Samantha J. Rowe, Patricia Volhard, Jin-Hyuk Jang, John Young, Ulysses Smith, Eike Björn Weidner

The European Union’s (the “EU”) scheme for corporate sustainability reporting, the Corporate Sustainability Reporting Directive (“CSRD”), took effect from 1 January 2024 for EU and non-EU companies with securities listed on an EU “regulated market”. From 1 January 2025, large private EU companies will be in scope, including those with non-EU parent companies.

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Patricia Volhard, Jin-Hyuk Jang, John Young, Eike Björn Weidner

The European Securities and Markets Authority (“ESMA”) recently published an update (the “Statement”) to ESMA’s consultation (of November 2022) on Guidelines on the use of ESG or sustainability-related terms in the names of funds (the “Guidelines”) managed by fund managers in the European Union (“EU”). The Guidelines are directed at EU fund managers operating under the Alternative Investment Fund Managers Directive (“AIFMD”). Non-EU managers marketing funds in the EU will likely also have to comply with the Guidelines, consistent with the scope of the Sustainable Finance Disclosure Regulation (“SFDR”).

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Patricia Volhard, Jin-Hyuk Jang, John Young, Eike Björn Weidner

The European Supervisory Authorities (the “ESAs”) recently published their final report (the “Final Report”) on amending the existing Regulatory Technical Standards (the “RTS”) under the Sustainable Finance Disclosure Regulation (the “SFDR Level II”). The RTS include the list of principal adverse impact (PAI) indicators and the templates for pre-contractual disclosure and ongoing reporting under SFDR.

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Patricia Volhard, Samantha J. Rowe, Jin-Hyuk Jang, John Young, Eike Björn Weidner

The European Union’s (“EU”) Corporate Sustainability Reporting Directive (“CSRD”) is the EU’s ambitious scheme for corporate sustainability reporting. It takes effect for financial years beginning on or after 1 January 2024 for companies (EU and non-EU) with securities listed on an EU “regulated market”. From 2025, large private EU companies will be in scope. The CSRD requires in-scope companies to include a large body of sustainability information in their annual reporting, in accordance with the detailed European Sustainability Reporting Standards (“ESRS”), combined with external “assurance” of the information provided.

The impact of the CSRD is not limited to EU companies. To level the playing field between EU and non-EU companies, the CSRD extends in important ways to the activities of companies outside the EU’s borders. Most notably, EU companies which are in scope of the CSRD, and whose ultimate parent company is incorporated in a “third country”, are subject to an additional obligation beyond producing their own sustainability reporting. From 2028, such companies are required to produce a sustainability report at the group level of the ultimate parent company, provided the group as a whole generates more than €150 million of turnover in the EU—effectively, a sustainability report for the entire world-wide group. These reports will follow separate reporting standards, expected to be adopted by the European Commission in 2024.

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Christopher Dortschy, Patricia Volhard, Jin-Hyuk Jang, John Young, Mathieu Voos, Eike Björn Weidner

On 13 November 2023, the European Commission (the “Commission”) published the final compromise text amending AIFMD (“AIFMD II”). The publication of the text of AIFMD II signifies the conclusion of the technical trialogue and consultations between the Commission, the Council of the European Union and the Parliament. The original draft proposal for AIFMD II was published by the Commission on 25 November 2021 (the “Original Draft”), with political agreement being reached on 20 July 2023.

The most notable change is the introduction of a pan-European loan origination regime for alternative investment fund managers (“AIFMs”) and the alternative investment funds (“AIFs”) they manage. Despite the new requirements, it is helpful that AIFMD now expressly permits loan origination as an investment activity of an EU AIFM.

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Samantha J. Rowe, Patricia Volhard, Jin-Hyuk Jang, John Young, Ulysses Smith

The Taskforce on Nature related Financial Disclosures (TNFD) published the final version of its recommended disclosures in September 2023. These are in a similar format to the recommended disclosures published by the Taskforce on Climate related Financial Disclosures (TCFD) and, like the TCFD, available for voluntary adherence by organisations world-wide. Alongside the recommended disclosures, there is a “Getting started” guide, a Glossary and various pieces of additional guidance.

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Patricia Volhard, Jin-Hyuk Jang, John Young.

The Taxonomy Regulation (the “Taxonomy”) is the framework for a European Union (“EU”)-wide taxonomy, or classification system, of environmentally sustainable economic activities. As a pillar of the EU’s sustainable finance policy, it requires a limited number of EU companies to report on the alignment of their economic activities to the Taxonomy and requires fund sponsors in scope of the Sustainable Finance Disclosure Regulation (“SFDR”) to report on the extent to which their portfolios are in investments aligned with the Taxonomy. Separate and detailed technical screening criteria accompany the Taxonomy, specifying the activities in scope (Taxonomy-eligible activities) and the criteria for alignment (Taxonomy-aligned activities).

We cover in this update a number of key questions relating to the Taxonomy, including matters that have been addressed by the EU authorities since the adoption of the Taxonomy, and important outstanding matters.

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Patricia Volhard, Jin-Hyuk Jang,John Young,Eike Björn Weidner.

On 28 September 2023, the European Supervisory Authorities (the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority, together referred to as the “ESAs”) published a report (the “Report”) on how firms have disclosed information on “principal adverse impacts” (“PAIs”) under the Sustainable Finance Disclosure Regulation (the “SFDR”). The SFDR requires firms (also referred to as “FMPs”) above a certain size to publish information on their websites on their consideration of PAIs in the form of aggregated data across all their funds (and other financial products), and gives firms the option to include PAI information in fund-specific annual reports.

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Patricia Volhard, Jin-Hyuk Jang,John Young,Eike Björn Weidner.

The Sustainable Finance Disclosure Regulation (the “SFDR”) applies from March 2021. On 14 September 2023, the European Commission (the “Commission”) launched the first stage in its review of the SFDR by means of a public consultation aimed at a broad set of stakeholders. The consultation covers a large number of topics on implementation of the SFDR and its overall effectiveness, with the Commission asking for views on a number of concrete improvements. The Commission’s work covers current areas of uncertainty and reflects its continuing concerns on greenwashing. As expected, the consultation proposes, among other things, a new categorisation system for funds, reflecting the SFDR’s development into a “labelling and marketing tool” beyond its originally intended use as a disclosure framework.

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Patricia Volhard, Jin-Hyuk Jang, John Young, Eike Björn Weidner.

The EU’s Corporate Sustainability Reporting Directive (“CSRD”) is a new framework that requires companies to include a large body of sustainability information in their annual reporting, in accordance with the detailed European Sustainability Reporting Standards (“ESRS”), combined with external “assurance” of the information provided. CSRD first takes effect for financial years beginning on or after 1 January 2024 for companies (EU and non-EU) with securities listed on an EU “regulated market”. From 2025, large private EU companies will be in scope.

Given the preparation required, private equity firms are well advised to start to consider the impact of CSRD, and we outline in this Update suggested steps for firms to take.

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Catherine Amirfar, Christopher Anthony, Katherine Ashton, Jason Auerbach, Dominic Blaxill, Ezra Borut, Kara Brockmeyer, Geoffrey P. Burgess, Lawrence K. Cagney, Andrew J. Ceresney, Jennifer L. Chu, Alexander R. Cochran, Eric Dinallo, Christopher Dortschy, E. Drew Dutton, Jane Engelhardt, Jyotin Hamid, Ted Hassi, Morgan J. Hayes, Gareth Hughes, Peter J. Irwin, Mark Johnson, Eric T. Juergens, Rafael Kariyev, Meir D. Katz, Satish M. Kini, M. Natasha Labovitz, Henry Lebowitz, Maurizio Levi-Minzi, Andrew M. Levine, Sidney P. Levinson, Jonathan F. Lewis, Marilyn A. Lion, Timothy McIver, John (Jay) Neukom, Benjamin R. Pedersen, Marc Ponchione, Nicholas F. Potter, Ryan T. Rafferty, Julie M. Riewe, Samantha J. Rowe, Paul D. Rubin, Scott B. Selinger, Jane Shvets, Steven J. Slutzky, Patricia Volhard, Erica S. Weisgerber, Barbara Barath, Alison E. Buckley-Serfass, Zhiyan Cao, Robert T. Dura, Robert M. Fettman, Samuel Fung, Caroline P. Geiger, Andrew J. Gershon, Jin-Hyuk Jang, Stuart Hammer, Kim T. Le, Michael P. McGuigan, Sheena Paul, Tricia Bozyk Sherno, Jennifer Wheater, John Young, Jeffrey P. Cunard, Ulysses Smith, Jacob W. Stahl, Sergio Torres, Jennifer Wheater, Elie J. Worenklein, Adam Aukland-Peck, Colleen B. Bernaiche, Sasha Burger, Charles Cartiglia, Paul Eastham, Jay E. Evans, Sara Ewad, Christopher Gossage, Camila Isern, Yiran Ji, Maryam Kanna, Rekha Korlipara, Adriana Kranjac, Samuel D. Krawiecz, Merryl Lawry-White, Megan MacDonald, Harshil Mehta, Stephen Petraeus, Gianni Pizzitola, Stanley G. Seckler, Sheng Shao, Massy Vainshtein, Kimberly Anker

At the beginning of the year, we noted in our Private Equity Report: 2023 Outlook the considerable macroeconomic and geopolitical challenges facing private equity. As we pass the year’s midpoint, those challenges continue to hang over the private equity industry like a stalled weather system, refusing to dissipate, as existing obstacles have solidified and new hurdles have emerged. While the crisis around the collapse of Silicon Valley Bank, First Republic Bank and Signature Bank was not protracted, it nonetheless compounded an already difficult liquidity environment. Fundraising remains highly competitive. The polarization around ESG in the United States has intensified, resulting in a patchwork of wildly different state legislation. The SEC continues to take aim at private fund practices, while in the EU, new regulations stand to complicate both fundraising and the M&A landscape. In this environment, caution rules the day for both sponsors and investors.

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Christopher Dortschy, Patricia Volhard, Jin-Hyuk Jang, John Young, Mathieu Voos, Eike Björn Weidner

Businesses worldwide with operations in the European Union (“EU”) are preparing to comply with the EU’s Corporate Sustainability Reporting Directive (the “CSRD”). This new framework requires EU companies with securities listed on an EU “regulated market” or large EU companies in scope to include sustainability information in their annual reporting. The CSRD’s requirements will be phased in for financial years beginning on or after 1 January 2024.

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Patricia Volhard, Christopher Dortschy, Jin-Hyuk Jang, John Young, Mathieu Voos, Eike Björn Weidner, Johanna Waber

On 24 May 2023, the European Commission (the “Commission”) published its proposal for a Retail Investment Strategy (the “RIS”). The RIS consists of (i) a proposed Omnibus Directive that amends several EU directives, including the Markets in Financial Instruments Directive (the “MiFID”) and the Directive on Alternative Investment Fund Managers (the “AIFMD”) (the “Omnibus Directive”), and (ii) a proposed Regulation amending the PRIIPs Regulation (the “Amending Regulation”).

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Christopher Dortschy, Patricia Volhard, Jin-Hyuk Jang, John Young, Mathieu Voos, Eike Björn Weidner

On 12 April 2023, the Joint Committee of European Supervisory Authorities (the “ESAs”) published a consultation paper (“Consultation”) proposing amendments to the Regulatory Technical Standards under the Sustainable Finance Disclosure Regulation (the “SFDR Level II”). The Committee’s Consultation is in response to the European Commission’s (the “Commission”) request to address certain technical issues and broaden the disclosure framework under the SFDR.

The Consultation proposes a number of changes to the SFDR Level II rules, including: (i) extending the list of social indicators for principal adverse impacts (“PAIs”); (ii) improving the definitions, methodologies, metrics and presentation for various PAI indicators; (iii) extending disclosures (and related reporting) under the “do no significant harm” (“DNSH”) principle; (iv) introducing new disclosures regarding greenhouse gas (“GHG”) emissions reduction targets and (v) proposing changes to the templates for pre-contractual and periodic disclosures.

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Christopher Dortschy, Patricia Volhard, Jin-Hyuk Jang, John Young, Eike Björn Weidner, Mathieu Voos

The EU Commission (the “Commission”) recently published its long-awaited answers to questions raised in September 2022 by the European Supervisory Authorities (the “ESAs”) on the legal interpretation of the Sustainable Finance Disclosure Regulation (the “SFDR”). The answers provide clarification on significant points of interpretation in the SFDR, in particular in relation to the concept of “sustainable investment” and the meaning of “to consider” principal adverse impacts.

These points are of particular relevance to sponsors that market their funds in the EU with promotion of environmental or social themes, as the guidance helps delineate further the SFDR concepts of “reduction in carbon emissions as a sustainable objective” and of “sustainable investments”, which prospectively apply to funds within scope of Article 8 of SFDR (which applies to funds that promote environmental or social characteristics) or Article 9 of SFDR (which applies to funds with sustainable investment as their objective).

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Christopher Dortschy, Patricia Volhard, Jin-Hyuk Jang, John Young. Mathieu Voos, Eike Björn Weidner

On 24 March 2023, the Luxembourg financial regulator, the Commission de Surveillance du Secteur Financer (the “CSSF”), published a communication (the “Communication”) relating to a data collection exercise (the “Data Collection Exercise”) that requires Luxembourg fully authorized fund managers that manage Luxembourg-regulated and unregulated funds, and also other EU fund managers (and Luxembourg sub-threshold managers) managing Luxembourg CSSF-regulated funds (including ELTIFs), to provide in electronic format data on the pre-contractual sustainability disclosures made under the Sustainable Finance Disclosure Regulation (the “SFDR”) for funds currently being marketed. Along with the Communication, the CSSF also published a user guide with the formats, contents and technical details of the Data Collection Exercise (the “User Guide”).

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Patricia Volhard, Jin-Hyuk Jang, John Young, Yannis Paradeisiadis

Businesses worldwide with operations in the European Union (the “EU”) are now preparing for compliance with the EU’s Corporate Sustainability Reporting Directive (the “CSRD”), a new framework that will require companies with securities listed on an EU “regulated market” or large EU companies in scope to include sustainability information in their annual reporting. CSRD will be accompanied by the European Sustainability Reporting Standards (the “ESRS”), which detail the reporting required and which the EU Commission (the “Commission”) has called the “centrepiece” of this legislation. Following implementation into the national law of EU Member States, the CSRD’s requirements will be phased in for reporting periods beginning on or after 1 January 2024. We describe the companies in scope and the timing of application of CSRD’s requirements in our recent Debevoise In Depth.

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Christopher Dortschy, Patricia Volhard, Jin-Hyuk Jang, John Young, Xavier Couderc-Fani, Eric Olmesdahl, Lukas Ott, Eike Björn Weidner

On 2 December 2022, the Luxembourg financial regulator, the Commission de Surveillance du Secteur Financier (“CSSF”), published an FAQ paper which aims to provide further clarity to fund managers on selected aspects of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial sector (“SFDR”).

The CSSF reserves the right to adapt its approach to any matter covered by the Q&A at any time and emphasizes that the FAQ paper should be read in conjunction with the SFDR Q&As provided by the European Commission and clarifications issued by the European Supervisory Authorities (“ESAs”).

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Patricia Volhard, Jin-Hyuk Jang, John Young

Over a year since the European Sustainable Finance Disclosure Regulation (the “SFDR”) came into effect, the FCA recently published a Consultation Paper on Sustainability Disclosure Requirements. This is a significant step in the UK’s development of a regime on sustainability related disclosure and labels for funds and other financial products. Whilst the FCA’s draft rules have some parallels to the SFDR, the FCA has taken a different approach, notably introducing a retail consumer facing product “labelling” regime alongside separate product level disclosures.

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Patricia Volhard, Jin-Hyuk Jang, John Young

The European Commission’s Platform on Sustainable Finance, an expert group established to assist with the development of the European Union’s sustainable finance policies, recently published its Final Report on Minimum Safeguards under the EU Taxonomy Regulation (the “Report”). The Report sets out the checks for firms to determine whether their investee companies have in place “minimum safeguards” in relation to human rights, as well as other business practices. Whilst the concept of Minimum Safeguards broadly encompasses human rights, the Report construes that topic very broadly, covering, in a company, concerns relating to employment rights, legal compliance and best business practices. Also, whilst the checks described in the Report form part of the process for qualifying an investment under the Taxonomy Regulation as taxonomy aligned, the practical impact of the Report is likely to be wider—the Report’s standards are general criteria for due diligence on human rights and best business practices, and there is significant overlap between the concept of “Minimum Safeguards” and “good governance” in the definition of sustainable investment and the Do No Significant Harm test (the “DNSH”) for funds classified under Article 8 and 9 of the EU Sustainable Finance Disclosure Regulation (the “SFDR”).

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Patricia Volhard, Jin-Hyuk Jang, John Young, Eric Olmesdahl, Jan Schoberwalter

On 5 September 2022, the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin”) published a Q&A paper providing guidance on the interpretation of certain aspects of the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088, “SFDR”). This Q&A paper takes into consideration, and in part seems to divert from, previous guidance issued by the European Commission in July 2021 and May 2022.

