” in which staff will review one or more higher-risk areas of their operations, including marketing, conflicts of interests, and valuation.” Considering, in particular, the lack of consensus on the valuation of illiquid assets of the nature often held by private funds, these “beefed up” examinations can be expected to produce long, frustrating and costly SEC staff examinations and possibly expand into investigations, especially in the case of an adviser availing itself of the benefit of general advertising to the U.S. public.

Conclusion With the freedom promised under the JOBS Act following so quickly on the heels of a significant increase of the registration of advisers to private funds, many registered (and unregistered) investment advisers will want to re-orient themselves as to what information they share, and how they communicate, with investors, both prospective and existing. The SEC staff ’s current focus on the valuations used for private funds should concentrate minds on this matter. As a result, investment advisers to private funds that are subject to the Advisers Act should re-familiarise themselves with legal and operational best practices around valuation of illiquid securities, to avoid and costly mistakes when the inevitable exam with today’s hyper-vigilant SEC staff takes place.

Thomas Devaney is a partner in the New York office of Morrison & Foerster LLP. Tom counsels sponsors and the management teams of private funds with respect to fundraising and subscriptions, U.S. securities laws and regulations, and fund administration and operations, generally.

Tom primarily advises clients on private placement securities offerings, cross-border transactions, and venture and strategic financings, but his counseling has covered a broad range of investment transactions. Tom’s practice generally draws upon his expertise in U.S. securities laws, including the Investment Advisers Act of 1940 and relevant portions of the Investment Company Act of 1940, as well as relevant portions of the Commodity Exchange Act and ERISA.Tom consistently works with U.S. domestic and global real estate funds, infrastructure funds, debt funds, venture capital funds, and hedge funds with a broad range of investment strategies.

He possesses more than a decade-worth’s of experience counseling clients on the formation, organisation and operation of domestic limited partnerships, limited liability companies and corporations, and a range of off-shore entities.

Some of Tom’s currently active representations include serving as global counsel to a Luxembourgbased, European infrastructure fund with assets under management in excess of €1 billion, a North American infrastructure fund raising its second fund with a target to exceed $1 billion, a leading Asian logistics facility operator raising its initial real estate fund with a target exceeding $1 billion, a number of medium to smaller sized energy, cleantech and real estate fund groups in the market and a roster of hedge funds and their managers. In addition, Tom recently served as counsel to a consortium of international investors that financed and developed the only FIA-certified Grade 1 track in the United States, and one of only 26 Grade 1-certified motorsports facilities in the world, which hosted the first (and highly acclaimed) F1 grand prix in the U.S. in more than five years.

Thomas Devaney can be contacted by phone on +1 212 336 4232 or alternatively via email at tdevaney@mofo.com

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Consequences of the Dodd-Frank Act: New Priv Requirements By Heather Cruz, Mark D. Young, Maureen Donley, Geoff Bau

T

he Dodd-Frank Act greatly increased the reporting requirements applicable to private investment funds and their advisers. In recent months, both the SEC’s and CFTC’s new reporting forms have become effective. Now that the initial round of filings is complete for the largest advisers, we expect that their experiences will prove instructive for advisers preparing their first reporting forms.

Form PF Registered investment advisers that advise at least one private fund1 and have at least $150 million in private fund regulatory assets under management are required to file Form PF, the SEC’s new systemic risk reporting form. Form PF requires advisers to report detailed information with respect to their private funds, including the use of leverage and derivatives, collateral practices, counterparty exposures, liquidity, and investment strategies. Large private fund advisers2 are required to provide the SEC with additional detailed information regarding their hedge funds, liquidity funds, and private equity funds, respectively.

The first wave of Form PF filings for hedge fund advisers occurred in August 2012 and consisted of the largest advisers (advisers with at least $5 billion in regulatory assets under management attributable to hedge funds). The filing deadline for smaller advisers will occur in the first months of 2013.

The experiences of the August filers provide useful insights for advisers who have yet to file their first Form PF. First and foremost, the initial filers have shown that getting an early start on Form PF is essential. Not only does Form PF ask for large amounts of information, but the process of completing Form PF is unlike any that advisers have been asked to fulfill in the past. The questions on Form PF require active input across an adviser’s business lines, from legal and compliance depart-

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ments to portfolio managers, operations, and technology personnel. Many of the early filers learned that Form PF is as much a financial reporting form as it is a legal reporting form, making collaboration across business lines imperative. Some of the questions on Form PF require qualitative judgments, which not only add time but makes automation of the responses difficult, if not impossible. Due to the volume of information and the various departments that must collaborate to complete Form PF, the time required to prepare a filing is extensive.

