Private equity general partners and limited partners have been hit by waves of complex and often contradictory regulatory reform in recent years. Last month’s lifting of the 80-year-old ban forbidding mass solicitation in the United States for private equity funds, and the implementation in July of the European Union’s Alternative Investment Fund Managers Directive - seen by many as diametrically opposed to the U.S. reform - are the most emblematic of these changes. We think they underline the value of an online private equity fund marketplace like Palico.
The end of the U.S. ban on mass marketing for private placements is a landmark event for both general partners and limited partners. Greater transparency and freedom to promote private equity investment opportunities will help both GPs and LPs allocate resources more efficiently in an asset class that has become diversified over the past decade in terms of geography, specialization and investment structure.
Still, several issues limit the value of the reform when it comes to private equity fund managers connecting directly with investors.
Abolishing the ban on mass solicitation does not end the time consuming bureaucracy that comes with efforts to verify the accredited status of potential private equity fund investors. While the reform will facilitate discovery of new investment opportunities, it can’t simplify the complexity of choice, or the exhaustive due diligence facing limited partners. It will even add a layer of bureaucracy; the United States’ Securities and Exchange Commission wants managers planning mass solicitations to submit to 15-day SEC review periods ahead of launching advertising campaigns.
For GPs hoping to promote investment opportunities, AIFMD is also “a spanner in the works”. Echoing a number of experts, Julia Corelli, a funds partner at law firm Pepper Hamilton, recently observed in Private Equity International that “AIFMD is almost the antithesis” of the U.S. mass solicitation reform. “At present, we don’t expect them to live well together.” AIFMD, unlike the U.S. reform, prohibits mass solicitation. “Websites may need two investor portals to ensure that EU investors cannot access information that could be considered marketing under the AIFMD,” Corelli notes.
Apart from its potentially negative impact on U.S. reform, AIFMD poses other limitations and time consuming requirements on GPs. AIFMD regulations include an “asset stripping” clause restricting dividend recaps during the first two years of an investment, they mandate detailed annual reports for regulators, and they require a range of disclosures to portfolio companies, shareholders and LPs.
Although AIFMD is being interpreted, imposed and enforced differently across Europe, GPs compliant with AIFMD in one country are able to market throughout the European Union and in European countries that are part of the broader European Economic Area. But all GPs will have to adapt to the EEA-wide regime by the end of 2018.
Foreign GPs not already marketing in the EEA before the July imposition of “first-stage” AIFMD rules, can now promote investments only if they’re domiciled in countries where national regulators have cooperation agreements with the EEA geographies being targeted. The U.S., for example, does not yet have cooperation agreements with Croatia, France or Slovenia.
Summing up the feelings of many observers, John Moulton, founder of U.K.-based Better Capital - one of Palico’s oldest GP members - referred to AIFMD at a conference in Australia last month as “meaningless” for investor protection and a source of “real pain in the future.” Given judgments like that, there is a strong possibility that AIFMD will be altered before it fully comes into effect when national regulatory regimes are eliminated in 2018.
Reconciling the wide range of new regulations imposed on private equity is challenging for GPs and LPs. We at Palico believe, however, that the platform we have developed, and continue to enhance, helps GPs and LPs make the most of positive developments, while mitigating painful change.
For example, Palico’s services take what’s possible via mass solicitation in the U.S. one step further. Palico follows “Know Your Customer” rules to determine who is an accredited investor so that fund managers and investors can reach out easily and efficiently to each other. Also, given that contact on Palico is initiated by LPs showing interest in a particular GP’s profile, the platform allows GPs to comply with the relatively light regime of EEA rules applying to reverse solicitation, where LPs reach out to GPs first. Full AIFMD rules apply when managers actively seek out investors.
The information and/or views expressed in this document have been compiled exclusively by Palico SAS.