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Jonathan Adler, Christopher Anthony, Katherine Ashton, Sally Bergmann, Dominic Blaxill, Ezra Borut, Geoffrey P. Burgess, Jennifer L. Chu, William Y. Chua, Christopher Dortschy, E. Drew Dutton, Jane Engelhardt, Avi Gesser, Jyotin Hamid, Morgan J. Hayes, Emily F. Huang, Peter J. Irwin, Satish M. Kini, M. Natasha Labovitz, Andrew M. Levine, Sidney P. Levinson, Marilyn A. Lion, Peter J. Loughran, Nicole Levin Mesard, Brett M. Novick, Marc Ponchione, Ryan T. Rafferty, Jeffrey E. Ross, Scott B. Selinger, Steven J. Slutzky, Thomas Smith, Ramya S. Tiller, Patricia Volhard, Richard Ward, Jeffrey P. Cunard, Tricia Bozyk Sherno, Marshal L. Bozzo, Zhiyan Cao, Robert T. Dura, Andrew J. Gershon, Stuart Hammer, Sheena Paul, Jin-Hyuk Jang, Andrew C. Rearick, Jennifer Wheater, John Young, Ulysses Smith, Sasha Burger, Jennifer R. Cestaro, Thomas A. DeMarzo, Paul Eastham, Isabel Espinosa de los Reyes, Andrew Field, Michael C. Godbe, Christopher Gossage, Anna R. Gressel, Merryl Lawry-White, Sheng Shao, Rachel Tennell, Malina Welman, Matthew Mrozek, Chika Ojukwu

As we head into the second half of the year, geopolitical and economic uncertainties persist, and markets around the globe have slowed accordingly. While private equity fundraising and M&A activity levels remained generally strong in the first half of the year (although comparatively weaker than 2021), the macroeconomic environment, market volatility and heightened regulatory oversight present challenges to which the private equity industry will need to adapt. We may see increasing competition in fundraising in the second half of the year, as the demand by sponsors for capital continues to be strong, as well as increasing use of bespoke structures that are tailored to investors’ needs and of warehousing vehicles as alternative sources of capital. Meanwhile, as overall M&A activity slows, we anticipate that continuation funds and fund-to-fund transactions will remain popular. More generally, we expect parties to deploy more creativity in structuring and bridging valuation gaps to get deals over the finish line, including in the secondaries market as well as M&A and leveraged finance transactions.

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Patricia Volhard, Jin-Hyuk Jang, Eric Olmesdahl, Jan Schoberwalter, Johanna Waber

Shortly after implementation of the AIFMD Directive (Directive 2011/61/EU), the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) published an FAQ paper providing guidance on their approach to the marketing provisions (the “FAQ Paper”). On 5 July 2022, in the wake of the Cross Border Distribution of Funds Directive (2019/1160/EU), the FAQ Paper received an overdue do-over.

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Patricia Volhard, Jin-Hyuk Jang, John Young 

On 31 May 2022, the European Securities and Markets Authority (“ESMA”) published a supervisory briefing on best practices for disclosures under the Regulation on sustainability-related disclosures in the financial services sector (“SFDR”). The purpose of this briefing is to ensure convergence across the European Union in the supervision of investment funds with sustainability features, and to combat greenwashing by investment funds.

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Patricia Volhard, Christopher Dortschy, Jin-Hyuk Jang, John Young, Eric Olmesdahl

On 16 May 2022, the Committee on Economic and Monetary Affairs (ECON) of the European Parliament published a draft report on the European Commission’s proposal for review of AIFMD. We previously reported on the Commission’s proposal at the end of 2021. The new report takes into account many of the concerns raised by the industry and simplifies many of the newly introduced requirements in a helpful manner.

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Patricia Volhard, Jin-Hyuk Jang, John Young

The European Securities and Markets Agency (ESMA) this week published a Commission Decision and Annex containing a set of answers on the Sustainable Finance Disclosure Regulation ((EU) 2019/2088) (SFDR) and the Taxonomy Regulation ((EU) 2020/852), which the European Commission adopted on 13 May 2022.

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Patricia Volhard, John Young, Jin-Hyuk Jang

The EU Regulation on sustainability-related disclosures in the financial services sector (the “SFDR”) came into effect in March 2021. Subsequently, the European Supervisory Authorities (the “ESAs”) produced on 6 April 2022 the final Regulatory Technical Standards (“RTS”), including the templates for disclosure by funds within Article 8 or Article 9 of SFDR.

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Patricia Volhard, John Young

Following proposals published in 2021, the FCA published in December 2021 its final requirements for a climate-related financial disclosure regime for asset managers (as well as life insurers and FCA-regulated pension providers). As expected, the FCA’s new rules require firms in scope to produce climate related disclosures based on the Recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). TCFD is an international initiative for companies and investors to disclose climate related information. The rules first apply to the largest asset managers from 1 January 2022. The rules form part of the FCA’s new Environmental, Social and Governance (ESG) sourcebook.

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Jonathan Adler, Catherine Amirfar, Christopher Anthony, Katherine Ashton, Andrew L. Bab, Geoffrey P. Burgess, Ezra Borut, Andrew J. Ceresney, William Y. Chua, Jennifer L. Chu, Jeffrey P. Cunard, Alexander R. Cochran, E. Drew Dutton, Jane Engelhardt, Morgan J. Hayes, Eric T. Juergens, Maurizio Levi-Minzi, Nicholas P. Pellicani, Ryan T. Rafferty, Julie M. Riewe, Scott B. Selinger, Marc Ponchione, Thomas Smith, Ramya S. Tiller, Patricia Volhard, Richard Ward, Alisa A. Waxman, Marshal L. Bozzo, Christopher Dortschy, Andrew J. Gershon, Emily F. Huang, Andrew C. Rearick, Jennifer Wheater, Sasha Burger, Dominic Blaxill, Charles Cartiglia, Robert T. Dura, Nathan Frost, Natalia Pszenny, Matthew J. Sacco, Sheng Shao, Sergio Torres, Charlotte A. Walkovik, Paul Eastham, Christopher Gossage, Robert B. Kaplan, Scott M. Caravello, Stephen Petraeus, Sheena Paul, John Young, Jin-Hyuk Jang, Lukas Ott, Andrew M. Levine, Stuart Hammer, Ulysses Smith, Merryl Lawry-White, Luke Dembosky, Avi Gesser, Michael R. Roberts, Peter J. Irwin, Ina C. Popova, Samantha J. Rowe, Natasha Labovitz, Sidney P. Levinson, Paul D. Rubin, Eric R. Dinallo, Marilyn A. Lion, Jacob W. Stahl, Nicholas F. Potter, Kim T. Le, Adam Aukland-Peck, Melissa Runsten, Matthew Mrozek, Michael C. Godbe, Christel Y. Tham, Lisa Wang Lachowicz

After the private equity industry’s tremendous rebound from the challenges brought on by the pandemic in 2020, the momentum continued through 2021. Low interest rates, massive amounts of dry powder and record fund-raising on both the primary and secondary markets fueled a torrent of investment activity.

As we begin 2022, the industry’s biggest challenge—aside from intense competition for deals and increased valuation of targets—is on the regulatory and legal front. Sponsors face a more hostile antitrust environment, greater scrutiny over ESG disclosures and deeper probing into their agreements and operations for conflicts of interest and inappropriate incentives. Sponsors in disputes with host States arising from European Union cross-border investments are facing difficulties in accessing treaty protections, and investors in U.S. healthcare are finding themselves at risk for False Claim Act suits. All of these developments will require sponsors to focus on the execution of fundamentals, such as due diligence and compliance controls, while also ensuring that they provide fund investors with comprehensive disclosure that accurately reflects their practices and operations.

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Patricia Volhard, Ulysses Smith, John Young, Jin-Hyuk Jang

This is a summary guide for private equity sponsors and their portfolio companies to the frameworks, initiatives and resources for climate and sustainability targets, reporting and disclosure. The guide covers both mandatory and voluntary frameworks, and is particularly targeted at sponsors who market their funds in the European Union.

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Patricia Volhard, Christopher Dortschy, Jin-Hyuk Jang, John Young, Mathieu Voos

As long anticipated, the European Commission has recently published a proposal to amend the Alternative Investment Fund Managers Directive (AIFMD). The proposal targets specific amendments to the AIFMD and does not entail a wholesale review of the Directive. The Commission also proposes to carry across certain of the amendments to the EU Directive for retail funds, UCITS. At the same time, the Commission published a proposal for review of the Regulation on European Long-Term Investment Funds (ELTIF).

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Ted Hassi, Timothy McIver, Michael Schaper, Kevin M. Schmidt, Erica S. Weisgerber, Anne-Mette Heemsoth, Gregory V. Gooding, Uri Herzberg, Kevin M. Schmidt, Katherine E. Durnan, Shannon Rose Selden, Zachary H. Saltzman, David J. Hotelling, Natascha Born, Jonathan Adler, Geoffrey Kittredge, Ina C. Popova, Patrick Taylor, Cameron Sim, Benjamin Teo.

Identifying and managing risk is an essential concern for private equity funds. Some risks, like the upheaval brought on by the COVID-19 pandemic, are novel and arrive with little warning. Many others, however, can be spotted in advance, through policy pronouncements or developments in case law, giving agile investors an opportunity to revise strategy and, where possible, to take appropriate countermeasures.

In our 2020 Private Equity Report – Year-End Review and Outlook issue, we noted the uncertainty that came with a new administration in Washington. In the months since then, a clearer picture has emerged of the challenging antitrust environment that dealmakers now face, both in the United States and abroad. Recent developments under Delaware case law have also affected risk assessment by private equity investors. Sponsors can no longer make formerly safe assumptions regarding the redemption of preferred shares or certain M&A litigation risks with respect to minority investments. Other disputes illustrate that a private equity fund’s ability to pursue arbitration against a foreign state under investment treaties may be adversely affected by the fund’s structure.

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Samantha J. Rowe, Patricia Volhard, John Young, Charlotte Bocage, Merryl Lawry-White

In September 2021, the Independent Modern Slavery Commissioner (the “Commissioner”), issued a report (“September report”) setting out the Commissioner’s recommendations for the financial sector to take concrete steps to address modern slavery and human trafficking (“MSHT”) in supply chains and activities across all operations. The report explains that financial organisations may be involved in contributing to MSHT in several ways and have a critical role to play in combating MSHT. For instance, financial services companies may act as “upstream” providers of financial goods and services linked to MSHT through the trading of commodities generated by modern slavery or human trafficking; the subscription to funds using profits drawn from MSHT; or through underwriting, reinsurance or inter-bank services provided to the firm by other financial service companies with links to MSHT. MSHT can also occur “downstream”, at the clients and value-chain level, implicating financial services companies that provide loans or investments in businesses with modern slavery in their supply chains or project finance where the project engages forced labour or human trafficking.

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Patricia Volhard, Jin-Hyuk Jang, John Young, Eric Olmesdahl

The European Commission (the “Commission”) recently issued the long-awaited answers to questions raised by the European Supervisory Authorities earlier this year on the Regulation on Sustainability-related Disclosures in the Financial Sector (“SFDR”). This Update covers answers to questions that relate to some key areas of legal uncertainty under SFDR. While the explanations are welcome, a number of answers do not provide the clarity expected.

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Jonathan Adler, Christopher Anthony, Katherine Ashton, Andrew L. Bab, Megan K. Bannigan, Sally Bergmann, David H. Bernstein, Paul S. Bird, Ezra Borut, Geoffrey P. Burgess, Jennifer L. Chu, William Y. Chua, Matthew Dickman, Christopher Dortschy, E. Drew Dutton, Jane Engelhardt, Peter A. Furci, Avi Gesser, Jyotin Hamid, Morgan J. Hayes, Peter J. Irwin, Meir D. Katz, Rafael Kariyev, M. Natasha Labovitz, Maurizio Levi-Minzi, Andrew M. Levine, Sidney P. Levinson, Jonathan F. Lewis, Marc Ponchione, Ryan T. Rafferty, Paul D. Rubin, Zachary H. Saltzman, Kevin M. Schmidt, Shannon Rose Selden, Scott B. Selinger, Steven J. Slutzky, Ramya S. Tiller, Richard Ward, Alisa A. Waxman, Patricia Volhard, Franci J. Blassberg, Jeffrey P. Cunard, Andrew J. Gershon, Stuart Hammer, Jin-Hyuk Jang, Gregory T. Larkin, Kim T. Le, Sheena Paul, Andrew C. Rearick, Tricia Bozyk Sherno, Jacob W. Stahl, Jennifer Wheater, John Young, Adam Aukland-Peck, Dominic Blaxill, Charles Cartiglia, Jongmin Char, Robert T. Dura, Paul Eastham, Jay E. Evans, Christopher D. Freeman, Eric N. Fischer, Norma Angelica Freeland, David J. Hotelling, Samuel D. Krawiecz, Wen-Wei Lai, Merryl Lawry-White, Robert Maddox, Sergio Torres, Joshua E. Roberts, Malina Welman

At the end of 2020, many regarded the extraordinary resiliency shown by both the economy in general and private equity in particular and wondered if the momentum would last. As we pass the midpoint of 2021, the answer so far has been clearly in the affirmative. To be sure, the recovery is uneven across sectors, the COVID-19 threat is far from extinguished, and there may well be a cooling of the economy on the horizon as we witnessed by the volatility in the stock market this past week. But broadly speaking, fundraising, M&A and the secondaries market are all strong.

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Patricia Volhard, John Young

The FCA recently announced a proposal for a climate-related financial disclosure regime for UK asset managers, as well as life insurers and FCA-regulated pension providers. This is an important step in the United Kingdom’s implementation of a regime that is similar to the European Union’s Sustainability Finance Disclosures Regulation (“SFDR”), although the United Kingdom’s regime for the time being focuses exclusively on climate-related disclosure, whilst the European Union’s regime encompasses environmental, social and governance considerations.

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Patricia Volhard, Jin-Hyuk Jang, John Young, Merryl Lawry-White

The Taxonomy Regulation (the “Taxonomy”) defines a European Union (“EU”)-wide taxonomy, or classification system, of environmentally-sustainable economic activities, covering six environmental objectives. It contains technical screening criteria that draw on existing EU standards, labeling and certification regimes. It also introduces disclosure requirements for (i) financial services firms in relation to activities of their investments that they term as environmentally sustainable and (ii) large EU “public interest” companies in relation to their own economic activities.

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John W. Rife III

Partner John Rife joined the latest secondaries roundtable hosted by Private Equity International, where the participants discussed the growth of GP-led secondaries, and the rising potential of the LP secondaries market.

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Christopher Anthony, Paul S. Bird, E. Raman Bet-Mansour, Geoffrey P. Burgess, Jennifer L. Chu, Alexander R. Cochran, E. Drew Dutton, David Grosgold, Morgan J. Hayes, Uri Herzberg, Eric T. Juergens, Robert B. Kaplan, Marilyn A. Lion, Edwin Northover, Marc Ponchione, Nicholas F. Potter, Julie M. Riewe, Samantha J. Rowe, Kevin M. Schmidt, James C. Scoville, Shannon Rose Selden, Scott B. Selinger, Steven J. Slutzky, Patricia Volhard, Matthew Dickman, Jin-Hyuk Jang, Andrew G. Jamieson, Allison Lee, Benjamin Lyon, Clare Swirski, Norma Angelica Freeland, Adrian St. Francis, Laurence Hanesworth, Spencer K. Gilbert, Sarah Hale, Matthew B. Parelman, Brett M. Novick

Over the past year, the private equity industry has responded to the upheaval of the COVID-19 pandemic with tremendous resiliency and innovation. Private equity sponsors have acquired new long-term sources of capital through insurance investments, accessed the IPO market through SPACs and protected exit strategies from volatility in the debt financing market through the use of portability provisions. While these strategies were already part of the private equity playbook, the pandemic has intensified their use.

The pandemic has also highlighted the importance of nonfinancial factors in investing—not just climate change, but other environmental issues like biodiversity, and social issues, such as racial justice and economic inequality. The EU’s ESG directives are thus one point in an arc tracing the evolving expectations of regulators and investors.

In this issue of the Debevoise Private Equity Report, we explore these developments, what they mean for private equity sponsors and the caveats to keep in mind. We hope that you will find this to be a useful guide in developing your own strategies to flourish during times of great change.

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Finding it hard to navigate the swiftly developing ESG landscape?  As Environmental, social, and governance (ESG) issues continue to move up the corporate agenda we have launched a dedicated online ESG Resource Center which includes all the firm’s ESG-related thought leadership, webcasts, articles, and other insights.

Visit the ESG Resource Center

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Patricia Volhard, Johanna Waber

As part of the Practical Law Global Guides series, Patricia Volhard and Johanna Waber have contributed a Q&A chapter to the Retail Investment Funds Global Guide.

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Geoffrey Kittredge, John W. Rife III, Richard Ward, Patricia Volhard, John Young, Jin-Hyuk Jang

In 2020 in Europe and beyond, asset managers turned to the integration of environmental, social and governance factors in their investment decisions, and 2021 looks set to continue the trend. The EU’s new Sustainable Finance Disclosure Regulation (SFDR) entered into force on 10 March 2021.

Under the new rules, funds that promote sustainability in their investment process will have to substantiate that promotion, depending on the level of their ESG-related ambitions. The focus of the regulation is transparency on whether and how a firm applies ESG standards. The EU has created a tiered regime, with sets of basic and enhanced disclosures. Basic disclosures are required for all firms in scope (e.g. fund managers, portfolio managers and investment advisers), which will need to explain whether and how their investment decisions, as well as remuneration policies, integrate sustainability risks (i.e. ESG risks which could impact on the value of their investments). They will need to make these disclosures available on their websites and in their pre-contractual documents, including the private placement memorandum.

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Dr. Thomas Schürrle, Dr. Andrea Pomana

On 19 January 2021, the Tenth Amendment to the German Act against Restraints of Competition (the “ARC”) entered into force. The Amendment, also known as the Digitalization Act, brings about a major revamp of the German competition rules. It addresses the challenges posed by the highly dynamic digital economy and the need for ex-ante competition oversight in order to curb the market power of large digital platforms to ensure effective competition.

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Patricia Volhard, Jin-Hyuk Jang, John Young

The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published last week the long-awaited Final Report, including the draft Regulatory Technical Standards on the content, methodologies and presentation of disclosures under the EU Regulation on sustainability related disclosures in the financial services sector (the “SFDR”) (the “SFDR Level 2 Rules”). The rules provide the detailed disclosure and reporting required for products and regulated EU investment firms within scope of SFDR.