Many of the questions on Form PF are ambiguous and subject to interpretation. Filers have the opportunity to indicate any assumptions they have made while completing Form PF in Question 4: Miscellaneous, and it is expected that the responses provided in the Miscellaneous section will help the SEC refine the guidance offered in their Frequently Asked Questions on Form PF. The early filers have shown a variety of approaches to the Miscellaneous section. Some advisers chose to use the Miscellaneous section as a way to document all of the judgment calls the adviser made in preparing Form PF, and as a result filed many pages of assumptions. Other advisers took a restrained approach by listing only select highlevel assumptions that applied to all of their funds generally, and a few advisers listed minimal or no assumptions at all. Regardless of an adviser’s approach to the Miscellaneous section, the touchstone of reporting on Form PF is to ensure that the adviser’s responses are consistent with the information provided by the adviser on other SEC

vate Fund Reporting

uer & Daniel Konar II reporting forms, such as Form ADV, and with the adviser’s internal books and records.

Finally, advisers have grappled with deciding whether to prepare Form PF in-house or to hire outside service providers. Some of the initial filers prepared Form PF entirely in-house; however, the early filers represent the largest asset managers, typically with sizeable internal legal, compliance, and operations staff. Other managers may find Form PF’s complexity to be a drain on internal resources and prefer to use an outside service provider. A number of large administrators and accounting firms offer Form PF preparation and filing services, and many advisers have found efficiencies in utilising existing service providers to assist with the process. However, the adviser’s various internal departments must be involved to respond to the qualitative questions on Form PF and to ensure consistency with the adviser’s other filings and books and records.

CFTC Forms CPO-PQR, CTA-PR & NFA Pool Quarterly Reports With the Dodd-Frank Act’s expansion of the CFTC’s jurisdiction to include swaps, many private fund advisers have recently registered as CPOs and/or CTAs. Registering as a CPO or CTA brings an adviser within the scope of the CFTC’s new systemic risk reporting requirements. Under these requirements, registered CPOs report quarterly or annually (with the period being determined by the amount of “commodity pool” assets under management) on Form CPO-PQR and registered CTAs report annually on Form CTA-PR.3 Registered CPOs and CTAs are also required to become members of the NFA, a selfregulatory organisation, which imposes its own reporting requirements in addition to the CFTC’s.

Registered CPOs must file the NFA’s Form PQR quarterly and registered CTAs may soon be required to file the NFA’s proposed Form PR, also quarterly.4

Fortunately, private fund advisers that file Form PF and are registered as CPOs may avoid the more burdensome schedules of Form CPO-PQR; the CFTC allows these advisers to complete the corresponding sections of Form PF instead.

It appears that advisers who have a choice of consolidating some of their systemic risk reporting into their Form PF filing are choosing to do so.

Like Form PF, Forms CPO-PQR and CTA-PR contain questions that require some additional interpretation. One of the more common issues in completing Forms CPO-PQR or CTA-PR is appreciating the scope of the “commodity pool” definition, which the CFTC and its staff have interpreted broadly to mean any “investment trust, syndicate or similar form of enterprise” that uses even a single CFTC-regulated product.

For example, the staff of the CFTC’s Division of Swap Dealer and Intermediary Oversight has recently issued letters that include as commodity pools certain types of mortgage REITs, structured finance vehicles and family investment vehicles, while other letters have made clear that equity REITs, most securitisations and other family investment vehicles would not be viewed to be commodity pools.

As a result of the complexity of this definition, private fund investment advisers that are subject to the CFTC’s and NFA’s systemic risk reporting requirements may underestimate the complexity of particular questions that are dependent on the commodity pool definition (for example, Question 2.b. of Form CTA-PR, which asks about the “total pool assets” directed by the CTA).

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Another consequence of the CFTC’s broad interpretation of the commodity pool definition is that a private fund adviser that is dually registered as a CPO may be subject to systemic risk reporting requirements for a wider variety of pooled investment vehicles than just private funds. For example, if a private fund adviser is also the CPO to a mutual fund, it would be required by the CFTC to file a systemic risk report (either on Form PF or Form CPO-PQR) with respect to that mutual fund.

While select CPOs began filing Form CPO-PQR in November of 2012, many other CPOs and CTAs only became registered on January 1, 2013.

Accordingly, many in the investment management community have yet to work through the CFTC’s and NFA’s reporting requirements.

Heather Cruz is a partner in the firm’s Investment Management Group, based in New York.

Heather can be contacted by phone on +1 212 735 2772 or alternatively via email at heather.cruz@skadden.com

Mark D. Young is a partner and head of the firm’s Derivatives Regulation and Litigation Group, based in Washington D.C. Mark can be contacted by phone on +1 202 371 7680 or alternatively via email at mark.d.young@skadden.com

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Maureen Donley is of counsel in the firm’s Derivatives Regulation and Litigation Group, based in Washington D.C. Maureen can be contacted by phone on +1 202 371 7570 or alternatively via email at maureen.donley@skadden.com Geoff Bauer is an associate in the firm’s Investment Management Group, based in New York.

Geoff can be contacted by phone on +1 212 735 3619 or alternatively via email at geoff.bauer@skadden.com

Daniel Konar II is an associate in the Derivatives Regulation and Litigation Group, based in Washington D.C. Daniel can be contacted by phone on +1 202 371 7102 or alternatively via email at daniel.konar@skadden.com

1 - A “private fund” is defined as any issuer that would be an investment company as defined in Section 3 of the Investment Company Act of 1940 but for Section 3(c)(1) or 3(c)(7) of that Act.

2 - Large private fund advisers are defined in Form PF to include (i) advisers with at least $1.5 billion in hedge fund assets under management (“Large Hedge Fund Advisers”), (ii) advisers with at least $1 billion in liquidity fund assets under management (“Large Liquidity Fund Advisers”), and (iii) advisers with at least $2 billion in private equity fund assets under management (“Large Private Equity Fund Advisers”).

3 - A commodity pool is defined as “an investment trust, syndicate or similar form of enterprise operated for the purpose of trading” any CFTC-regulated products.

4 - In addition to proposing Form PR, the NFA also has proposed to amend the current Form PQR to incorporate many of the questions from Schedule A of CFTC Form CPO-PQR.

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Fund of One

By Gregg S. Buksbaum

A

lthough not a new phenomenon, in the post-Madoff world there is an increasing desire for institutional investors in hedge funds to seek customised solutions from fund managers in order to gain more transparency, reduce liquidity risk, and influence portfolio construction in ways that cannot necessarily be achieved through a typical co-mingled investment pool. These solutions primarily take the form of separately managed accounts or “funds of one.” The use of such structures has increased as more public and private pension plans, sovereign wealth funds and other institutional investors have expanded their allocations to hedge fund products with a view towards segregation of assets and specialised management. Although managed accounts and funds of one have many similar features, there are important distinctions. This article will focus primarily on funds of one given the recent uptick in the use of this type of vehicle even though it remains somewhat below the radar within the broader institutional investor community.

ing funds. In addition, they can be formed onshore or offshore depending on the tax character, domicile and preferences of the investor and/or the requirements of the fund manager. From a cost-benefit analysis there are issues to consider within each variety when selecting the appropriate structure, such as the cost of construction and operation, protection against co-investor redemption risk and cross-class liability. Funds of one also can be utilised for investors in fund of hedge funds.

What Is a Fund of One?

It often is a convenient way for funds of hedge fund allocators to offer large institutional investors customised exposure to certain underlying managers and strategies. Although funds of one are primarily used in the hedge fund space, in certain cases, they also can serve the interests of private equity fund investors seeking a more customised platform with a private equity sponsor.

Simply put, it is an investment fund for a single investor. But unlike co-mingled funds, a fund of one can be a highly-negotiated and customised undertaking between a fund manager and an investor. It generally has the same look and feel of a co-mingled fund in terms of entity structure, delegation of management duties to the fund manager and counterparty relationships. However, the interior architecture of the fund of one is where its uniqueness comes into play. It can be flexible to meet the investment and risk objectives of the sole investor seeking more creative and protective access into hedge fund investing or expansion of its existing hedge fund portfolio.

Funds of one come in several varieties. They can be structured as separate vehicles that engage in direct trading activities, separate feeder funds within master-feeder fund schemes, and even separate share or interest classes of exist-

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The key difference between a fund of one and a managed account is the ownership and control of the assets. In a managed account, the investor retains ownership and control, while in a fund of one it does not – even if the manager is given investment discretion over the assets in a managed account, the investor can exercise some measure of control through direct engagement of an administrator, prime broker and custodian, or by terminating the manager. By contrast, in a fund of one, the assets are owned by the fund, not the investor, and control is in the hands of the fund manager – any control exerted by the investor

would likely jeopardise the limited liability it is afforded by the fund vehicle.

Funds of one have benefits and drawbacks, a sampling of which are discussed below. But on the whole, they are a useful means to gain protection from co-investor risk.

Benefits Customisation of Strategy. Where a fund of one is a stand-alone and not designated as a feeder fund in a master-feeder structure or as a separate class within an existing fund vehicle, it will afford the investor the opportunity to customise the strategy, portfolio construction, risk parameters and leverage guidelines with the fund manager.

Enhance Transparency and Risk Management.

Funds of one can provide the investor with increased levels of transparency to monitor sectors, risk, performance and operational controls than could otherwise be offered in a co-mingled fund. This is achievable where the manager is not subject to fiduciary duties to treat all investors equally as it would be in a co-mingled fund context. While the level of transparency given to the investor will depend largely on individual negotiations with the manager – e.g., the manager may not want to provide position level data to the investor – the fund of one investor is likely to have a better look-through to the asset mix.

More Favourable Liquidity Terms. For the sole investor, there generally will be an ability to have better liquidity terms. These, of course, will be subject to negotiations with the manager and to the fund of one’s investment strategy. Both factors will impact the ability of the manager to liquidate underlying assets in a crisis environment, thereby affecting how redemption frequency and notice requirements will be structured. However, for an investor able to customise a strategy as to portfolio construction, risk and leverage, among other things, the investor and the manager should be able to agree on appropriate liquidity terms. A

cautionary note for funds of one that allocate to underlying hedge funds is that structuring liquidity at the fund of one level will depend mostly on liquidity profiles of the underlying hedge funds.