Whilst the SFDR largely applies as of 10 March 2021, the SFDR Level 2 Rules apply only in January 2022. This means that whilst firms must comply with the high-level disclosure requirements in the SFDR, the detailed disclosure need not be supplied until January 2022.

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Geoffrey P. Burgess, Timothy McIver, John Young, Benjamin Lyon, Kayleigh Anderson, Dominic Blaxill, Katie Power, Edoardo Troina

Many post-Brexit changes will play out in the years ahead in the M&A arena. This In Depth explores several significant recent developments: the UK’s and EU’s new rules on investment review, the impact of Brexit on UK and EU merger control, as well as the consequences for investment protection, the loss of financial services “passporting” rights and changes to UK law resulting from Brexit.

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Christopher Dortschy, Patricia Volhard, Jin-Hyuk Jang, John Young

Following the end of the Brexit transition period, the new EU-UK trade and cooperation agreement (the “Treaty”) entered into force on 1 January 2021. From that date, directly applicable EU law ceased to apply in the UK and UK firms lost their access to EU clients and markets through their “passports”. As expected, the Treaty did not provide any mutual market access for financial services and effectively amounted to a “hard Brexit” in financial services terms—with UK and EU firms putting in place long contemplated plans to address the loss of the EU financial services passports.

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2020 was a year of remarkable resilience for the private equity industry. After every aspect of the industry was upended in the second quarter, sponsors, investors and their advisors quickly adapted, factoring pandemic-related risks into their assessments and settling into a new normal for their business operations. To appreciate the extent of the industry’s agility, contemplate the strong M&A market, the stronger IPO market and the banner year for secondary fundraising and LBO financing—and then consider how unlikely those conditions seemed at the start of the pandemic.

To be sure, there are many unknowns on the long road toward economic recovery. Beyond market conditions, further uncertainty comes from tax policy, regulation and enforcement. The tremendous cost of fighting the COVID-19 pandemic and shoring up battered economies has governments reexamining their tax codes. A new administration in Washington will likely bring more aggressive enforcement of financial, environmental and workplace regulations. In Europe, while funds and investors are generally well prepared for Brexit, the effects of the new EU regulations regarding ESG disclosure remain to be seen.

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Patricia Volhard, Jin-Hyuk Jang, Eric Olmesdahl 

The German Ministry of Finance has published the long-awaited ministerial draft of the act implementing (among other things) the Cross-border Distribution of Funds Directive 2019/1160 (the “Directive”). The act is referred to as the Act to Promote

Germany as a Fund Jurisdiction (the “Act“) and includes some changes to improve the regulatory framework for German funds and German fund managers. As to non-EU funds, the Act also provides rules with respect to pre-marketing in implementation of the Directive, making non-EU funds and managers subject to the same rules regarding pre-marketing as EU funds, to the extent marketed in Germany.

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Andrew M. Ahern, Gavin Anderson, Christopher Anthony,Katherine Ashton, Sally Bergmann, Paul S. Bird, Franci J. Blassberg, Ezra Borut, Jennifer L. Chu, William Y. Chua, Erin Cleary, Peter A. Furci, Maurizio Levi-Minzi, Andrew M. Levine, John W. Rife III, Rebecca F. Silberstein, Kevin M. Schmidt, Steven J. Slutzky, Rafael Kariyev, Patricia Volhard, Jin-Hyuk Jang, Andrew C. Rearick, John Young, Marisa Demko, Jay E. Evans, Samuel D. Krawiecz, Sergio Torres, Wen-Wei Lai, Tiffany Wu, Shawn Xiao Yang

This issue of the Private Equity Report comes during a time of reflection—not merely due to the events of this turbulent year, but because it marks the twentieth anniversary of the founding of the publication. To celebrate the occasion, six Debevoise partners who have shaped the Report over the past two decades—including founding editor Franci Blassberg—gathered for an Editors’ Roundtable discussion on private equity’s past, present and future. We’ve included the takeaways from that discussion, which can be found below under our 20th Anniversary Spotlight Section.

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John F. Anderson

John Anderson, an international counsel in our Funds/Investment Management Group, has published an article in Private Debt Investor exploring how new reporting frameworks will help ESG practices become more normalized in debt funds.

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Thomas Smith, Pierre Maugue

Thomas Smith and Pierre Maugue, partners in our Finance Group, have been interviewed by Private Equity International about latest trends in fund finance, including innovations to link fund finance to EGS metrics.

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Patricia Volhard

Patricia Volhard, a partner in our Funds/Investment Management Group, has taken part in the latest Germany roundtable hosted by Private Equity International.

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Geoffrey P. Burgess, David Innes, Timothy McIver, Kayleigh Anderson, Edoardo Troina

The UK government has published long-awaited draft legislation increasing its ability to intervene in acquisitions of UK businesses to address national security concerns. The UK is following other European countries that have already strengthened their foreign investment review mechanisms, and is moving to something more comparable to CFIUS in the United States. The National Security and Investment Bill (the “Bill”) will be the biggest change to the UK merger control regime since 2003 and comprehensively overhauls the current UK Foreign Direct Investment (“FDI”) framework. The Bill is wide-ranging and is facing calls for greater clarity; in particular around the risks of politicisation of inbound UK M&A activity, uncertainty as to how the regime will apply, and bureaucratic delay for otherwise benign deals.

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Byungkwon Lim, Klaudius Heda, Anna V. Maximenko, Gary E. Murphy, Philip Orange, Elena Klutchareva, Evgenii A. Lebedev, Dr. Friedrich Popp, Jan Schoberwalter

As part of its digital finance package, the European Commission published a draft regulation regarding a pilot regime for market structures based on distributed ledger technology (the “DLT Pilot Regime”).

The DLT Pilot Regime is part of an EU-wide strategy to further enable and support the potential of digital finance in terms of both innovation and competition while mitigating related risks. The European Commission recognizes that the existing financial services regulatory framework is not fully adapted to the use of distributed ledger technology (“DLT”) and therefore poses obstacles to the further development of innovative market infrastructures for financial instruments. The European Commission identifies these obstacles as one of the factors that had prevented the European security token market from thriving in past years.

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David Innes, Dominic Blaxill, Laurence Hanesworth, Kirsten Watson

The UK Takeover Panel has published a consultation paper proposing a number of changes to the Takeover Code rules governing the timetable for contractual offers and invoking certain offer conditions. The proposed changes aim to simplify the contractual offer timetable and to accommodate the potentially lengthy timeframes required to satisfy regulatory approvals. The proposed amendments are subject to a public consultation which closes on 15 January 2021, with the final amendments to the Code expected to be published in Spring 2021. The changes to the Code would take effect three months thereafter.

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Nicholas F. Potter, James C. Scoville, Clare Swirski, John M. Vasily, Benjamin Lyon, Philip Orange, Sarah Hale, Katie Power

Following a preview tweet posted on 2 November 2020, Lloyd’s of London (“Lloyd’s”) published on 5 November 2020 its plan to deliver the second phase of the Future at Lloyd’s – the strategy to modernise the 334-year-old insurance marketplace, which has previously suffered from a reputation for being arcane, opaque and having a sometimes costly expense base. Among the main aims of the plan is a material reduction in operating costs for brokers, insurers and partners—estimated at £800 million ($1 billion) (the equivalent of about 3% of current operating costs). A summary of Lloyd’s Blueprint Two proposals is set out in the client update.

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Richard Ward, Jennifer Wheater, Tom Berry, Charles Cartiglia, Paul Eastham

Following its semi-annual review, the EU Council has removed the Cayman Islands and Oman from its list of non-cooperative jurisdictions for tax purposes, the EU’s so called tax haven “blacklist”, given improvements made to their tax policy frameworks. Meanwhile, the Council has added Anguilla and Barbados to the list. Both changes apply as from 6 October 2020.

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Cécile Beurrier, Michael Bolotin, Erin Cleary, Rafael Kariyev, Daniel Priest, Matthew D. Saronson, Peter F.G. Schuur, Adam M. Namm, Cameron E. Rotblat, Sabrina Y. Hsieh
 
The Treasury and the IRS have released final regulations under Section 1446(f) (the “Final Regulations”) providing guidance on the rules governing withholding on transfers of partnership interests. The 2017 Tax Cuts and Jobs Act imposes US federal income tax on a non-US seller on the gain from the sale of an interest in a partnership engaged in a US trade or business to the extent such gain does not exceed the non-US seller’s share of the partnership’s built-in ECI gain (“ECI Gain”). Under Section 1446(f), a purchaser of a partnership interest must withhold 10% of the amount realized by a non-US seller unless an exception applies.

The Final Regulations generally retain the same structure and general rules as the proposed regulations issued in 2019 (the “Proposed Regulations”), including many of the important exceptions to withholding such as the Non-Foreign Status Exception, Nonrecognition Exception and No Gain Exception (all described below). However, the Final Regulations modify some of the rules in a way that should allow more taxpayers to qualify for withholding exemptions or reductions, though non-US sellers may still face challenges establishing eligibility for such exemptions or reductions.

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Catherine Amirfar, Lord Goldsmith KC, Natalie L. Reid, David W. Rivkin, Samantha J. Rowe, Karolos Seeger, Patrick Taylor, Patricia Volhard, Jin-Hyuk Jang, Robin Lööf, John Young, Merryl Lawry-White, Charlotte Bocage

In 2019, the UK government established an independent taskforce—the Global Resource Initiative (“GRI”)—as part of its 25-Year Environment Plan. The GRI was tasked with considering actions that the UK could take to make international supply chains greener. In March 2020, the GRI submitted its final recommendations to the government, which included the introduction of “a mandatory due diligence obligation on companies that place commodities and derived products that contribute to deforestation on the UK market and to take action to ensure similar principles are applied to the finance industry”. The proposed legislation is a response to this recommendation. 

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Geoffrey P. Burgess, Timothy McIver, Alexandre Bisch, Gavin Chesney, Philipp von Holst, Philippe Tengelmann, Dr. Andrea Pomana, Jan Schoberwalter, Edoardo Troina

Across Europe, lockdown measures have been lifted. In the post-lockdown world, a significant proportion of commercial undertakings will have to navigate the phased reopening and implement commercial strategies to navigate the “new normal” of living with COVID-19. This transitional phase, whilst a relief to many Europeans, has caused fears of a second wave of infections and further lockdowns. It is clear that there might be rough seas ahead for businesses operating across Europe.

Governments across Europe have indicated that the unprecedented state-sponsored packages currently in place will continue and be supplemented to aid businesses. For many businesses, quantifying the long term economic impact of COVID-19 will take time. However, the depth and scale of the economic shock caused by the pandemic on economies across Europe is becoming clearer with many countries across the continent on the brink of deep recessions.

The vast majority of existing measures are open to any company with domestic employees and impose relatively few restrictions based on the size or nationality of the ultimate beneficial owner. This means that help is on hand for multinational companies or PE-owned portfolio companies with operations in Europe. The measures are heterogeneous in nature, ranging from tax forbearance to State-subsidised temporary staff layoffs.

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Patricia Volhard, Simon Witney, John Young, Eric Olmesdahl, Jin-Hyuk Jang, Christopher Dortschy

As part of the review of the AIFMD, ESMA has published a letter to the European Commission outlining areas for possible change. The Commission will publish a proposal for the AIFMD review, expected later this year, and ESMA’s views are likely to carry significant weight. We cover in this post some key aspects of ESMA’s proposals, with a particular focus on the impact on private equity and private debt funds.

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Jonathan Adler, Christopher Anthony, Megan K. Bannigan, David H. Bernstein, Ezra Borut, Geoffrey P. Burgess, Jennifer R. Cestaro, William Y. Chua, Andrew J. Ceresney, Jeffrey P. Cunard, Peter A. Furci, Morgan J. Hayes, Peter J. Irwin, Robert B. Kaplan, M. Natasha Labovitz, Andrew M. Levine, Sidney P. Levinson, Marc Ponchione, Julie M. Riewe, Kevin M. Schmidt, Scott B. Selinger, Steven J. Slutzky, Thomas Smith, Ramya S. Tiller, Patricia Volhard, Alisa A. Waxman, Michael P. McGuigan, Almas Daud. Wen-Wei Lai, Dominic Blaxill, Nicole Levin Mesard, Edward M. Rishty, Richard A. Grossmann, Rafael Kariyev, Samuel D. Krawiecz, Richard Ward, Paul Eastham, Kenneth J. Berman, Stuart Hammer, Jin-Hyuk Jang, Gregory T. Larkin, John Young, Christopher Dortschy, Jay E. Evans, Norma Angelica Freeland, James L. Harrington, Merryl Lawry-White

The first half of 2020 has, of course, been dominated by the pandemic. Public markets have been up and down, M&A activity dramatically slowed, and the outlook for new fundraisings is less clear than it has been for many years. As we report in this edition of Private Equity Report’s Mid Year Review and Outlook, sponsors have been focused on supporting the liquidity and business requirements of portfolio companies. During the second half of the year, we expect some innovative refinancing transactions alongside an uptick in restructuring activity. At the same time, many dealmakers have been creative, with take-privates and strategic investments in public companies seeing something of a resurgence in Asia and the United States respectively.

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Katherine Ashton

Katherine Ashton took part in a virtual discussion as part of the Spotlight podcast series from Secondaries Investor, focusing on how to encourage more women in the secondaries industry, and recognizing and dealing with unconscious biases.

Listen to the podcast

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Thomas Smith, Ramya S. Tiller, Michael P. McGuigan, Andrew C. Rearick, Lee Henderson

Private equity sponsors have focused since the outset of the pandemic on access to liquidity for their portfolio companies. This keen focus on liquidity has extended to fund-level financings as sponsors seek to raise funds not only as a defensive measure but also to make opportunistic investments at a time of market dislocation. Below are some updates in the fund finance market that may be of interest to private equity sponsors and investors.

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Christopher Dortschy, Patricia Volhard, Simon Witney, Jin-Hyuk Jang, John Young, Philip Orange, Eric Olmesdahl, Clarisse Hannotin, Johanna Waber, Helena Inghelram

There is less than six months until the end of the transition period provided for in the Withdrawal Agreement between the European Union (the “EU”) and United Kingdom (the “UK”), at which point UK-based financial services firms will cease to benefit from the “passporting” rights conferred by EU law. This note follows our update in January 2020 on the UK’s withdrawal from the EU and the regulatory consequences for UK and European Economic Area (“EEA”) based private equity and venture capital firms.

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Geoffrey P. Burgess, Alan J. Davies, David Innes, M. Natasha Labovitz, Richard Lawton, Kevin Lloyd, Emily Lodge, Ardil Salem, Edoardo Troina, Elie J. Worenklein

Improving the insolvency framework had been on the UK Government’s agenda for many years and the economic crisis caused by the COVID-19 pandemic accelerated the introduction of new legislation. On 20 May 2020, the UK Government published the long-awaited draft Corporate Governance and Insolvency Bill (the “Bill”), which received Royal Assent on 25 June 2020 to become the Corporate Insolvency and Governance Act 2020 (the “Act”).

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Christopher Dortschy, Patricia Volhard, Jin-Hyuk Jang, Simon Witney, John Young, Clarisse Hannotin, Eric Olmesdahl, Johanna Waber, Helena Inghelram

The Luxembourg financial regulator (Commission de Surveillance du Secteur Financier, “the CSSF”) recently published a circular (the “Circular”) and a new regulation (the “Regulation”) on the “equivalence” of the supervisory and authorisation framework that applies to “third-country” investment firms in certain states outside the European Economic Area (“the EEA”). The Regulation grants Canada, Switzerland, the United States of America, Japan, Hong Kong and Singapore equivalence status. Firms from these countries will now be able to apply for authorisation to provide investment services to Luxembourg clients.

The Circular also provides some helpful guidance on the provision of investment services by non-EEA firms and, more specifically, answers the question as to when a service is considered to be within the territorial scope of the Luxembourg regulatory framework.

Both announcements are relevant for non-EEA investment managers or advisers providing portfolio management or investment advisory services to alternative investment fund managers (“AIFMs”) in Luxembourg and are of particular significance for the continuity of services provided by UK investment firms post-Brexit.

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Patricia Volhard, Simon Witney, John Young, Philip Orange

The Financial Conduct Authority (“FCA”) recently published a Discussion Paper on the new UK prudential regime—encompassing regulatory capital, staff remuneration and risk management requirements—for all firms authorised under the EU’s Markets in Financial Instruments Directive (“MiFID”). The Discussion Paper covers the regime that the UK will adopt in place of implementing the EU Investment Firms Directive and Regulation (“IFD” and “IFR”), which come into force in June 2021, after the end of the current Brexit transitional period. The UK’s regime is closely modelled on the IFD and IFR. We have published a separate briefing on the IFD and IFR.

EU private equity firms that are structured as “adviser-arrangers” are often (but not invariably) authorised under MiFID. Unless they are classified as “Non-Systemically Important Investment Firms” (i.e., sub-threshold firms) under the various tests in the IFD and IFR , they will need to consider the impact of many of the IFD and IFR’s provisions. Despite representations by the private equity industry, the FCA gives no indication that it will introduce a tailored regime for private equity advisers. However, the FCA’s Discussion Paper contains helpful guidance on the FCA’s interpretation of various rules and points of uncertainty and indicates how the FCA will exercise various discretions in the IFD and IFR.

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Timothy McIver, Anne-Mette Heemsoth, Megan MacDonald, Dr. Andrea Pomana

The global pandemic COVID-19 has caused major disruptions to supply and demand chains throughout Europe and the world. European governments have therefore implemented a number of measures to support their national businesses and economies by granting various forms of aid, ranging from loans on favorable terms and public guarantee schemes to tax reliefs and compensation (see overview).