Protection from Impact of Other Redeeming Investors. The fund of one also gives the sole investor a unique advantage by reducing, if not eliminating, liquidity risk posed by other redeeming investors. Without a multiplicity of investors, the sole investor does not have to worry that its portfolio will be compromised by the manager having to liquidate positions to satisfy other investors’ redemption requests. And there should be little, if any, reason to incorporate a “gate” into the redemption terms. The scenarios where liquidity risk is not entirely eliminated or where a gate could be built in are if the fund of one (i) is a feeder fund or otherwise has an overlap in holdings with other accounts or funds managed by the manager, or (ii) is not actually a separate fund vehicle, but rather a separate class in an existing structure. These scenarios would still have the specter of liquidity risk for the investor, and in the latter case, a separate class would also be subject to cross-class liability issues (unless the fund’s entity structure eliminates this risk, such as with segregated portfolio companies in certain offshore jurisdictions).

Administrative and Operational Efficiency. Funds of one, like co-mingled funds, entail less administrative and operational complexity for the investor than does a managed account. For example, the manager undertakes the task to put in place administrators, prime brokers and custodians, and to negotiate ISDA agreements. And once the fund is up and running, the manager handles the counterparty relationships and reconciles the accounting and other data aggregation functions to relieve the investor of these burdens.

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No Fiduciary Liability. Based on a lack of ownership and control over the fund of one’s assets, the investor does not have the fiduciary burden inherent in managed accounts where an investor has to perform due diligence on and contract directly with third party services providers and counterparties, or may have ongoing monitoring responsibilities and may have to deal with sudden adverse situations in the portfolio, which they are not equipped to handle. And since the fund of one has a separate legal identity and management responsibility has been delegated to the fund manager (and a board, in the case of an offshore fund formed as a corporate entity), the investor has a shield to limit its liability. This assumes that the investor remains passive with respect to fund governance.

Drawbacks Ownership and Control Over Assets. The flip side of limiting an investor’s liability with respect to a fund of one is that the investor has no ownership or control of the fund’s assets. Although the central element of a fund of one is that it is a customised platform, the investor generally has no authority to direct the investment decisions and the management of the assets, unless certain consent rights have been negotiated with the manager (but even in that situation, an investor should use caution in determining what authority to reserve for itself so as not to lose its limited liability status).

Limitations on Ability to Exit. Notwithstanding the customised nature of a fund of one, the investor’s ability to exit is dependent on the redemption terms negotiated with the manager.

Although the investor should have minimal or no co-investor risk, it cannot expect to have unrestricted exit rights as the manager will need to have the ability to effectively and prudently manage the liquidation of assets.

Price of Entry. Because of the operational scale and infrastructure costs, managers generally will

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not set up funds of one unless a high minimum asset under management threshold can be met by the investor. There is no hard-and-fast rule, but minimums can be as high as $100 million.

Cost. The cost to investors of setting up and operating funds of one is considered “medium” as compared to “high” for managed accounts and “low” for co-mingled funds.

Ramp up. Like a managed account, the time within which a fund of one can fully deploy the investment capital contributed by the Investor can vary.

Even so, it is a longer period compared to existing co-mingled funds that accept new capital since co-mingled funds often have the ability to offset redemptions with subscriptions to minimise the disruption to a portfolio. Ramp up periods for funds of one can be short, though, particularly where a fund of one is set up for an investor who is simply shifting its investment from a manager’s co-mingled fund – the efficiency of this is dependent on the extent to which a proportionate amount of assets in kind can be transferred from the co-mingled fund to the fund of one.

Consolidation. As the 100% owner of a fund of one, the investor will need to consider whether it has to consolidate the fund on its books for accounting purposes. This may or may not pose a burden for the investor depending on its own situation, but thought should be given as to how the structure of the investment terms will impact this. For example, even though the manager maintains full control over the funds activities, if the investor has the ability to terminate the fund manager, then under accounting standards such as IFRS the fund may have to be consolidated on the investor’s books.

Conclusion The fund of one concept offers unique benefits to institutional investors with sizeable investment mandates who don’t want to co-mingle their assets with other investors. Investors can avoid

certain downsides associated with co-mingled funds. Not every manager is equipped to run a fund of one, but those that are may find this type of platform increasing in popularity.

Gregg S. Buksbaum is a partner in the Business Department of Patton Boggs LLP and a member of its Private Investment Funds Group, Securities and M&A Group, and International Business Group. Mr. Buksbaum represents domestic and international fund sponsors in the formation of various types of investment funds and the execution of merger and acquisition transactions. He also counsels these clients on securities regulatory matters. Mr. Buksbaum also represents large institutional investors, including sovereign wealth funds and family offices, that invest in various types of private funds and acquire and sell portfolio company and real estate investments.

Gregg can be contacted by phone on +1 202 457 6153 or alternatively via email at gbuksbaum@pattonboggs.com

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Private Equity Latin America

By Daniel Serventi

L

atin America has continued to see significant PE activity over the last several months, as local and global firms are drawn to the region’s compelling domestic growth story. This is despite the deceleration of the global macroeconomic environment that has challenged growth over the near-term and led to significant policy interventions designed as countermeasures against economic headwinds and consumer credit saturation.

Transactions Retail and consumer goods companies have accounted for over 37% of PE acquisitions in the last 18 months. These deals are likely to continue into the foreseeable future, as PE firms work to consolidate and expand promising businesses in these high-growth sectors.

2012 deals illustrate the continuing diversification and maturation of the Latin America PE industry across the region. Less than half of PE transactions were for companies headquartered in Brazil. Argentina accounted for 20% of the annual’s transactions, followed by Colombia, Chile and Peru. Moreover, the region continues to see investment from a diverse range of global and local PE players. On a value basis, firms in Brazil accounted for over 60% of the region’s total investment.

Fund-raising According to Preqin, PE firms focused on Latin America raised just over US$440m in the second quarter of 2012, adding to the US$3.1b of funds closed in the first quarter of the year. 2012 has seen a number of significant closings by local funds and global investors alike, the largest of which was the US$850m in commitments achieved by Victoria Capital Partners’ second fund.

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Another significant close was the May closing of Capital International’s sixth PE fund. While not targeted exclusively on the Latam region, the firm has been an active player in the market for years. Last year, the firm took two portfolio companies public – Arcos Dorados on the NYSE in April 2011, raising US$1.4b, and Magazine Luiza in Brazil, raising US$566m. According to Capital International, the firm enjoyed a 90% re-up rate among existing investors with an active allocation to private equity. Other closes during the quarter included GTIS Brazil Real Estate Fund, with US$850m in assets, and Rio Bravo Energia (renewable-energy sector), which closed with US$235m in commitments.

PE firms across the emerging markets have been increasingly positioned among the industy’s largest firms. In the recently released Private Equity International rankings of the world’s 300 largest PE funds, which ranks firms based on their fiveyear fund-raising totals, eight firms were based in Latin America, up from four in 2011. Gavea Investimentos entered the top 100, climbing from 136 to 84, based on the firm’s successful final close on Fund IV, which added US$1.8b to the firm’s assets under management.

Value Creation in Latam EY performed a point study with EMPEA (Emerging Markets Private Equity Association) on value creation, an analysis of exists in Latam Markets.

The Exits The prevalence of privately sourced deals subsequently exited via private channels results in less transparency around Latin American exits, thus constraining the development of a definitive population. Drawing from initial research into 60 transactions executed across the region, we conducted interviews on more than 25 exits.

Consistent with the composition of the underlying investment population in Latin America, the majority of deals analysed are minority transactions, with stakes ranging from 20% to 50%.

the majority of transactions. Organic revenue growth fuels 80% of EBITDA growth in Latin America deals. This compares with organic growth’s 44% contribution to revenue growth in the US and European studies.

Despite the market fragmentation in these markets, add-on acquisitions are a comparatively minor factor, accounting for only 14% of revenue growth.

The majority of transactions are minority deals with median equity values of US$14 million in Latin America markets outside Brazil and US$45 million in Brazil.

Cost reduction, a significant source of profit growth in the US and Europe, has contributed far less in Latin American exits. This could also reflect the prevalence of “growth” versus “turnaround” investment rationales, as well as less stress on portfolios as a result of robust macroeconomic growth in the region over the last few years.

Growth-driven Performance

Buying Well: Proprietary Deals Rule

One of the key factors behind Latin America’s success in recent years has been its resiliency in the face of adversity. Through the downturn, the region generally saw a significantly shallower recession and faster recovery than many of the developed markets.

More than in developed markets, network relationships — often informal — are key at every stage in the process, from finding good prospects to direction setting to final sale.

Auctions figured into only 20% of the deals we sampled, with proprietary deal flow featuring heavily — 65%.

As a result, average gross IRRs of the exits in Latin America compare favorably with returns from the best years in the developed markets, when we saw mean IRRs in excess of 50%. Overall, when compared with deals exited over the same period, returns in our Latin America exhibited IRRs that were roughly twice those of the US and Europe.

Given underlying EBITDA growth rates of over 45% in the Latin America deals, compared with 13.5% in the US and Europe, this strong relative performance is not hugely surprising.

Organic Revenue Growth the Overwhelming Diver of Returns in Latin America

Owning Well: Entrepreneurial Approaches to Driving Value While buying well is important in the Latin American market, an entrepreneurial approach to ownership is crucial, far more so than in developed markets. In the majority of deals sampled, the investment thesis hinged on backing entrepreneurs and professionalizing incumbent teams, the goal being to enhance or transform the core business model rather than completely “clean house.”