On 13 March 2020, the EU Commission (“Commission”) set out a European coordinated response to counter the economic impact of COVID-19. “We will do whatever is necessary to support the Europeans and the European economy”, said Commission President Ursula von der Leyen. Since then, the Commission mobilized a total of EUR 65 billion to provide liquidity, i.e. EUR 37 billion from the existing EU budget and structural funds, EUR 28 billion of unallocated structural funds and an additional EUR 800 million from the EU Solidarity Fund for hardest-hit Member States.

The main financial response has, however, come from the individual Member States. As at 2 April 2020, they together mobilized more than EUR 2.7 trillion to mitigate the socio-economic impacts of the pandemic. Such aid has been made possible under the “Temporary Framework” (the “Framework”), which was adopted by the Commission on 19 March 2020 and which relaxes the existing State aid rules to allow Member States to provide fiscal stimulus to businesses and ensure that sufficient liquidity is available.

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Geoffrey P. Burgess, Timothy McIver, Edoardo Troina, Anne-Mette Heemsoth, Megan MacDonald

From 23 June, the UK government is able to intervene in M&A deals to ensure they do not threaten the United Kingdom’s ability to combat a public health emergency. The new powers enable the government to intervene if a business that is directly involved in a pandemic response (for example, a vaccine research company or personal protective equipment manufacturer) finds itself the target of an approach. There is sufficient ambiguity in what that may mean in practice that the rules could potentially be applied widely across the healthcare, pharmaceutical, manufacturing and food supply chain sectors. In addition, the government will have expanded powers to scrutinise and intervene in deals affecting certain key technology sectors considered central to national security. 

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Patricia Volhard, Simon Witney, Jin-Hyuk Jang, John Young

On 10 June 2020, the European Commission published a short report (the “Report”) on the application and scope of the Alternative Investment Fund Managers Directive (the “AIFMD”). This is a further step towards the Commission’s proposal to amend the AIFMD, which is expected in September and follows publication in 2019 of the Commission’s detailed survey of the operation and impact of the AIFMD carried out by KPMG.

The Report does not include any concrete proposals. Instead, it refers both to the 2019 survey and to a range of other initiatives (such as work by the Financial Stability Board) that may inform the Commission’s approach to recommending amendments to the AIFMD later this year. It gives us some clues as to the provisions and changes that are under active consideration by the Commission.

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Patricia Volhard, Simon Witney, Jin-Hyuk Jang, John Young, Clarisse Hannotin, Eric Olmesdahl, Philip Orange, Johanna Waber

The European Union’s 2018 action plan on sustainable finance set some ambitious goals for financial services regulation and the private equity industry will be among those who feel its effects. Significant progress has been made in recent months, including an important consultation by the European Supervisory Authorities (“ESAs”) on the framework for firms that will disclose the principal adverse impacts of their investment decisions on sustainability factors.

Now the European Commission (the “Commission”) has published a draft delegated regulation (the “Draft Regulation”) with proposals to amend the delegated regulation made under the Alternative Investment Fund Managers Directive (“AIFMD”). The Commission’s proposals go beyond the disclosure obligations of the Disclosure Regulation by also providing organisational and procedural requirements, although these are not unduly prescriptive. Unlike the Disclosure Regulation, which also seems to apply to non-EU managers if they market their funds in the EU, the Draft Regulation only applies to EU AIFMs.

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Gavin Anderson, Katherine Ashton, Ezra Borut, Geoffrey P. Burgess, John W. Rife III, Andrew C. Rearick, Jake Grandison

For international investors, one noteworthy response to the COVID-19 pandemic by national governments, including Australia, Canada, India, the United States and various EU Member States, has been the introduction or tightening of legislation related to foreign direct investment (“FDI”). These legislative changes, which follow a broader global trend of enhancing FDI regulation that has emerged in recent years, are being proposed to curb what many national lawmakers perceive as opportunistic takeovers by foreign investors of companies that are struggling in the current crisis, in particular companies involved in infrastructure, technology, healthcare and other critical industries.

Naturally, FDI rules have a direct impact on traditional cross-border M&A, and as a result, legal advisers who regularly advise on cross-border M&A closely track the applicable legislative processes around the world, advise on deal structures that address their application and assist in making required filings. For private equity secondaries market participants, however, the breadth of recently adopted FDI laws in certain jurisdictions, which might also impact many types of secondaries transactions, may come as a rather unwelcome surprise and have significant knock-on effects on transactions.

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Geoffrey P. Burgess, David Innes, Kevin Lloyd, Simon Witney, Emily Lodge, Ardil Salem, Edoardo Troina

Unprecedented measures have been taken by governments across the world in response to the COVID-19 crisis. Many of those measures have focused on protecting businesses from the financial impact of government-imposed lockdowns, in order to facilitate the eventual economic recovery. One specific concern has been that insolvency law, and the prospect of personal liability for directors, could push companies that are otherwise viable into insolvency procedures, or into taking unwarranted and hard-to-reverse measures. In the UK, the policy responses to that concern are now taking shape.

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Andrew M. Ahern, Ramya S. Tiller, Andrew C. Rearick, Daniel Randazzo, Julie Baine Stem

Private equity fund managers and their investors seeking to manage the financial impact of the COVID-19 pandemic are considering options to preserve financial flexibility for their present and future needs. On May 13, 2020, senior Debevoise lawyers Andrew M. Ahern, Ramya S. Tiller and Andrew C. Rearick participated in a webinar hosted by the Investment Adviser Association (the “IAA”), which was moderated by IAA Associate General Counsel Monique S. Botkin.

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Patricia Volhard, Jin-Hyuk Jang, John Young, Clarisse Hannotin, Eric Olmesdahl, Philip Orange, Johanna Waber

From 10 March 2021, new environmental, social and governance (“ESG”) disclosures will be mandatory for fund managers, financial advisers and many other regulated firms in the European Union (“EU”), as well as non-EU fund managers marketing their products in the EU. As we have discussed in a prior update, the Regulation on sustainability‐related disclosures in the financial services sector1 (the “Disclosure Regulation”, as amended and supplemented by the “Taxonomy Regulation”) sets out detailed EU-wide rules that will require many firms, including most private fund managers, to disclose policies and procedures dealing with “sustainability risks” and “adverse sustainability impacts”.

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E. Raman Bet-Mansour, Pierre Clermontel, Philippe Tengelmann, Rosanne Lariven

Since mid-2019, an active debate has been growing in France on shareholder activism and its regulation. Four reports have been published by various committees and think tanks since last fall.

Currently, two very vigorous activist campaigns are broadly covered by the media in France: Amber Capital’s failed attempt to designate a majority of the members of the board of directors of Lagardère Group on May 5; and the opposition by Charity Investment Asset Management (“CIAM”) to SCOR’s compensation scheme. But such activism is not a recent phenomenon in France, which has in the past witnessed a number of high-profile activist campaigns, such as CIAM’s attempt to block the alliance between Renault and Fiat Chrysler Automobiles in 2019, TCI’s activism in the merger between Safran and Zodiac Aerospace in 2017, and Cevian’s investment in Rexel in 2017.

The French stock market regulator, Autorité des marches financiers (the “AMF”), has played a key role in these activist campaigns. French-listed companies have generally sought its support in warding off activists, in particular where the activists have been non-French hedge funds. The AMF, for its part, has acted on a case-by-case basis and so far has not sought to take any general overarching policy position.

This changed recently when the AMF entered the debate by publishing on April 28, 2020 its report on shareholder activism, which includes recommendations on subjects discussed in the four above-mentioned reports.

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James C. Scoville, Clare Swirski, Benjamin Lyon, Sarah Hale, Katie Power

The United Kingdom’s Financial Conduct Authority (the “FCA”) announced today that it will seek a court declaration in order to settle ongoing disputes over business interruption insurance. This is part of an ongoing attempt by insurance regulators around the world to resolve the uncertainty faced by businesses at this time.

The FCA plans to seek a court declaration on an urgent basis on whether commonly used policy wordings should apply as a result of coronavirus, in order to address concerns about lack of clarity and certainty in respect of business interruption claims. The FCA has emphasised that the proposed action is not intended to cover all potential insurance coverage disputes and that it will not go into the amounts payable under individual policies but instead only whether there is a basis for claims to be paid.

The FCA proposes to put the example policy wordings before the court on an agreed basis with the relevant insurers. However, customers will still be able to access the Financial Ombudsman or the courts if they qualify and choose to do so.

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Andrew M. Ahern, Paul S. Bird, Jennifer L. Chu, Rafael Kariyev, Scott B. Selinger, Simon Witney

The COVID-19 pandemic has dealt the private equity industry a slew of fundamental challenges, including the liquidity constraints of limited partners and portfolio companies, the interpretation of key contract clauses, and eligibility for pandemic-related government assistance. In addition to adapting to the current disruption, the private equity industry must look ahead to the post-pandemic world. How will due diligence need to evolve? What will the new expectations be for employee health and safety at portfolio companies?

Sponsors and investors navigating this terrain must balance business and financial considerations with the complex legal issues that invariably arise when contracts, regulations and benchmarks are applied in new and wholly unforeseen circumstances. In this issue of the Debevoise’s Private Equity Report, we have collected a variety of recent client communications from our COVID-19 Resource Center that we hope provide clarity in this uncertain time.

Debevoise is proud to have been a trusted advisor to the private equity industry for over forty years—a span that includes the moratorium on leveraged buyouts in 1990, the dot-com collapse in 2000 and the global financial crisis in 2008. We are confident that the private equity industry will demonstrate its ability to respond quickly and effectively to this current crisis, as it has in the past, and the support that firms will provide to their portfolio companies will deliver economy-wide benefits. Here at Debevoise, we will do all we can to help you meet the challenges of today, and prepare for the opportunities of tomorrow.

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Geoffrey P. Burgess, David Innes, Dominic Blaxill, Jake Grandison

As global financial markets continue to feel the strain of the COVID-19 pandemic, M&A activity has reduced significantly. But with private equity sponsors sitting on record levels of capital commitments, the recent fall in public company equity values presents an opportunity for sponsors to deploy some of this capital. 2019 saw a notable rise in the number of public-to-private transactions in the United Kingdom, the number of such deals increasing by 40% compared to 2018. Although such growth may not be repeated this year, the combination of reduced share prices, record-low UK interest rates and capital commitments available to sponsors for investment could lead to an uptick in public-to-private activity in the rest of 2020.

This client update explores some of the key considerations sponsors should bear in mind as they consider undertaking a public-to-private transaction involving a UK-listed target against the backdrop of the COVID-19 crisis, with a focus on what is different in the current economic and political climate.

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Timothy McIver, Anne-Mette Heemsoth, Megan MacDonald, Dr. Andrea Pomana

The global pandemic COVID-19 has caused major disruptions to supply and demand chains throughout Europe and the world. European governments have therefore implemented a number of measures to support their national businesses and economies by granting various forms of aid ranging from loans on favorable terms and public guarantee schemes to tax reliefs and compensation (see overview).

On 13 March 2020, the EU Commission (“Commission”) set out a European coordinated response to counter the economic impact of COVID-19. “We will do whatever is necessary to support the Europeans and the European economy” said Commission President Ursula von der Leyen. Since then, the Commission mobilized a total of EUR 65 billion to provide liquidity, i.e. EUR 37 billion from the existing EU budget and structural funds, EUR 28 billion of unallocated structural funds and an additional EUR 800 million from the EU Solidarity Fund for hardest-hit member states.

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Andrew M. Ahern, Jonathan Adler, Gavin Anderson, Katherine Ashton, Kenneth J. Berman, Ezra Borut, Lorna Bowen, Geoffrey P. Burgess, E. Drew Dutton, Jane Engelhardt, Andrew Ford, Geoffrey Kittredge, Marc Ponchione, David J. Schwartz, Rebecca F. Silberstein, Thomas Smith, Justin Storms, Andrew C. Rearick, John W. Rife III, Patricia Volhard

As significant economic sectors grind to a halt around the world due to coronavirus-related lockdowns and travel restrictions, many portfolio companies will face liquidity crunches, raising concerns for private equity fund managers and their investors. Uncertainty around the duration and extent of coronavirus-related business interruptions presents a further challenge for sponsors trying to manage financing needs across their portfolio. In this hazardous environment, many sponsors are considering how to preserve financial flexibility for present and future needs, including:

• amending limitations on follow-on investments in the fund’s governing documents;
• amending recycling provisions in the fund’s governing documents to permit additional re-investment;
• entering into or expanding NAV facilities;
• conducting strip sales of portfolio companies to secondary buyers (which can be done synthetically) and reinvesting proceeds into the portfolio; and
• issuing a preferred equity interest in the fund’s portfolio (or some of it) to secondary buyers and reinvesting proceeds into the portfolio and/or distributing the proceeds to investors.

At the same time, investors in private equity may soon be deluged with requests for capital infusions and other accommodations across their private equity portfolios. Some of these may be defensive in nature (e.g., hoarding reserves to protect portfolio companies), while others may be more opportunistic, raising a “war chest” to take advantage of opportunities that may arise. Against this backdrop, some investors may be looking to reduce their exposure to private equity or to find creative ways to bridge their own potential liquidity issues, while others may see opportunity ahead.

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Pierre Clermontel, Antoine F. Kirry, Alexandre Bisch, Philippe Tengelmann, Rosanne Lariven

Following the outbreak of the COVID-19 pandemic, the Autorité des marchés financiers (the French Financial Markets Authority or the “AMF”) has: 

• banned the creation or increase of any net short position on shares admitted to trading on French trading venues; 

• created some flexibility regarding publication deadlines under the Transparency Directive; 

• reminded issuers of their information obligations pursuant to the Market Abuse Regulation; and 

• recommended that French issuers take actions in respect of the organization of their annual shareholder meetings.

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Alan J. Davies, Pierre Maugüé, Geoffrey Kittredge, John W. Rife III, Thomas Smith, Patricia Volhard

COVID-19 is placing stress on financing markets throughout the private equity industry, making it paramount for sponsors to consider the impact on all of their sources of liquidity at both the fund level and portfolio company level. In that context, this debrief suggests practical considerations for sponsors in relation to their capital call facilities.

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Dr. Thomas Schürrle, Philipp von Holst, Dr. Andrea Pomana, Jan Schoberwalter

The COVID-19 pandemic, related lockdowns and other preventive measures may make it difficult or even impossible for parties to perform certain contractual obligations. For affected businesses, important questions arise as to how these obligations are impacted. With regard to contracts governed by German law, the nonperformance of obligations would first have to be addressed on the basis of contractual provisions being broad enough to cover pandemic risks and their effects. Contracts may provide for clauses related to a material adverse change (“MAC”) or a material adverse event (“MAE”) as well as force majeure. In the absence of any such provisions, German law provides for statutory provisions on frustration of contracts or (temporary) impossibility to perform contractual obligations, which may give guidance on how to deal with situations arising from the COVID-19 outbreak.

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David Innes, Christopher Garrett

The UK government announced recently that it is launching a new arrangement allowing UK employers to access support to continue paying part of the salary of employees whose employment would otherwise have been terminated during the COVID-19 crisis. Guidance has now been published explaining further details of the arrangement, to be known as the Coronavirus Job Retention Scheme (the “Scheme”).

Separately, the government has also announced details of the assistance it will offer to the self-employed.

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Patricia Volhard, Simon Witney, Christopher Dortschy

On 18 March 2020, the Luxembourg government declared a state of emergency in light of the current COVID-19 epidemic. Amongst various other measures, two days later, it enacted a Grand-Ducal Regulation (the “Regulation”), the purpose of which is to ensure the continued functioning  of Luxembourg companies despite all difficulties for the management as well as the owners and other stakeholders of Luxembourg entities to travel to, from and within Luxembourg. The Regulation effectively overrides the bylaws of all Luxembourg companies and allows them to hold board meetings and general meetings without physical presence regardless of what is set out in their instruments of incorporation. 

General Meetings 

The core provision of the Regulation deals with the possibility of holding  non-physical meetings of stakeholders in Luxembourg companies (i.e., shareholders, bondholders, (limited and general) partners, members, etc.) (the “Stakeholders”). Whereas the articles of incorporation of most private limited liability companies (Sàrls) and the partnership agreements of most limited partnerships (SCS/SCSp) will already positively permit decisions to be taken via written resolutions (with certain exceptions depending on the type of decisions), the Regulation now effectively enables entities taking other widely used legal forms – such as public limited liability companies (SAs) or partnerships limited by shares (SCAs) – to derogate from their obligation to hold physical meetings. Any general meeting of any Luxembourg company (which should include general meetings which require the presence of a notary) convened to be held on or prior to 30 June 2020 may effectively be held without any person being present. Stakeholders may “attend” and exercise their voting rights (a) by distance voting (in writing or electronically), (b) by way of power of attorney granted to a person designated by the company or (c) by video conference or other telecommunication means permitting their identification. 

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Antoine F. Kirry, Alexandre Bisch, Floriane Lavaud, Philippe Tengelmann, Ariane Fleuriot, Rosanne Lariven

The COVID-19 pandemic and related lockdowns and other preventive measures may make it difficult or impossible to perform contractual obligations. For contracts governed by French law, the nonperformance of obligations for reasons attributable to the pandemic would first have to be addressed on the basis of any material adverse events stipulations that would be broad enough to cover pandemic risks and their effects. In the absence of any such provisions, French law offers statutory force majeure and hardship (imprévision) provisions that may provide guidance on how to deal with situations arising from the outbreak.

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Jeremy Feigelson, Avi Gesser, Jane Shvets, Alexandre Bisch, Ariane Fleuriot, Fanny Gauthier, Robert Maddox, Dr. Friedrich Popp

As businesses adapt to the COVID-19 pandemic, the challenges of managing a remote workforce and its desire for information about the virus’s impact have significant data protection implications. While European Data Protection Board (“EDPB”) guidance confirms that the GDPR should not impede the fight against the pandemic, even in these exceptional times, companies must continue to safeguard individuals’ data protection rights.

We share here our top three tips for those who oversee data protection compliance, drawing on guidance from the EDPB, UK, French, German and Irish supervisory authorities. Links to other authorities’ guidance are accessible here.