The bulk of equity returns are driven by EBITDA growth, with leverage playing little to no role in

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In three-quarters of the deals analysed, PE firms backed founders or family owners, most commonly to execute on plans already in place (40%), and these deals averaged the highest IRRs. Partnering to jointly determine an improved course of action was a feature in 35% of the deals. Only one-quarter of the deals entailed bringing in new management and a new plan, including a handful of instances where the PE firm started a company to avail itself of an opportunity in the market.

Although the majority of deals in Latin America are non-control, PE buyers are minority investors with strong influence in decision making, achieved via strong partnerships with management, incentives and board-level advisory roles more so than through term sheets. However, in nearly every case, the ability to introduce financial discipline by deciding the finance function was critical to the deal. In 90% of deals studied, PE buyers installed a new CFO; the CEO (often a founder) was retained over 60% of the time; the CEO was replaced most commonly in majority-stake deals. Senior management teams were incentivised with equity or equity and bonus in 93% of companies in the study.

Realising Value: Alignment from the Outset Whereas 74% of deals were sourced through private channels, half were sold through private channels, and for 40% the exit was an IPO. Of those exits via sales to strategic and PE buyers, nearly 75% were to a single buyer sourced through the PE investor’s network or with some market testing. In many cases the PE buyer had actually identified a potential buyer at the outset of the deal. Auctions accounted for roughly onequarter of exits.

Regardless of whether the mode of exit is to a strategic buyer or via the listed markets, PE buyers are executing on similar goals: introducing or improving financial discipline and corporate governance to ready the company for sale, which may mean elevating a company to the interna-

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tional standards required by multinationals or by retail investors in international markets.

Daniel Serventi is an Ernst & Young Transaction Advisory Services Partner based in Buenos Aires, Argentina.

He leads the Transaction Advisory practice that EY has in South America.

Daniel has industry expertise in Utilities and Oil & Gas sectors.

Daniel specialises in providing transactional and consulting services to power generation and electric utilities companies, among other industries.

He also leads many due diligences in Argentina (most of the privitisation processes) as well as in other countries in the región such as Peru, Bolivia and Chile.

Daniel Serventi can be contacted by phone on +54 11 4318 1595 or alternatively via email at Daniel.serventi@ar.ey.com

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Venture Capital

Europe

The maximum size of a company that a VCT can invest new money in has been increased from £7million to £15million from 5 April 2012, while the maximum a VCT can invest in an individual company is now £5million, up from £1million.

This enables VCTs to take bigger stakes and focus on larger companies.

Companies can raise no more than £10million via venture capital schemes in any 12 month period, up from £2million since 6 April 2012. Certain trades are specifically excluded, e.g. farming, property development, hotels, nursing homes, banking, insurance and businesses earning from Feed-in-Tariffs (FITs) such as the Solar FITs. Companies may have up to 250 full-time employees. The previous figure was a maximum of 50 prior to 6 April 2012.

Association of Investment Companies (AIC) research suggests that for every £1 of upfront income tax relief received by investors in VCTs, £7 of new turnover is created by the small and medium-sized enterprises that get funding from the sector.

December’s Autumn Statement announced that the cap on the annual amount savers may put into private pension plans would be lowered to £40,000. Many VCT managers can expect to benefit from that move, particularly since pension schemes have such restrictive rules on how benefits may be taken.

With VCTs there’s no need to buy an annuity and there has been a steep rise in enquiries from investors looking to supplement their pension pots through VCTs.

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Snapshot 2012

USA

Venture capitalists invested $26.5 billion in 3,698 deals in 2012, a decrease of 10 percent in dollars and a 6 percent decline in deals over the prior year, according to the MoneyTree Report by PricewaterhouseCoopers LLP and the National Venture Capital Association (NVCA), based on data from Thomson Reuters.

Double-digit decreases in investment dollars across most industries, specifically the traditionally capital-intensive Clean Technology and Life Sciences sectors. The Clean Technology sector experienced a 27 percent decrease in dollars and a 23 percent decline in deal volume in 2012, bringing the year’s total to $3.3 billion going into 267 deals, compared to $4.6 billion going into 348 deals in 2011. Clean Technology investing accounted for 12 percent of all venture capital dollars in 2012 compared to 15 percent in 2011.

The Software sector was seen as the biggest winner from 2012, maintaining its status as the single largest investment sector for the year, with dollars rising 10 percent over 2011 to $8.3 billion, which was invested into 1,266 deals, an 8 percent rise in volume over the prior year. This represented the highest level of investment in the Software sector since 2001.

First-time financings fell both in terms of dollars and deals from the prior year, declining to $4.1 billion going into 1,163 companies, a 24 percent decrease in dollars and an 11 percent decrease in deals.

For the fourth quarter, venture investment of $6.4 billion into 968 companies fell 3 percent in dollars, but rose 5 percent in deal volume over Q3 for 2012.

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Proposed Amendment to the Investment Trust Corporation Act of Japan By Osamu Adachi & Takahiko Yamada

I

nvestment funds established in Japan using an investment trust structure (the “Investment Trusts”) or an investment corporation structure (the “Investment Corporations”) are subject to the Investment Trust and Investment Corporation Act of Japan (the “ITICA”). The ITICA also governs investment funds established in other countries (such as the Cayman Islands and Luxembourg) using an investment trust structure (the “Foreign Investment Trusts”) or an investment corporation structure (the “Foreign Investment Corporations”), and for which solicitations for investments are conducted in Japan.

The ITICA has not undergone extensive amendments since 2000, when the Investment Corporation for investment in real property (i.e., J-REITs) was introduced in Japan. The Financial Services Agency of Japan (the “FSA”) is currently contemplating an extensive amendment to the ITICA to take into account international trends in fund regulations, social and economic changes, and developments in financial products in recent years. A working group under the FSA published its final report on the proposed amendments to the ITICA on 7 December 2012. The key points of such amendments to the ITICA are outlined as follows.

Amendments to Investment Trust Regulations Deregulation in response to recent international trends in fund regulations and social and economic changes Written resolution. Under the existing ITICA, a unit-holders’ written resolution is required for (i) any “material change” 1 to the trust deed of an Investment Trust or a Foreign Investment Trust or (ii) a merger between two Investment Trusts or Foreign Investment Trusts. However, it is practically difficult for a fund (especially one that is publicly offered) to obtain such written resolution. Accordingly this written resolution requirement is claimed to impede the flexible manage-

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ment of a fund. To address this issue, the FSA proposes to limit the written resolution requirement to certain changes to trust deeds and certain merger terms.

Trade of assets between funds managed by the same manager. Currently, asset trading between Investment Trusts managed by the same investment management company is, in principle, prohibited unless such trade is deemed necessary and reasonable or the consent of all unit-holders in the relevant Investment Trusts has been obtained for such trade. The scope of the safe harbors for this provision will be further clarified in the amended ITICA.

Multi-class funds. In response to international trends on fund regulations, the FSA initially contemplated allowing Investment Trusts to issue several different types of units, similar to class shares, whose trust fee structures, currencies and other arrangements would respectively be different. However, as a result of discussions on this issue, the FSA decided against the introduction of this amendment in order to further analyse how the conflicting interests of various classes may be balanced.

To secure proper products suitable to retail investors Management report. Currently, investment management companies managing Investment Trusts and issuers of Foreign Investment Trust units are,

t and Investment in principle, required to prepare management reports for each of the fund’s accounting period and deliver such reports to fund unit-holders. In order to make it easier for unit-holders to understand the actual investment status of funds in which they are investing, the FSA intends to require fund managers and issuers to prepare two types of reports, namely, (i) a report on material issues regarding investment status which will be delivered to fund unit-holders in writing or email, and (ii) a report detailing information regarding investment status which will be delivered to fund unit-holders in the form of, in principle, electronic copies through the website. The FSA will also be reviewing the items required to be included in such management reports.

Restrictions on certain investments. In response to recent complicated financial products and complex risks posed by such products, and in order to protect retail investors, restrictions on funds’ investments based on degrees of credit risk and derivative transaction risk will also be introduced into regulations governing investments by Investment Trusts and Foreign Investment Trusts. The FSA will also enhance regulations on disclosures to investors regarding investment risks in order to allow investors (in particular retail investors) to understand investment risks faced by the Investment Trusts and Foreign Investment Trusts in which they are investing.

Amendments to Investment Corporation Regulations Need for fundraising measures Rights offering. Fundraising options for Investment Corporations are limited under the current ITICA. Due to such limited fundraising options, cash flow and other financial issues faced by Investment Corporations became especially apparent during the Lehman crisis. Accordingly, the FSA will be introducing rights offerings as an additional fundraising option to Investment Corporations in order to improve the stability of Investment Corporations.

Convertible bonds, etc. The FSA had initially also contemplated introducing the issuance of (i) convertible investment corporation bonds and (ii) classified equity units in an Investment Corporation, as further fundraising options to investment corporations. However, the FSA ultimately decided against making these options available at present in order to further analyse how the conflicting interests of various equity holders under the current relatively simple corporate governance structure may be balanced.

Transparency of system & trading Corporate governance. The ITICA will also be amended to enhance the corporate governance system of Investment Corporations to facilitate the monitoring of asset trades between Investment Corporations and parties related to the investment management company thereof.

Insider trading regulations. The trading of equity units in Japan-listed Investment Corporations is currently not subject to the insider trading regulations under the Financial Instruments and Exchange Act of Japan (the “FIEA”). However, considering that such trading is generally subject to insider trading regulations in other countries, and in order to enhance investor confidence in the securities market as well as transparency in trading, the scope of insider trading regulations under the FIEA will be expanded to cover listed equity units in Investment Corporations.

Other measures Offshore real property. Since the current ITICA prohibits Investment Corporations from being majority shareholders of other corporations, Investment Corporations are restricted from acquiring real properties located in other countries through the use of special purpose corporations established in such countries (especially in countries that prohibit foreign investors from directly acquiring real properties).