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David Innes, Christopher Garrett

The UK government announced on Friday that it is launching a new arrangement allowing UK employers to access support to continue paying part of the salary of employees whose employment would otherwise have been terminated during the COVID-19 crisis.

Amount of Salary Covered. The details of the scheme are still being finalized, but the government has announced that it will give grants to reimburse 80% of wage costs of employees covered under the scheme, up to a cap of £2,500 per month. It is not yet clear whether the cap applies to pre- or post-tax earnings. The scheme will be backdated to 1 March 2020. It will be up to the employer to decide whether to top up the amounts paid under the scheme so that employees receive more than the capped amount.

Employees Covered. The new arrangement will cover employees who have been designated as “furloughed workers”. This is not a term previously used under UK employment law, but it appears that it is intended to cover employees who have been laid off for a temporary period. Unless this is permitted by an employee’s contract of employment, it will need to be agreed with the employee, although given the choice of a redundancy termination or being sent home with at least some of their monthly pay preserved, many employees will readily agree to the latter.

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Almas Daud, Alan J. Davies, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney

Just as the truly devastating social and economic consequences of COVID-19 are now occupying most of the attention of private fund managers – in particular, with a focus on providing financial and practical support to the portfolio – so policy-makers have redirected their efforts. In the UK, the short-term measures announced in the budget last week have already been superseded by a significantly more generous package of aid for businesses, aspects of which may be of value to some UK-based private equity-backed companies. However, there are still some important gaps, and these need urgent attention.

Last week, the UK government’s budget included a plan to suspend business rates for firms in certain sectors, to help with funding for sick pay, and to offer emergency support for the health service. However, it quickly became clear that these were not bold enough, given the scale of the disruption, and this week the government accelerated – and significantly bolstered – its plan to offer loan guarantees to support smaller businesses, and announced a separate “COVID-19 Corporate Financing Facility” (CCFC) for larger ones.

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David Innes, Christopher Garrett

UK employers of all sizes are facing unprecedented human resource challenges in the face of the COVID-19 pandemic. There is no one-size-fits-all approach, but the immediate and unexpected deterioration in economic conditions and potential incapacity (as a result of illness or self-isolation) of a sizable portion of the workforce are causing many employers to consider their long- and short-term options.

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Christopher Boyne, Tony Dymond, Lord Goldsmith KC, Gavin Chesney

The steps taken across the world in recent days to try to combat the spread of COVID-19 are having a very significant impact on businesses across numerous sectors, as workers find themselves unable to go to work or to travel, manufacturing and transportation operations are disrupted, and events and meetings are cancelled. This post briefly addresses what consequences the COVID-19 outbreak and the measures adopted in various countries might have on contracts governed by English law

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Geoffrey P. Burgess, Timothy McIver, Alexandre Bisch, Gavin Chesney, Philipp von Holst, Philippe Tengelmann, Dr. Andrea Pomana, Jan Schoberwalter, Edoardo Troina

As more and more countries go into lockdown, a significant proportion of commercial undertakings are either closed or struggling. The ways in which the pandemic affects businesses are too many to count and include a reduction in orders and availability of parts as well as reduced access to the workforce.

There is no doubt that the negative impact of the pandemic on the European (and global) economy will be severe. Governments and institutions across Europe (including the EU Commission, the European Central Bank, as well as national and local governments) are scrambling to launch support and stimulus measures to blunt the impact of the economic shock.

The vast majority of these measures are open to any undertaking employing domestic employees, with relatively few restrictions based on size/nationality of the ultimate beneficial owner. In practice, this means that help is on hand for multinational companies or PE-owned portfolio companies with operations in Europe. The measures are heterogeneous in nature, ranging from tax forbearance to State-assisted temporary lay-offs.

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Paul Eastham, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Richard Ward, Simon Witney 

Given everything else that is going on this week, it might have been easy to miss the first UK budget since last year’s general election – and the first for Rishi Sunak, appointed as the UK’s finance minister just a few weeks ago. Indeed, many of the headlines have focused on the short-term measures that the government is taking to shore up the health service and limit the damage to the economy that COVID-19 will inflict. However, important though these are, the longer-term commitments – and a likely re-definition of the rules that the government imposes on itself to govern public spending – may prove even more significant. Certainly, what is reportedly the largest increase in government spending for a generation (mostly financed by borrowing) will affect many sectors of the UK economy in the years ahead. 

As expected, having cut its growth forecasts, the government confirmed significant increases to infrastructure spending and long-term investments. Here, the ambitions of the government should not be understated: if these commitments are honoured, over the next five years the UK will be spending double the average amount spent on investment for the last 40 years. Among the announcements were a commitment to spend £27bn on roads, £5bn on broadband and £800m on carbon capture, as well as £12bn earmarked for affordable housing.

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Katherine Ashton, David Innes, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney

Last month, the UK government published the first part of its long-awaited proposals for reform of the UK immigration system. European businesses, including private fund managers and their portfolio companies, have until 1 January 2021 to prepare for the new “points-based” system, which will no longer treat EU citizens differently from other foreign nationals. The challenges will be particularly acute for employers who currently rely on employees with lower skills or income migrating from the EU. Those people will find it much more difficult to come to the UK to work from next year, and the government says that businesses must “adapt and adjust” to that. On the other hand, prospective employees with a job offer and the right level of skills will generally be given a visa.

The “points-based” approach will only be available for jobs paying a basic salary of at least £20,480. Applicants will then need to obtain 50 points in three compulsory categories: they must hold an offer from an employer with a sponsor licence; they must be able to speak English to the required level; and they must have an appropriate level of skill. However, the applicant will then need to find another 20 points to reach the threshold of 70. A basic salary of £25,600 or above will achieve that; otherwise, there are other ways for those with an offer at a salary of between £20,480 and £25,600 to get the extra points, including where the job is in an occupation with a designated “shortage”.

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Katherine Ashton, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney, Akima Paul Lambert

What do garden shed builders, game designers, lamb farmers and lawyers have in common? Apparently, they all contributed to the Brexit recommendations included in a document published this week by the CBI, the UK employers’ federation, which says that it speaks for 190,000 businesses. The CBI is certainly an important voice – and its views on the future UK-EU economic relationship should be taken seriously by the UK negotiators – but the extent to which it will influence the direction of travel is an open question.

Considerable uncertainty remains over whether the UK and the EU will be able to agree a trade deal this year, before the transition period ends on 31 December 2020. That was always a tall order and is, perhaps, looking slightly less likely now that the UK and the EU have published their negotiating objectives. Those objectives would seem to be in conflict: the UK wants a comprehensive free trade agreement with minimal loss of sovereignty, while the EU is willing to sign a fulsome deal but, in return, wants to bind the UK to EU rules in some key areas. These positions may yet be reconciled: a comprehensive deal on trade in goods remains in the interests of both sides, and they will strive to achieve it. But businesses would do well to plan for a less positive outcome.

The bulk of this week’s CBI document is focused on ways to reduce frictions when goods are traded. The CBI recognises that, given the UK’s decision to leave the customs union and the single market, some frictions are inevitable, but it makes a number of suggestions to reduce “red tape” for exporters. The CBI says that these suggestions respect the parameters for the deal that have been set out by the negotiators, and there is considerable detail – much of it highly technical – for the UK team to digest.

However, the first eight of the CBI’s 22 recommendations relate to trade in services. As the CBI points out, the UK is the world’s second-largest exporter of services, and 40% of those exports are to the EU. At the same time, even the EU’s most comprehensive free trade agreement – the EU/Canada deal – has only “patchy” coverage of services, with many sectors not covered at all. Furthermore, services are not fully harmonised across the EU, making future access for UK businesses particularly challenging. For these reasons, the CBI argues that services should be covered by the future trade deal.

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Geoffrey Kittredge, Peter F.G. Schuur, Patricia Volhard, Simon Witney, John Young, Tom Berry

Cayman Islands added to blacklist. The EU Council (comprising the finance ministers of the 27 EU Member States) announced on 18 February 2020 that the Cayman Islands, alongside Palau, Panama and the Seychelles, has been added to the EU’s list of noncooperative jurisdictions in tax matters, known as the EU’s tax haven “blacklist”.

What is the significance of the blacklist? The blacklist is a tool used by EU Member States to address the use of non-EU jurisdictions that are perceived to encourage abusive tax practices—in particular, regimes which provide low or zero tax rates without a sufficient degree of substance in the jurisdiction. It covers jurisdictions which do not meet international standards on transparency and exchange of information and whose tax regimes are perceived to offer unfair tax competition. Jurisdictions whose tax systems are deemed unsatisfactory are expected to remedy them within an agreed timeframe, with the attendant risk of moving to the blacklist. As we describe below, establishment of an investment fund in a blacklisted jurisdiction may result in individual EU Member States imposing “defensive” tax measures (such as applying higher withholding taxes) and may make the fund unattractive to EU institutional investors.

Whether a jurisdiction should be on the blacklist is subject to continuing review. For example, Bermuda moved from the blacklist to the EU’s “greylist” after a number of weeks of being blacklisted last year and was removed altogether on the same day that the Cayman Islands was moved to the blacklist.

Cayman Islands response to its inclusion on the blacklist. The specific basis of the decision to place the Cayman Islands on the blacklist was that the Cayman Islands does not have appropriate measures in place relating to economic substance in the area of collective investment vehicles.

The Cayman Islands responded by stating that it was added to the blacklist because of a technical timing issue, pointing out that it has already passed the necessary legislation to address the EU Council’s concern by bringing certain categories of Cayman Islands investments funds within the regulatory framework for the first time. This legislation came into force on 7 February 2020, a few days after the date of the EU Council’s meeting. On this basis, the Cayman Islands is confident that the EU Council will remove it from the blacklist when it next reviews the list, expected to be later in the year.

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Geoffrey Kittredge, Delphine Jaugey, Eric Olmesdahl, John W. Rife III, Patricia Volhard, Simon Witney

Preparing for new sustainability regulations in Europe – many of them effective from March 2021 – will be high on the list of compliance tasks for European firms this year. GPs themselves will face additional disclosure obligations and changes to internal rulebooks. And many European LPs are also in scope of the new rules, meaning that environmental, social and governance (ESG) issues will be increasingly relevant for any international firm that wants to attract European investment. It is, however, also clear that the focus on sustainability is not going to end there: European policymakers have an ambitious agenda – confirmed by the regulatory strategy laid out by the European Securities and Markets Authority (ESMA) last week.

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Simon Witney, Patricia Volhard

On 3 February 2020, the Luxembourg financial regulator, the CSSF, launched its annual AML/CTF (anti-money laundering and counter-terrorist financing) online survey for 2019. This survey is the second of its kind. The CSSF had announced in spring 2018 that it would conduct annual online surveys collecting standardised key information concerning money laundering and terrorist financing risks to which the professionals under its supervision are exposed and would implement related risk mitigation and targeted financial sanctions measures. The first 2018 survey was conducted in February 2019. In substance, the 2019 survey is the same as last year’s version.

The affected entities will have to submit their response to the survey questions through the CSSF eDesk portal by 15 March 2020. For banks, the deadline is 2 March 2020.

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Katherine Ashton, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney, John Young

Phase 1 is over: the UK will officially leave the EU this evening. But whether that event represents the beginning of the end of the Brexit saga, or just the end of its beginning, depends on one’s perspective. One thing is certain: after nearly 50 years of membership, the UK’s departure from the European Union (or the European Economic Community, as it was known when Britain joined in 1973) is an historic event with far-reaching consequences. It is, however, much more difficult to predict with any certainty what those consequences will be – for the UK and for the rest of the EU. That uncertainty will last for some time.

In the near term, the legal framework will change very little. The UK’s formal participation in the EU’s institutions and rule-making bodies will end immediately, but – under the transition (or implementation) period that has been agreed – the UK will be bound to follow EU law until the end of 2020, and most of the rights and privileges of EU membership will continue. It is possible for the transition period to be extended, but – given the UK government’s apparent determination to avoid an extension, a determination that is now enshrined in UK law – that seems unlikely. In reality, therefore, firms should be prepared for the legal framework to change on 1 January 2021.

Negotiations on the future UK/EU relationship will be tough. Some potential deal-breakers, like fishing rights, could make it impossible to conclude the “comprehensive and balanced free trade agreement”, contemplated by the joint Political Declaration, before the end of the year. Both sides will strive for an agreement, of course, but no one should take it for granted. For private equity firms, an ongoing assessment of the effects of a “no-deal” Brexit remains important. Making sure that European portfolio companies are properly prepared should be a priority.

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Simon Witney, Andrew Lee  and Andrew Burnett

On 10 January 2020, The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 came into force in the UK. These Regulations amend the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and implement the EU’s 5th Money Laundering Directive (MLD5) into UK law.

MLD5 was designed to improve transparency and create an “environment hostile to criminals seeking shelter for their finances through non-transparent structures”. The most notable non-transparent structures that MLD5 targets are “virtual currency” structures, particularly “providers engaged in exchange services between cryptoassets and flat currencies” and those who provide "services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies” (i.e. custodian wallet providers). Firms providing these services will now have to comply with a range of anti-money laundering obligations, including preparing anti-money laundering and terrorist financing risk assessments.

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John Young

The FCA wrote to the Chief Executives of asset managers last week, setting out its “Supervision Strategy” in terms of both the broad asset management industry and alternatives (hedge, credit, or private equity funds) industry. The letters are amongst a number of “Dear CEO” letters that the FCA has addressed to different sectors this year. Whilst some aspects of the letters are not relevant to private equity (or indeed the alternatives industry generally), and whilst UK private equity firms should not have immediate concerns as to renewed focus by the FCA on their industry, the letters provide colour on areas in which the FCA may expend supervisory resources in the year ahead including firm visits.

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Simon Witney, John Young, Andrew Burnett

The European Securities and Markets Authority (ESMA) published its Annual Statistical Report on EU Alternative Investment Funds (AIFs) on 10 January 2020 (the “Report”). The Report confirms that the AIF market, including the private equity segment, has been thriving.

ESMA’s analysis suggests that the net asset value (NAV) of all AIFs in 2018 amounted to €5.8 trillion, an 11% increase from 2017 and representing 40% of the EU’s funds industry, compared with one third in 2017. The Report breaks down the industry into five broad categories: Funds of Funds, Real Estate, Hedge Funds, Private Equity Funds and “Other” Funds, and reviews each category’s contribution to the total. The disproportionately large “Other” category – accounting for 61% of the total – makes proper analysis difficult, but the Report does indicate healthy growth in private equity as well as other alternative fund types and suggests that UK-based managers continue to dominate the private equity and hedge fund markets.

For funds that classify themselves within ESMA’s “Private Equity” category, NAV increased 66% from its 2017 total, reaching €352 billion. This, in no small part, was due to the rise of private equity NAV managed from the UK which, despite Brexit uncertainty, more than doubled and, at €166 billion, accounted for almost half of the EEA’s overall private equity NAV in 2018. Although the Report does not specify what proportion of this increase is due to increased valuation, it notes that the overall EEA AIF increase in NAV to €5.8 trillion is only partially due to increased valuation, with much of it coming from new AIFs entering the market.

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Geoffrey Kittredge, Natasha McCarthy, John W. Rife III, Patricia Volhard, Simon Witney, John Young

As all UK-regulated private fund managers will know, the Financial Conduct Authority (FCA) extended its “Senior Managers and Certification Regime” (SM&CR) to virtually all UK-regulated firms at the end of last year. Although it has big ambitions for the regime, the FCA did not intend its extension to smaller firms to be an upheaval and, for most, the change was pretty smooth. Of course, the transition involved some paperwork and a training course for staff, but relatively little adjustment to internal organisation – although changes to recruitment and appraisal processes will be required in 2020, so the project is far from complete.

First, the ambition: the FCA’s expectation is that the SM&CR – which took effect in UK banks in 2016 – will change the culture in regulated financial services firms. At its core, the new rules apply personal responsibility – and, in theory, significant personal liability – to a relatively small number of named senior managers. Those people, usually the most senior partners or executive directors in the firm, are approved by the FCA and agree to discharge specified responsibilities. If failings are identified in the firm, the FCA will look to those individuals for an explanation. If not satisfied, the regulator can sanction the individuals personally if the senior manager(s) responsible had not taken “reasonable steps” to avoid the breach – with the powerful benefit, for the FCA, of hindsight. The firm cannot indemnify a senior manager for any fines, or take out insurance on their behalf.

Alongside this new “duty of responsibility”, the SM&CR also makes the firm itself, and one of its senior managers, responsible for certifying that other senior staff are “fit and proper”. Anyone who has the potential to do “significant harm” to the firm or its customers must be certified by the firm, both as to their conduct and their competence, and the FCA no longer has to approve that person. From now on, responsibility for doing any required checks on recruitment falls squarely upon the firm, as does an annual certification process that will need to be built into HR and assessment processes in the coming months.

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Timothy McIver, Simon Witney, John Young

2019 was notable for the continuing trend among antitrust authorities globally to prosecute infringements in the financial services sector. Violations that might in the past have been considered more naturally issues of prudential regulation have increasingly become subject to investigation under antitrust law. As such, it demonstrates a commitment on the part of the antitrust authorities to continue to educate themselves and become involved in the long-term policing of the financial markets in parallel with more familiar supervisory bodies.

That this is a recent phenomenon is shown by the fact that there was very little antitrust enforcement in the financial services sector before the 2008 global financial crisis. One consequence of that crisis, however, was the coordinated investigation of a range of anticompetitive activities that had previously gone on undisturbed, perhaps the most notable one—at least in terms of how central a role it had played in global finance—being the LIBOR scandal and the manipulation of the interest rate-setting benchmarks. That, in turn, spawned investigations into other asset classes, products and sectors, such as interest rate derivatives, credit default swaps, and the foreign exchange markets.

The more recent antitrust investigations show a greater maturity, however, in that the authorities are increasingly focused less on explicit anticompetitive behaviour and more on entrenched systemic ways of doing business that to date had gone unchecked. That dovetails with a more general policy shift in the EU, UK and elsewhere reacting to concerns about possible historic under-enforcement and the need to intervene more directly in markets to address the potential for consumer harm. At the same time, authorities have become better resourced and have greater expertise, which have enabled them to delve deeper into the highly technical, and somewhat opaque, world of equity fundraisings and loan syndications.

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BlackRock announced this week that it will redouble its focus on sustainability, and ask its investee companies to report on climate change issues in line with demanding international standards. That announcement is another reminder that all large businesses are under increasing pressure to provide detailed disclosures on how they perform against a number of environmental and social metrics, and how their governance processes support stakeholder engagement and informed and enlightened decision-making. Large private companies are far from immune from these global trends: private equity firms face increasing pressure to ensure that portfolio companies fully comply with emerging legal rules and social norms. That pressure will continue to mount this year. 

2020 will certainly be an important year in the UK. New laws – and a new Corporate Governance Code for Large Private Companies (the “Wates Principles”) – mean that many private equity investors, and particularly the nominated directors that sit on portfolio company boards, will need to pay attention to the quality of the annual report. As we reported at the end of last year, some private equity-backed companies are already behind the curve, with only 53% of those assessed for compliance with the UK’s Walker Guidelines achieving a rating of “good” or better. The bar is being raised significantly this year – and not only for firms covered by the Walker Guidelines. For example, new mandatory reporting requirements will apply to any UK company with over 250 employees, and large companies will have wider stakeholder and governance reporting to deal with. Those that choose to follow the Wates Principles will have to explain in detail how they have complied. 

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This post is an edited version of a note that appeared in our 2019/2020 Private Equity Year-End Review and Outlook. To read the full publication, click here.

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Samantha Rowe, Simon Witney, Conway Blake, Tom Cornell

Environmental, social and governance (ESG) issues have become increasingly pressing for private equity and venture capital firms, with responsible investors taking care to ensure that their portfolio companies comply with applicable legal rules and adopt relevant best practices. However, recent developments in UK domestic law have brought into focus the risks associated with greater involvement by parent companies (and, by extension, investors) in the policies and operations of their subsidiaries or underlying investee companies.

Although the parent-subsidiary relationship cannot in itself give rise to a duty of care for parent companies as a matter of UK law, several cases have explored the circumstances in which a parent company can nevertheless assume responsibility for the wrongdoing of subsidiaries. For example, a number of significant UK Court of Appeal cases in 2018 appeared to confirm that parent companies could not assume responsibility merely through the imposition of mandatory group-wide policies. In those cases, the relevant test was said to be one of “control”: Did the parent company exercise a sufficient level of control over the business operations of the subsidiary? The Court of Appeal generally took the view that group-wide policies by themselves did not meet this criterion.

The test was revisited last year by the UK Supreme Court in Vedanta Resources PLC v. Lungowe, a case which involved a claim brought by a large number of individuals in Zambia against a Zambian copper mining company and its UK-based parent company. The Supreme Court confirmed that the key question is the level of control or intervention exercised by the parent company in the management of the subsidiary’s operations. By way of illustration, the Supreme Court drew a distinction between passive investors and vertically integrated corporate groups whose business is carried on “as if they were a single commercial undertaking, with boundaries of legal personality and ownership within the group becoming irrelevant, until the onset of insolvency, as happened with the Lehman Brothers group.”

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This post is an edited version of a note that appeared in our 2019/2020 Private Equity Year-End Review and Outlook. To read the full publication, click here.

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Eric Olmesdahl (Associate) and Andrew Burnett (Trainee Associate)

The third of the headline regulations that will implement a key part of the EU’s Action Plan for Financing Sustainable Growth is almost complete.  The final compromise text of the proposed Regulation on the Establishment of a Framework to Facilitate Sustainable Investment (2019/0178(COD)), also known as the Taxonomy Regulation, was agreed by the Council of the EU on 17 December 2019. The Taxonomy Regulation aims to identify sustainable economic activities to help guide investors and prevent greenwashing.  It is hoped that it will further shift investor preferences to more sustainable products.  The other two headline regulations, the Disclosure Regulation and Low Carbon Benchmark Regulation, were adopted by the Council in late October this year and published in the Official Journal on 9 December.

The agreement reached on the Taxonomy Regulation will first need approval by the Environment Committee and Economic Affairs Committee, after which it will be put to a plenary vote. 

Agreement on the Regulation’s timeline, alongside a number of other points, has not been easy to come by.  There were several draft compromise proposals between Parliament and the Council before agreement was finally reached.  The main areas of disagreement over the Taxonomy were its scope, the nature of the activities to be included and the implementation deadlines. 

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Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Jin-Hyuk Jang, Simon Witney, John Young

As European private equity firms look forward to another busy year for fund-raising and investment activity – albeit with the threat of a slowdown or correction hanging in the air – European legal and compliance teams will be planning their 2020 projects. There are a number of ongoing and new work streams that will keep those teams busy throughout the year. At the same time, there is a little more clarity than there was this time last year on a number of fronts, and some welcome breathing space.

2019 saw successive extensions to the date on which the United Kingdom will leave the European Union, but it is now almost certain that it will do so on 31 January – although, if all goes according to plan, nothing much will change then. However, the transition period – which is likely to end on 31 December 2020 – may lead the UK and the EU to a hard landing at the beginning of 2021 if a new free trade agreement cannot be agreed in time. Furthermore, it is very unlikely that any such trade agreement will deal extensively with financial services, meaning that “passporting” will probably be lost when the transition ends. Most firms are now familiar with the risks that Brexit entails (including the tax consequences) and are as prepared as it is possible to be, but 2020 will see them looking at their longer term plans once again.

In the regulatory sphere, the focus has been on any restriction that Brexit will impose on a UK firm’s ability to approach EU investors during fund-raising. Working on the assumption that UK-managed funds will no longer have the benefit of the EU AIFMD marketing “passport” (which would depend on extension of the “third-country” passport to the UK – not likely in the short term), Luxembourg and (to a lesser extent) Ireland are now firmly established as the EU hubs for private equity fund management. Many managers intend to continue their portfolio management and fund-raising activities from a UK office, often with authority delegated by a manager in Luxembourg or Ireland. However, such an arrangement will need to satisfy regulators scrutinising the “substance” of the EU office and its ability to supervise the UK team’s activities. Work on these structures will continue throughout 2020 so that firms can continue to raise funds seamlessly from 1 January 2021. UK firms that do not intend to establish an EU structure will need to have a Plan B.

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Richard Ward, Paul Eastham

The UK election handed the Conservative party a decisive mandate to form a majority government to “Get Brexit Done.” While that vote provided a sense of direction, plenty of uncertainties remain. For example, the Conservative election manifesto was curiously silent on changes to UK tax policy that might be needed to help cover funding gaps and improve the UK’s post-Brexit global competitiveness. In any event, private equity firms whose investment structures include UK companies should plan for the fact that they will soon no longer benefit from the EU Directives that currently remove withholding taxes on interest and withholding taxes and income tax on dividends, in each case paid between a UK company and a group company in an EU member state. In addition, the EU Directive that facilitates the tax-neutral treatment of cross-border mergers between a UK company and a group company in an EU member state will no longer apply. However, it appears that there will be no material changes (other than administrative) to the UK’s VAT regime, even though this is an EU-mandated tax. We’ve previously commented, in some depth, on these tax aspects of Brexit.

Brexit-related tax questions aside, the new Conservative government’s intention appears to be to keep much of UK taxation the same as it is, although there will be changes in some areas. For private equity firms holding UK businesses in their portfolio, the following three points in particular should be kept in mind:

• The UK’s corporation tax rate will remain at 19 percent (rather than be reduced to 17 percent, as previously proposed).
• Entrepreneur’s relief, which can lower a UK seller’s effective UK capital gains tax rate on disposal of an interest in a trading business from 20 percent to 10 percent, will be reviewed.
• Tackling tax avoidance and evasion will be the subject of renewed focus, in part by implementing the controversial digital services tax, which is most likely to affect UK-inbound multinational enterprises with material UK sales.

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This post is an edited version of a note that appeared in our 2019/2020 Private Equity Year-End Review and Outlook.  To read the full publication, click here.

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David Innes, Delphine Jaugey, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney

Since 2008, the Private Equity Reporting Group (PERG) – a semi-independent body established by the BVCA, the UK’s private equity association – has monitored corporate reporting by the largest UK-based private equity-backed companies.  Each year, PERG assesses a sample of the annual reports issued by qualifying portfolio companies, looking for conformity with the Walker Guidelines.  In general, the objective is that large portfolio companies match the disclosure standards set by UK-listed companies of equivalent size.  This year’s report (PERG’s 12th) confirmed that, although all the annual reports sampled were compliant with the Walker Guidelines, there is more work that can be done to improve disclosures further.  (The accompanying Good Practice Guidance will help companies in that regard.)

Last December, in its 2018 report, PERG reported that 73% of companies achieved an overall standard of reporting that was at least “good”.  Somewhat disappointingly, the 2019 report puts that proportion at just over 50% (although one company was able to achieve an “excellent” rating). 

Of course, the comparison is not entirely fair, because the benchmark is constantly moving:  improved reporting in the listed sector on, for example, environmental and social issues, means that continuous improvement is required and companies need to upgrade their reports in order to stand still.  In addition, PERG’s report highlights that an unusually high number of the companies sampled this year had not been assessed before and were new to the population:  perhaps they were not quite ready for the more exacting standards required by the Guidelines.

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Paul Eastham,Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Richard Ward, Simon Witney

The UK election results are in: Boris Johnson will remain as British Prime Minister and lead a Conservative government with a healthy majority. That should enable him to deliver on his pledge to “Get Brexit Done” – the slogan that dominated the Conservatives’ election campaign, despite being widely regarded as somewhat misleading. It will also clear the path for the new government to honour the other promises the Conservatives have made over the last six weeks or so, so it is a good time to remind ourselves what those were.

Uncertainty over Brexit is far from over, of course. It is now almost certain that the UK will leave the European Union in January, on the basis of the Withdrawal Agreement negotiated in October. However, that will only fire the starting gun on the second stage of the Brexit negotiations, and the time available to do a deal appears to be short: Mr Johnson pledged during the campaign not to extend the transitional period that is due to end on 31 December 2020. So, there is much more of Brexit still to come, including from those who will continue to argue that the UK’s direction of travel is misguided and should be altered. (For more detail on what the Brexit Withdrawal Agreement will mean for European private equity firms, you can read our recent European Funds Comment here.)

But, Brexit aside, what will a Johnson-led government mean for the UK private equity industry, and the business community at large?

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Katherine Ashton, Geoffrey Kittredge, John W. Rife III, Nikhil Subbiah, Patricia Volhard, Simon Witney

Diversity and inclusion are critical topics for the private equity industry.  Although perhaps not yet front-and-centre of the ESG (“environmental, social and governance”) agenda that is gathering increasing momentum, many European firms are now focused on their recruitment and retention policies.  For them, attracting and retaining professionals who are more diverse has become a priority, and LPs are also starting to ask questions during due diligence.

One well-known organisation leading the charge on gender diversity in private equity and venture capital is Level 20.  Founded with a mission to help the industry to get to a position where at least 20% of senior roles are held by women, their report, issued in the summer, revealed that there is still a long way to go.  Among GPs in the private equity industry, only 6% of senior investment professionals are women.  The picture is only a little better in venture capital firms, where the corresponding number is 13% (and LPs are doing better still with 21%).  In October, Coller Capital’s 2019 ESG Report painted a similarly bleak picture: women accounted for less than 20% of the senior positions at 82% of responding GP firms. 

A lack of diversity at GP level may contribute to a lack of female-led investee companies.  The 5th edition of the State of European Tech Report revealed that, in 2019, 92% of funding went to all-male teams, while investments in all-female teams have actually fallen.  Strikingly, the report notes that female-led venture capital firms are much more likely than their male counterparts to have taken proactive steps to find companies with more diverse founders.

These structural faults have to be addressed, as Jeryl Andrew, CEO of Level 20, and George Anson, its Chair, stressed when they recently spoke to the Debevoise Women’s Review.

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Heather Atkins, Paul Eastham, Geoffrey Kittredge, John W. Rife III, Richard Ward, Simon Witney

As the UK approaches the final two weeks of the general election campaign, and amidst increased spending commitments from both the main parties, many UK- based private equity professionals are trying to assess how the outcome could affect the amount of UK tax they pay. Debevoise professionals have been asked to explain the tax policies of the main opposition party in the Labour party’s manifesto – It’s Time for Real Change – and the related documents published this month, even though current polling suggests that a majority Labour government is unlikely.

Labour’s proposed tax changes are certainly radical – far more so than those included in the 2017 election manifesto – and would affect all companies and individual tax payers, especially those in the “top 5%”. In many areas Labour’s commitments would represent a fundamental shift for the UK, going well beyond tinkering with rates and allowances and reversing some long-established regimes – even ignoring any changes that may not have been included in the pre-election manifesto of any party for fear of inviting advance tax planning.

Among the most eye-catching (although not surprising) headlines for many business professionals are abolition of so called “non-dom status” – the UK’s rules that allow certain non-UK origin tax residents to mitigate UK tax liability on non-UK source income – and the alignment of capital gains tax rates with those applicable to income. The annual capital gains allowance and entrepreneurs’ relief would be abolished. Reduced tax rates for dividends would also go.

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Katherine Ashton, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Kirsten Watson, Simon Witney

Across Europe, the decisions made by large companies – both public and private – are under increasing scrutiny. It is not just that outsiders are asking more questions – they are asking about a wider range of issues. For example, companies are expected to articulate a clear strategic response to the longer-term challenges of climate change; they are expected to explain how they are making a positive contribution to the fight against forced and child labour; and they should be able to say that they have effective policies to avoid inadvertent complicity in corruption or money laundering.

And it is not only the decisions themselves that are being scrutinised. Policy-makers and stakeholders also want to understand – and, to some extent, dictate – the process by which decisions are made.

In the past, corporate governance reporting and corporate governance codes were largely the preserve of publicly listed companies, supposedly protecting distant shareholders from wayward managers. Not any more. In the UK, “very large” private companies – broadly, those with more than 2,000 employees, or both turnover and assets that exceed £200m and £2bn respectively – will need to start describing their corporate governance arrangements in some detail when they produce their next annual report. They are being encouraged to sign up to the Wates Corporate Governance Principles, written specifically for private companies. If they do, they will have to explain how they comply with those Principles. And a much larger group of UK companies – any that do not qualify as Small or Medium Sized (SMEs), or which have more than 250 employees – will need to describe how they have made sure that stakeholder and/or employee issues have been taken into account in decision-making.

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Jin-Hyuk Jang, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney, John Young

At a seminar this week in New York, our European funds regulatory team reviewed the key legal and regulatory issues for private fund managers wishing to raise capital from European investors in the years ahead. Europe’s institutional investors have had a strong appetite for private funds recently, and the challenges of accessing them are certainly manageable – but it pays to anticipate investor and regulatory requirements, and to build those in to the marketing strategy and structuring discussions.

Fund managers that are located in Europe will be well aware that the Alternative Investment Fund Managers Directive (AIFMD) offers both a significant compliance burden and a marketing benefit. EU-based managers that are within its scope – essentially those that have assets under management above €100 million, or €500 million if the fund is unleveraged and does not offer redemptions – will have no choice: they have to accept the burden, and will then be in a position to market to professional investors across all EU member states (and the three non-EU countries that are members of the European Economic Area). That marketing “passport” has value, but it certainly comes at a price.

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Simon Witney (special counsel), Clarisse Hannotin (associate), and Andrew Burnett (trainee)

After yet another Brexit extension has been granted to the United Kingdom by the European Council, the Luxembourg regulator, the Commission de Surveillance du Secteur Financier, issued a new communication to clarify the applicable deadline to benefit from the 12 month transitional period. The new date is 15 January 2020.

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Kate Ashton, Simon Witney, Nikhil Subbiah and Andrew Burnett

Despite some recent progress, the European private equity and venture capital industry is still a male-dominated environment—at least among senior investment professionals. Level 20 was founded with a mission to change that. A not-for-profit organization, Level 20 has a clear goal: to reach a point where 20% of senior positions in private equity and venture capital firms are held by women.

Recent research shows that there is still some way to go before that target is reached.

As part of The Debevoise Women’s Review, we spoke with Level 20’s CEO, Jeryl Andrew, and its Chair, George Anson, for an update on how Level 20 is helping the industry to meet the challenge of improving gender diversity.

Read the full interview > 

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David Innes, Geoffrey Kittredge, John W. Rife III, Samantha J. Rowe, Patricia Volhard, Simon Witney

Large businesses have an important role to play in furthering many of the UN’s Sustainable Development Goals (SDGs). One that has attracted significant attention in recent years – especially for companies with long and multi-layered supply chains – is Goal 8.7: the eradication of forced labour, modern slavery and human trafficking. Any responsible business will want to play its part in achieving this laudable aim, and policy-makers have been finding ways to nudge them.

In the UK, the Modern Slavery Act was launched with significant fanfare in 2015. Among other things, it required commercial organisations with turnover of £36 million or more and a UK connection to publish an annual modern slavery statement.

However, like the Californian law on which it was modelled, there are concerns that the Act has not yet had the desired impact. The UK government itself says that around 40% of companies in scope have not complied with the requirement to publish a statement and that some of the statements that have been published are “poor in quality or fail to even meet the basic legal requirements”. An independent report published earlier this year recommended that, instead of requiring companies to simply disclose what – if anything – they have done to investigate and, where appropriate, address modern slavery in their supply chain, the law should actively require companies to take steps. The report argued that reporting requirements should be bolstered, compliance should be more actively monitored, and sanctions should be strengthened. Although the government did not accept all of these recommendations, it has consulted on some important proposed changes.