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In order to facilitate the acquisition of offshore real properties by Investment Corporations, the ITICA will be amended to allow Investment Corporations to be majority shareholders of corporations which are set up to acquire offshore real properties.

Conclusion The FSA is currently preparing both an ITICA amendment bill and a FIEA amendment bill, and proposes to submit them to the regular Diet session in 2013. Assuming that these bills are passed, the amended ITICA and FIEA can be expected to come into effect after the latter half of 2014.

Mr. Osamu Adachi is a partner at Anderson Mori & Tomotsune. He has extensive experience in advising both Japanese and foreign clients on financial transactions and regulations (including fund regulation), mergers and acquisitions and other corporate matters.

Osamu is admitted to the bar in Japan and New York. He has an LL.B. from The University of Tokyo and an LL.M. from Columbia University School of Law. Mr. Osamu Adachi can be contacted by phone at +81 3 6888 1078 or via email at osamu.adachi@amt-law.com Mr. Takahiko Yamada is an associate at Anderson Mori & Tomotsune, and has been involved in a broad range of matters. His main practice areas are in financial regulations, asset management and investment funds, real estate investments, and financial transactions. Takahiko also served on secondment from July 2009 through February 2012 as deputy director of the Financial Markets Division, Planning and Coordination Bureau of the Financial Services Agency of Japan, where he

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was responsible for all aspects of law and regulations governing investment management businesses and participated in the development of new legislation.

Takahiko received his LL.B. from Keio University.

Mr. Takahiko Yamada can be contacted by phone at +81 3 6888 5861 or via email at takahiko.yamada@amt-law.com 1 - The term “material change� is not clearly defined under the current ITICA.

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Expert Direct UK PWC Phil Case +44 (0)20 7212 4166 Philip.v.case@uk.pwc.com www.pwc.com

UK Slaughter and May James Cripps James.Cripps@SlaughterandMay.com

Paul Dickson Paul.Dickson@SlaughterandMay.com www.SlaughterandMay.com

Isle of Man Isle of Man Funds Association Peter Craig +44 (0) 1624 689 689 peter.c.craig@iom.pwc.com www.iomfunds.com

UK Travers Smith Jeremy Elmore +44 (0)20 7295 3453 Jeremy.elmore@traverssmith.com www.traverssmith.com

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Republic of Ireland Dillon Eustace Donnacha O’Connor +353 1 6731729 donnacha.oconnor@dilloneustace.ie www.dilloneustace.ie

tory - Europe

Luxembourg ALFI Anouk Agnes www.alfi.lu

Luxembourg CACEIS Investor Services Pascal Hernalsteen +352 47 67 23 90 pascal.hernalsteen@caceis.com Nicolas Palate +352 47 67 23 56 nicolas.palate@caceis.com www.caceis.com

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Europe C Netherlands Kennedy Van der Laan Floor Veltman +31 20 5506 842 floor.veltman@kvdl.nl

Joris van Horzen +31 20 5506 655 joris.van.horzen@kvdl.nl

Joost Achterberg +31 20 5506 826 joost.achterberg@kvdl.nl www.kvdl.nl

Portugal Vieira de Almeida & Associados Pedro Sim천es Coelho +351 21 311 3447 psc@vda.pt Pedro Bizarro +351 21 311 3628 prb@vda.pt www.vda.pt

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Continued Switzerland DealMarket Urs Haeusler +41 43 888 75 35 urs@dealmarket.com www.dealmarket.com

Switzerland ACOLIN Daniel Haefele Daniel.haefele@acolin.ch www.acolin.ch

Malta Camilleri Preziosi Laragh Cassar +356 2567 8113 laragh.cassar@camilleripreziosi.com www.camilleripreziosi.com

Gibraltar Hassans James Lasry james.lasry@hassans.gi Anthony Jimenez anthony.jimenez@hassans.gi www.gibraltarlaw.com

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The Am USA Morrison & Foerster LLP Thomas Devaney +1 212 336 4232 tdevaney@mofo.com www.mofo.com

USA Skadden Heather Cruz +1 212 735 2772 heather.cruz@skadden.com Mark D. Young +1 202 371 7680 mark.d.young@skadden.com Maureen Donley +1 202 371 7570 maureen.donley@skadden.com Geoff Bauer +1 212 735 3619 geoff.bauer@skadden.com Daniel Konar II +1 202 371 7102 daniel.konar@skadden.com www.skadden.com

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mericas USA Patton Boggs LLP Gregg S. Buksbaum +1 202 457 6153 gbuksbaum@pattonboggs.com www.pattonboggs.com

Argentina Ernst & Young Daniel Serventi +54 11 4318 1595 Daniel.serventi@ar.ey.com www.ey.com

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Asia Japan Anderson Mori & Tomotsune Mr. Osamu Adachi +81 3 6888 1078 osamu.adachi@amt-law.com Mr. Takahiko Yamada +81 3 6888 5861 takahiko.yamada@amt-law.com www.amt-law.com

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