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Simon Witney and Andrew Burnett

On 24 October 2019, the European Council adopted the Disclosure Regulation and Low Carbon Benchmark Regulation at first reading. This means both Regulations will be published in the Official Journal of the EU in the coming weeks: the Low Carbon Benchmark Regulation will apply the day after publication while the Disclosure Regulation will come into force 20 days after publication, but will only apply from 15 months following that date. 

The Low Carbon Benchmark Regulation may have significant impacts in the longer-term, but does not require any immediate action from investment managers. Its aim is to create a single low-carbon benchmark providing for minimum standards and a common methodology. Currently, there are a number of divergent approaches to benchmark methodologies which do not provide clarity on whether an index is aligned to the Paris Climate Agreement or merely a benchmark that aims to lower the carbon footprint of a standard portfolio investment. The Council hopes this clarifying Regulation will resolve that lack of precision.  

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Katherine Ashton, Delphine Jaugey, Geoffrey Kittredge, Patricia Volhard, John W. Rife III, Simon Witney

“Brexit was never going to be a walk in the park. The past three-and-a-half years might be better characterised as a directionless ramble through an uncharted jungle with a cliff-edge lurking somewhere in the undergrowth. And the UK still seems rather lost: the result of the December general election that was confirmed this week is hard to predict, and may not be decisive.

But, even if the final outcome is not yet clear, three very important things have changed in the last few weeks.

First, the EU and the UK have agreed a further extension, and the UK did not leave the EU yesterday as previously scheduled. This latest extension lasts until 31 January, although the UK could leave before if it ratifies a deal. If it does not, a no-deal Brexit at the end of January remains possible, but now seems quite unlikely.

Second, we now know that there will be an election this year. That could lead to a radical change in UK policy – and not just in relation to Brexit. Britain could have a new prime minister on 13 December, with a very different set of priorities. Of course, a change of government will be at least as important for many UK businesses and their investors as Brexit itself, and preparing for it may be even harder than preparing for the UK’s departure from the EU.

But if that does not happen, the third recent change could prove to be the most important: the current Prime Minister, Boris Johnson, has re-negotiated a Brexit deal with the EU. His party will campaign for it in the forthcoming election. If he wins a majority, it seems likely that he will be able to secure its ratification.

If it turns out that way, Brexit would not be “done” – not by any means. But the UK would have reached an important waymarker. A concluded and ratified deal would be a signpost to the future, and we could start to imagine what the destination might look like.

So, what would that Brexit deal mean for European private equity firms?

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Paul Eastham, Geoffrey Kittredge, Patricia Volhard, John W. Rife III, Richard Ward, Simon Witney

“DAC6” is probably not a term that is yet widely known among the European private equity community, but the 6th amendment to the EU's Directive on Administrative Cooperation in the Field of Taxation (DAC6 for short) could yet enter common parlance. The Directive’s potentially wide-ranging disclosure regime will require taxpayers and their advisers to report, to EU tax authorities, cross-border arrangements that touch the EU and include certain “hallmarks”. It could be very onerous.

The UK will cease to be subject to DAC6 if and when it eventually leaves the EU (and after the end of any transitional period, if one is agreed). But the UK intends to implement it anyway, and the UK tax authority’s draft regulations, published in July, have caused some consternation among the private equity community. Earlier this month, the UK’s industry association, the BVCA, responded to the consultation setting out key areas of concern and recommended various changes and clarifications, and Debevoise made its own separate submission.

The UK regulations provide for both taxpayers and their “intermediaries” – shorthand for advisers – to report to the UK tax authority, HMRC, information about “cross-border” arrangements involving at least one EU member state that contain one or more prescribed “hallmarks”. While several of these hallmarks involve a tax advantage, some do not, so it is possible that commercial transactions without a tax advantage may be reportable. HMRC can share the reported information with other EU tax authorities.

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Geoffrey Kittredge, Patricia Volhard, John W. Rife III, Simon Witney

Large, sophisticated investors with long-term liabilities tend to have an allocation to private equity and venture capital. It is not hard to understand why: academics and investment consultants generally agree that investments in private equity and venture capital funds have consistently outperformed investments in the public markets. Pension funds are among the most obvious candidates to invest in this asset class, given their targeted returns and liquidity requirements, and it is not surprising that last year pension funds accounted for more than 30% of all capital raised by European fund managers (according to figures published by Invest Europe in May).

However, the UK pension fund industry is changing rapidly and dramatically and that has created a problem that needs to be fixed. Companies are closing their “defined benefit” schemes, where employees and employers contribute to a fund that promises to deliver a pension pegged to the employee’s final salary. Instead they are contributing to (and often are required by law to contribute to) “defined contribution” (or DC) schemes. There are significant tax breaks for these workplace pensions, but the employer has no further obligation to the retiree. But, for a variety of reasons, these DC schemes do not usually have an allocation to private equity and venture capital, and savers are therefore missing out on the returns available to other pension funds.

Aware of this problem, the British Business Bank (BBB) – a government-owned economic development institution – recently chaired a government funded “feasibility study”, the stated aim of which was to “create better outcomes for people saving for retirement”. The BBB published a report detailing its findings last month – and set out policy prescriptions that should be seriously considered by the industry and by government. If taken forward they could help to open up DC schemes to venture capital and private equity funds.

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Article by Patricia Volhard, Jin-Hyuk Jang, Simon Witney, John Young

On Friday of last week (11 October 2019), the Luxembourg regulator, the CSSF, released further guidance for UK-regulated alternative investment fund managers (AIFMs) of Luxembourg-domiciled funds, including unregulated partnerships, in anticipation of a possible hard Brexit (that is, one that does not include a transitional or standstill period) on 31 October 2019. The guidance will require some UK AIFMs to take urgent action.

The guidance is directed both at those AIFMs that have already submitted a notification through the portal opened by the CSSF in August, and those that have not.

By way of background, the portal opened by the CSSF in August gave UK AIFMs the ability to enter a 12-month transitional regime following the date of a hard Brexit, allowing them to continue to manage Luxembourg-domiciled funds during that period, but also requiring the AIFM to agree to appoint a replacement EU-regulated AIFM before the end of the transitional period (or to liquidate the fund). The industry had strongly objected to that approach, which would have required many Luxembourg-domiciled funds to change their AIFM, possibly against the wishes of their investors. It would also have put existing UK AIFMs in a less favourable position than other non-EU managers, who are permitted to manage Luxembourg funds and were not affected by this change.

It is therefore welcome that the further guidance issued by the CSSF last week now allows some UK AIFMs to continue to act as the AIFM of a Luxembourg partnership if they make a notification before 31 October 2019 and meet certain conditions.

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Guest article by Michael Moore, Director-General, British Private Equity and Venture Capital Association (BVCA)

To paraphrase one of the United Kingdom’s former Prime Ministers, there are three things that matter to businesses wherever you travel in the world: competitiveness, competitiveness and competitiveness.

Unpacking the different layers of that mantra, there are three essentials at stake: is the country’s business environment competitive, in particular to attract and sustain mobile global investment of whatever kind? Is the business sector competitive, with appropriate incentives and a proportionate regulatory regime? And is the business itself competitive, given the demands and opportunities in its market?

Private equity and venture capital in the UK have routinely been able to respond in the affirmative to each of these questions and as a result have grown significantly in recent years. As a positive consequence for the UK economy, billions of pounds of investment have been made and hundreds of thousands of jobs have been created and sustained. As such, we are a great British success story and proud of it.

In the heart of London, as with other globally significant cities, much of the broader economic success might be taken for granted by the casual observer. The City, and the wider UK economy, have been internationally competitive for centuries, the finance sector has thrived within it, and many globally significant businesses count it as ‘home’. The ‘competitiveness trinity’ is secure, it appears.

And yet, closer study quickly reveals that the persistent success of London and the UK has co-existed with creative and destructive tensions throughout its existence. Battles with politicians and regulators on the one hand and market developments on the other have never been far from the surface. And when we have experienced deep trauma, such as the financial crisis, it is all there in sharp focus right in front of us.

There has been a decade of convulsion as a consequence of the financial crisis, the effects of which still impact communities and businesses across the country. Add in to that the impact of mega-trends such as the tech revolution and the energy transition, and the recent political fallout in terms of Brexit is plainer to understand (quite apart from the fundamentals of the arguments about EU membership).

Whether or not we are on the cusp of a Halloween departure from the EU, or may yet see a further extension to the negotiations, the competitiveness debate looms large. We may speak confidently of the ‘competitiveness trinity’ – but for how long?

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Jin-Hyuk Jang, Geoffrey Kittredge, Patricia Volhard, John W. Rife III, Simon Witney, John Young

2021 will mark a step change in the way the European Union regulates environmental, social and governance issues (ESG) in the financial services industry. An Action Plan launched in March last year had big ambitions, including to “reorient capital flows towards sustainable investment”. And, although concrete proposals are at different stages of development, it is now clear that asset managers – including private equity fund managers – will have to adjust their practices to comply. In particular, there is likely to be an impact on due diligence and investment approval processes, as well as investor disclosures.

But, although the direction of travel is very clear, delays to the publication of detailed rules could make it harder for fund managers to get ready in time.

The concrete proposals to emerge from the 2018 Action Plan include three new Regulations: one to require additional disclosures by asset managers of their approach to ESG and the impacts of their investments on society; one to establish a “taxonomy” (or labelling system); and one to establish low-carbon benchmarks. In addition, specific changes are likely to be made to the Alternative Investment Fund Managers Directive (AIFMD) and to the Markets in Financial Instruments Directive (MiFID) to complement these headline law reforms. At the moment, the main thrust of these proposals is on disclosure and process, rather than requiring investment in specified “sustainable” activities.

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Christopher Boyne, Alan J. Davies, Geoffrey Kittredge, Patricia Volhard, John W. Rife III, Simon Witney

Previous UK governments have brought forward various policies to encourage and facilitate business rescue, to stimulate lending to growth businesses, and to protect unsecured creditors. Perhaps the most eye-catching – and, no doubt, one of the most expensive for government – was the abolition of “crown preference” in 2003, removing the government’s preferential status for unpaid taxes on an insolvency. Now the government wants to re-introduce an amended version of this rule. Many believe that the change will hinder access to finance and are calling for a re-think.

Crown preference used to provide that a certain level of unpaid taxes were given priority when a company went into insolvency, ranking ahead of all unsecured and some secured creditors. That made it more likely that the UK government would be paid what it was owed, but had a predictable impact on the willingness of certain creditors to advance finance. Indeed, an important justification for the removal of crown preference was to help keep viable businesses afloat: previously, lenders further down the ranking would demand that insolvency proceedings were started earlier because they were concerned that otherwise they would not be paid.

The UK government says that it has lost a significant amount of revenue from this change in the law and wants to partially reverse it. 

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Geoffrey Kittredge, Andrew Lee, Natasha McCarthy, Patricia Volhard, Simon Witney, John Young

The compliance teams of most UK-based asset managers and investment firms – including private equity fund managers and advisers – came back from their summer holidays with implementation of the Senior Managers and Certification Regime (SM&CR) close to the top of their “to-do” list. Banks and some other UK-authorised institutions have been subject to the SM&CR – the UK’s replacement for the Approved Persons regime – for around three years, but most other firms will be required to comply with large parts of the new regime from 9 December. That leaves less than three months. Given the length of time that firms have had to prepare, the regulator is not expected to have much sympathy for anyone who is not ready.

Firms are at different stages of their implementation, but for many there is still a lot to do. The FCA, the UK’s regulator, has been quite helpful, issuing detailed guidance and making clear that it does not expect firms to need to hire new staff or to reorganise. But there are some important decisions that firms need to take, some additional paperwork and internal procedures that will need to be put in place, and some staff training that the FCA will expect firms to carry out.

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UK company law gives directors a pretty clear steer on how – and in whose interests – decisions have to be made. Since 2006, company law has expressly adopted an “enlightened shareholder value” approach to directors’ responsibilities, meaning that directors of UK companies have to make decisions based on what each of them honestly believes is most likely to make the company successful, in the long term and for the ultimate benefit of the company’s shareholders. It is for directors to define how to achieve that success, and the law gives them considerable latitude in defining the factors that must be taken into account before reaching a decision. However, there is a clear recognition that “stakeholder” factors – the interests of customers, employees, suppliers, the community and the environment, for example – are generally important in the generation of long-term shareholder value, and should, therefore, generally be taken into account.

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Alan J. Davies, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Michelle Gilmore, Simon Witney

The UK’s Financial Conduct Authority (FCA) made it clear some time ago that, from the end of 2021, it will no longer seek to persuade or compel banks to submit the rates required to calculate LIBOR (the London Interbank Offered Rate), signalling the end of one of the world’s most important benchmark rates. LIBOR is used as a reference point for most sterling-denominated corporate loans and many bonds, and is the basis for many obligations in private equity fund documents. The end of LIBOR is a problem that needs to be addressed in the coming years, and it will entail some planning on the part of private equity firms and the lenders to their portfolio companies.

LIBOR first appeared in the 1980s and is calculated on the basis of submissions from panel banks as to the rate at which they could borrow funds. The reference rate was discredited in 2012, when it emerged that it had been widely manipulated by multiple banks in rate-fixing scandals. The FCA has reformed LIBOR’s governance since then but, as the FCA’s chief executive said in July, LIBOR is still not fit for purpose: among other things, it relies heavily on judgement – being based on a very thin underlying market for short-term wholesale unsecured funding – and it requires borrowers to assume the risk of bank funding costs. Borrowers are already demanding that banks use an alternative risk-free rate, and some are in a position to do so, even before LIBOR disappears altogether.

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Katherine Ashton, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney, John Young

The UK’s incoming Prime Minister, Boris Johnson, clearly faces some formidable challenges in the months ahead. The central question facing him – the same crucial question faced by many European and international businesses – is whether he can secure a negotiated withdrawal arrangement that allows the UK to leave the European Union in something approaching an orderly way.

Mr Johnson himself has quite recently said that the chances of a no-deal Brexit are a “million to one against”. Even allowing for some rhetorical flourish, those odds seem hard to square with other public statements he and other key figures have made in recent weeks. Prime Minister Johnson continues to say that the UK will leave the EU on 31 October, with or without a negotiated deal, and that the current draft deal is not acceptable and must be re-negotiated. The EU side, on the other hand, has repeatedly said that re-negotiation is not possible. If the UK is to avoid crashing out of the EU on Halloween, one or both sides will clearly have to find a way to step back from their previous position – and Mr Johnson’s strongly pro-Brexit Cabinet will make it harder for him to do that – or the UK Parliament will have to intervene to force the British Prime Minster to change course, probably triggering a general election.

Many commentators continue to believe that one of these routes to a negotiated settlement (or, at least, a further delay to Brexit) is likely but – as the depreciation of sterling in recent months illustrates – most think that the risk of a disorderly Brexit in October has risen.

David Innes, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Kirsten Watson, Simon Witney

The UK is one of the quickest and cheapest places to incorporate a company, offering same-day registration services, facilitating off-the-shelf companies and imposing no minimum capital requirements. That is generally regarded as an important factor in its attractiveness as a place to set up and run a business – see, for example, the 2019 World Bank Doing Business Survey, which awards the UK ninth place overall. (New Zealand, Singapore and Denmark top the table, with the United States in eighth place.)

But being able to set up a company quickly and cheaply is clearly only one factor in a country’s attractiveness to entrepreneurs, and the UK seems likely to face some challenges with some of the other criteria in the near future. In that context, it does not seem like a good time to add regulatory barriers to the incorporation and corporate reporting processes for small and medium-sized companies – and the UK government’s consultation on “Corporate Transparency” appears to be poorly timed. Issued in May, and with a return date of 5 August, the government’s proposals – heralded as the most significant reform of the UK’s company registration framework since 1844 – would add some important delays and administrative burdens.

On the other hand, these changes would have quite a long lead-time, and the UK government is rightly concerned about the growing problem of economic crime. If the UK’s business-friendly policies are being exploited by criminals, they do need to be looked at again, and initiatives to fight money laundering and terrorist financing must take centre stage.

The trick, of course, is to strike the right balance. Policy-makers need to make sure that the burden of new measures falls in the right place. Well-targeted and proportionate interventions, using new and emerging technologies and safeguarding data security and individual rights to privacy, will be welcomed by market participants. Demands for additional information that go beyond what is necessary, or put obstacles in the way of normal business activities, will be regarded with scepticism.

Guest article by Ian Conlon Partner Legal Services and Jennifer Murphy Associate Legal Services at Maples Group

Following widespread anticipation in the Irish funds industry, the Irish Government has now published a draft bill – the Investment Limited Partnership Bill 2019 – to amend the existing Investment Limited Partnership (ILP) law in Ireland.

The Bill seeks to introduce a number of important changes which aim to position the ILP as a leading EU fund vehicle for private equity, real assets and sustainable finance. Although the Bill remains subject to further approval as it passes through the legislative process, this is nonetheless a very positive and welcome development for the funds industry in Ireland.

The ILP is a common law partnership structure which is established as an alternative investment fund authorised and regulated by the Central Bank of Ireland (CBI). Whilst the ILP was introduced in Ireland in 1994, only a handful of partnerships have actually been established, the factors behind which we discuss in our previous blog post which can be found here.

Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney, John Young, Clarisse Hannotin

One of private equity’s hallmarks is active engagement with portfolio companies. The nature and extent of that engagement may vary from firm to firm – indeed, from company to company – but oversight of management and involvement in strategic planning are usually minimum requirements. Almost by definition, venture capital and private equity fund managers are not passive investors.

In the public markets, of course, investors often lack the wherewithal and the financial incentives to take a similar approach with their investments – and policy-makers see that as a problem. In Europe, the so-called “ownerless corporation” has been the target of various voluntary and mandatory initiatives aimed at institutional investors. Until now, perhaps the most ambitious has been the UK’s Stewardship Code (which, as we previously reported, could have some implications for private equity fund managers in its most recent iteration).

But the latest initiative – this one mandatory, and effective from last month – emanates from the European Union. And this second iteration of the Shareholder Rights Directive (SRD II) also has some implications for private equity fund managers: it applies to regulated investors across the EU, including – in relation to any investments they hold in listed companies – full-scope alternative investment fund managers (AIFMs) and firms regulated by the Markets in Financial Instruments Directive (MiFID) to undertake portfolio management. (SRD II does not apply to MiFID-regulated “adviser-arrangers”.)

Kenneth J. Berman, Geoffrey Kittredge, John W. Rife III, Rebecca F. Silberstein, Patricia Volhard, Simon Witney 

The various duties owed by private equity fund managers to their clients are often referred to collectively as “fiduciary duty”, as if that were a term that has a clear and consistent meaning. In reality, fiduciary duty means different things in different jurisdictions and in different contexts and, as a blanket statement of legal obligations, implies little more than a special relationship that has trust and confidence at its heart. Although fiduciaries have certain duties imposed on them by law, and may face tougher consequences if they breach those duties, the precise nature and extent of their duties can vary considerably.

It is perhaps not surprising, therefore, that final guidance on the meaning of fiduciary duty issued this month by the US regulator, the SEC, has revealed some disagreement among market participants. The SEC’s important guidance focuses on the federal duty that applies to investment advisers under the Investment Advisers Act and says that it “reaffirms – and in some cases clarifies” certain aspects of that duty. (For a more detailed note on the SEC’s release, please click here.)

Katherine Ashton, Geoffrey Kittredge, Andrew C. Rearick, John W. Rife III, Patricia Volhard, Simon Witney

Although not a new phenomenon, private fund restructurings now occupy a prominent position in a private equity secondaries market that reached an estimated $70 billion last year. That burgeoning market has enabled primary fund managers to initiate a process that gives their investors a choice: sell now and achieve early liquidity, or hold tight and continue to benefit from upside potential (and, in some cases, investors are invited to opt for a combination of both). No longer regarded as a sign of weakness, such transactions can boost a GP’s new fundraising while helping to solve a liquidity mismatch between investors, some of whom may be willing to hold assets for longer than others.

GP-led restructurings are certainly a helpful innovation, but the process is complicated and conflicts between the various parties involved – the GP, the selling investors, the “rolling” investors and the buyers – need careful management. The complexities and potential conflicts can be exacerbated by the fact that the Limited Partnership Agreements (LPA), often negotiated over 10 years ago, may not have anticipated these types of transactions and may need to be changed. In some cases, the consent mechanisms are cumbersome and may enable minority investors to hold-up a deal that the majority support.

Guest article by Albert Alsina, Founder, CEO and Managing Partner, Mediterrania Capital Partners

At Mediterrania Capital Partners we are committed to the highest standards of corporate governance. Our governance framework is applied to our own policies and procedures at the GP and fund levels, and those of our portfolio companies, providing rigor, consistency, accountability, and transparency in the way we conduct business. We firmly believe there is a strong correlation between good corporate governance and delivering top-quartile returns.

Firstly, a GP is a regulated entity and so there are several statutory requirements to be fulfilled in order to maintain its licenses. These requirements may differ depending on whether it is domiciled in Mauritius, Spain, Malta, Luxembourg, Cayman Islands, etc., but the fundamentals are similar. In the case of GPs with a small team like Mediterrania Capital Partners, the challenge lies in how you deliver strong governance without incurring an overburden of costs. We have found that using a combination of inside resources and external providers is key in maintaining a good cost-quality balance. As a result, we have inside resources that control the mechanics of the GP and the fund, and external providers delivering highly specialized services at a very reasonable cost. There are good service providers in the PE industry, such as fund administrators, compliance officers, risk officers, accountants, etc., but even so, in order to ensure that our standards of good corporate governance are rightly applied, it is important to always have them overseen by our own team members who have a very strong financial and/or legal background.

Geoffrey Kittredge, Eric Olmesdahl, John W. Rife III, Patricia Volhard, Simon Witney, John Young

As we reported at the beginning of last year, a new prudential regime for investment firms is set to raise the minimum capital requirements for many UK-based private equity firms. Although these changes have been brewing for some time, and will be phased in over a relatively lengthy period, the impact is potentially very significant and affected firms should start preparing.

The changes will affect firms regulated in the European Union by the Markets in Financial Instruments Directive (MiFID) and, possibly, some firms wanting to gain access to the European single market from outside by relying on a future “equivalence” determination.

Guest article by Abir Attia, Director, Responsible Investing at AfricInvest

In the specific case of funds and management companies operating with a broad geographic reach and a sector agnostic approach, rigorous governance procedures and discipline adopted by the firm are vital, both from a risk management perspective and from a business continuity angle.

With growth, risks naturally increase, and they can be magnified by a context of crises of all sorts: economic, political, social, pandemic, and reputational. Over the past few years, several companies have endured the consequences of poor governance, triggering acute interest and scrutiny from investors, as well as the investment management community.

Eric Bérengier, Cécile Beurrier, Peter A. Furci, Matthew D. Saronson, Richard Ward, Simon Witney

Those operating pan-European fund and deal structures have always been aware that they need to establish substance in the various jurisdictions in which they have legal entities. Reliance on the application of EU law or double tax treaties necessitates a certain level of activity in a country, or anti-abuse provisions can be implicated. In the tax context, several cases recently decided by the Court of Justice of the European Union (CJEU) could have important implications for some European private equity structures. In particular, they demonstrate the evolving European landscape so far as substance requirements are concerned.

These recent cases concerned several Danish companies that were held by (non-EU) private equity funds through structures that included intermediate EU holding companies, with back-to-back arrangements to repatriate funds to investors. The European holding companies had local offices, employees and external costs. Nevertheless, the Danish tax authorities claimed that the benefits of the EU Directives that provide an exemption from withholding tax on interest and dividends should not apply to payments made by the Danish companies to their holding companies. They argued that the intermediate companies were not the beneficial owners of the relevant income and were purely conduits. The question was elevated to the CJEU.

Guest article by Anna Lekston, Public Affairs Director, Invest Europe

The rise of populism across Europe was one of the biggest stories ahead of this May’s European Parliament elections. With the centre-right and centre-left parties losing their majority and the anti-EU parties keen to exercise their influence, what can private equity expect from this new political landscape?

Katherine Ashton, Geoffrey Kittredge, Akima Paul Lambert, John W. Rife III, Patricia Volhard, Simon Witney

The UK’s Financial Conduct Authority announced last week that the new deadline for notifications to be made under its Temporary Permissions Regime (TPR) – designed to allow EU-based firms to operate seamlessly after Brexit – is 30 October 2019. That announcement (and a related one by ESMA) was in recognition of the fact that, now that the UK has taken part in last week’s European elections, 31 October is the next possible date for a “hard Brexit”.

But – as the debate in the UK about whether, when and how to leave the European Union shows no signs of rapid resolution – UK regulators have already started to think about how they would use their regained autonomy if and when it comes. In two recent speeches – one by Andrew Bailey at the FCA, and the other by Sam Woods, CEO of the Prudential Regulation Authority – there were strong suggestions that, if left to their own devices, UK regulators would operate rather differently. Although it is clear that there will be no “bonfire of regulations”, and rulebooks will remain as stringent as they are now, for future regulatory projects the approach would be more in keeping with the common law tradition. Clear high-level objectives are set out in legislation, with adaptable and sector-specific rules made by the regulator.

Geoffrey Kittredge, Philip Orange, John W. Rife III, Patricia Volhard, Simon Witney, John Young

Investors into all types of investment funds are – quite rightly – demanding more information about the costs they bear for any given investment. Although, of course, investors are most focused on their net-of-fees returns, they also want to know the costs of any given investment strategy, and how much they are paying in fees. And they need to receive that information in a clear, concise format, and (ideally) one that allows fair comparisons across different investments.

As a principle, that sounds straightforward enough. In practice, finding fair ways to present the information can be challenging, especially if rigid templates are produced that do not accommodate the specificities of any given asset class. Against that backdrop, cost reporting templates issued in the UK this week by the Costs Transparency Initiative (CTI) look helpful – thanks mainly to positive engagement by the UK private equity industry.

Geoffrey Kittredge, Eric Olmesdahl, John W. Rife III, Patricia Volhard, Simon Witney, John Young

As we have reported before, private fund managers – along with all parts of the financial sector – will be affected by European initiatives that aim to deliver the EU’s commitments under the Paris Agreement on climate change. Further progress has been made on those initiatives in recent months, and we now know more about how, and when, changes will be made to existing regulation.

Pressure to invest responsibly is not only coming from regulators, of course. Indeed, European legislators are, if anything, behind the private funds market. LPs and GPs have already responded to a growing realisation that future changes to regulation, shifting consumer preferences, and state-sponsored financial inducements will have a meaningful impact on asset values in the not-too-distant future. Those risks and opportunities are increasingly considered as part of any investment process. Add to that a growing demand for impactful – or at least not harmful – investments from perennial investors who are responding to the ethical preferences of their ultimate beneficiaries, and private equity fund managers have clear reasons to respond.

However, emerging European regulations will both underpin and further develop this inexorable trend. They will affect all regulated EU-based asset managers, including private fund managers, and a wide range of regular investors.

Michael Bolotin, Peter A. Furci, Rafael Kariyev, Yehuda Y. Halpert, Molly Bailey Klinghoffer, T. Tina Xu 

The Tax Cuts and Jobs Act imposes a tax on a foreign seller on gain from the sale of a partnership interest to the extent such gain does not exceed the foreign seller’s share of the partnership’s built-in ECI gain. Moreover, under Section 1446(f), a purchaser of a partnership interest must withhold 10% of the amount realized by a foreign seller unless an exception applies.

Treasury has provided additional guidance (the “Proposed Regulations”) governing when such withholding is required and how it is applied. The Proposed Regulations follow in many respects prior IRS guidance provided in IRS Notice 2018-29. The Proposed Regulations will apply to transfers that occur 60 days after final regulations are published, although taxpayers are generally permitted to rely on them before finalization.

In light of the importance of these issues, we highlight some key changes and takeaways for private equity funds.

John Young

In a speech given on 13 May 2019, Evert van Walsum, Head of Investors and Issuers Department, ESMA, provided a helpful summary of the forthcoming Regulation on sustainability disclosure, highlighting in particular the requirement for public disclosure by firms of so-called “principal adverse impacts” of investment decisions on sustainability factors, such as environmental and social matters (which apply to market participants on a comply or explain basis, except for companies with more than 500 employees for which the obligation is mandatory), and ESMA’s work on technical standards under the Regulation, including the content, methodologies and presentation of information on disclosures of principal adverse impacts of investment decisions – although it is unknown whether ESMA’s technical work will amount to a set of detailed definitions or benchmarks to set environmental or social objectives.

In the same speech, Evert van Walsum separately signaled ESMA’s work on fund performance fees, noting that some performance fee models are permitted in some Member States but not in others, and that there is lack of standards on areas such as the frequency of performance fee computation and payment and disclosure. ESMA’s work here is focused on products offered to retail investors under the UCITS Directive, but it is possible that the principles that it will develop will apply to alternative investment funds (including private equity funds and their carried interest structures) that are offered to retail investors, as well.

Byungkwon Lim, Jeff Robins, Patricia Volhard, Emilie T. Hsu, John Young

The EU legislative process for the review of EMIR (the Regulation on OTC derivative transactions, central counterparties (CCPs) and trade repositories) is almost complete, with publication on 6 March 2019 by the Council of the European Union of the final text.

This post focuses on the impact of the EMIR Refit Regulation on non-EU investment managers and funds. By broadening the definition of “Financial Counterparty”, the EMIR Refit Regulation brings into scope EU funds managed by non-EU managers (as EU Financial Counterparties) and, prospectively, non-EU funds managed by non-EU managers (as “hypothetical” EU Financial Counterparties), with the consequence that those funds may be subject to the requirements to exchange margin for their uncleared derivative trades under EMIR. Non-EU funds managed by non-EU managers (for instance, US managed hedge funds) that trade with EU dealers may be subject to these requirements for the first time—although private equity funds that only enter into derivatives that are physically settled FX forwards will continue to be out of scope of EMIR margining rules, as the EMIR Refit Regulation confirms that these types of trades are exempt.

In addition, EMIR introduces a new category of “Small” Financial Counterparties that may exempt EU and non-EU funds from the mandatory clearing obligation.

Geoffrey Burgess, Geoffrey Kittredge, Simon Witney

Private funds with a focus on emerging markets occupy a key area in the current ESG discussion within the industry. It is these funds that often face the most acute ESG challenges, and also devise the most innovative solutions. In this context, we have contributed to an in-depth report from the Emerging Markets Private Equity Association (EMPEA), which maps current governance best practices and guidelines across three levels within the emerging markets private equity industry: the investee company, the fund manager, and the fund.

The report is the product of the Governance Working Group of the EMPEA ESG Community, and features insight from Debevoise lawyers who work closely with some of the market’s most active emerging market funds. Debevoise has a long standing relationship with EMPEA, having partnered with the organisation on various initiatives over a number of years. Our emerging markets funds practice has been active for over two decades, having acted as counsel for sponsors of or investors in over 200 emerging markets funds since 1993, including funds investing in Africa, Asia, Eastern Europe, Latin America and the Middle East.

Katherine Ashton, Jeffrey P. Cunard, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney

Many countries have been overhauling the rules that allow regulators to review, and possibly block or force divestiture of, foreign investments that pose a risk to “national security”, but the United States has been a trailblazer. The Committee on Foreign Investment in the United States (CFIUS) has long reviewed transactions by which non-U.S. persons acquire control of companies operating in sensitive business areas. However, last August, the Foreign Investment Risk Review Modernization Act (FIRRMA) expanded the scope of CFIUS review to include certain minority equity investments by non-U.S. persons. The expansion, when effective, could apply to non-U.S. private equity and venture capital funds that invest in sensitive sectors of the U.S. economy. (For a more detailed review of the changes, click here.

Most of the U.S. rules are unchanged. For controlling equity investments, the definition of “control” remains broad, and includes positive or negative control of board decisions or influence that arises from a dominant economic interest, even if it falls short of a majority position. The range of factors that can give rise to national security concerns also remains broad and includes: businesses that have government contracts; are the sole or a dominant source or supply of an important product; operate critical infrastructure; develop critical technology; collect or maintain sensitive personal information; or are proximate to U.S. military installations.

FIRRMA’s expansion means that a non-U.S. private equity fund sponsor making a non-controlling investment in a business that operates critical infrastructure, is involved with critical technology, or collects sensitive personal data of U.S. citizens, will need to consider whether to make a CFIUS filing. In such cases, the investment is within CFIUS’s jurisdiction if the non-U.S. “investing person” (which could be the fund managed by a non-U.S. sponsor or an investor) either has access to material non-public technical information (if the business involves critical technology), has a board (or observer) seat, or has substantive decision-making power with respect to the business.

David Innes, Geoffrey Kittredge, Andrew Lee, John W. Rife III, Patricia Volhard, Simon Witney

When the UK Bribery Act was passed in 2010 it was widely heralded as the toughest anti-corruption legislation in the world, and some businesses were very worried that its uncompromising approach, extra-territorial effect and strict liability offence would make it hard for them to do business in some parts of the world. Nearly 8 years later, a thorough Parliamentary review of the Act has been extravagant in its praise for the Act, concluding that it is an “excellent piece of legislation” and an exemplar both for other countries, and for the future UK approach to corporate crime. British private equity firms and their portfolio companies – who invested significant resources in preparing for the Bribery Act – should take note.

The Bribery Act was indeed a comprehensive response to criticisms of the UK’s somewhat ineffective laws on corruption, a patchwork of overlapping rules that had been developed, first by the courts and then by Parliament, over (literally) centuries. The “clear and concise” principal offences laid out in the Bribery Act were a crucial step forward, but so too was its approach to corporate liability. Historically, UK law had required that a prosecutor find a “directing mind” (usually the board of directors) of a company with the necessary intent to justify a criminal conviction. That was often very difficult to establish and made it hard to bring successful prosecution. The innovation of the Bribery Act was to establish a strict liability corporate offence of “failure to prevent bribery”, but with a defence available to a company that could show that it had established “adequate procedures”.

Jin-Hyuk Jang, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney, John Young

This week saw another Brexit deadline come and go: the UK will not crash out of the European Union this evening, having been granted a further extension to its original two-year notice period. All sides hope that this extra time will enable a “no-deal” outcome to be avoided, but private fund managers are still unable to rule that out. Indeed, they must now pencil in 31 October 2019 as the next possible date for a disorderly (transition-free) Brexit – although the UK could choose to leave with a deal earlier than that, or could even be forced out without a deal on 1 June if the UK fails to participate in May’s European elections.

Meanwhile, the EU continues to quietly prepare for the day when the UK becomes a “third-country” (EU-speak for “not one of us”) – whether that is following a hard Brexit later this year, or at the end of any transitional period that is agreed as part of a negotiated Withdrawal Agreement. Of course, if observers of the Brexit process have learned anything during the last few years, it is that things can change: we are certainly not in a process that is linear and predictable. The UK may not end up leaving the EU at all, or it might agree to remain aligned with the single-market rulebook in exchange for full market access. But it currently looks most likely that – so far as financial services is concerned – the UK is on course to rely on the EU’s partial and unsatisfactory “equivalence” rules to establish the terms of its access to EU-based investors. That is the path the UK government opted for in the non-binding Political Declaration that accompanies the draft Withdrawal Agreement, and it has been the working assumption of law-makers and regulators that this will indeed be the ultimate outcome. Not surprisingly, that assumption has had an effect on the regulations relating to third-country access that have been in process.

Patricia Volhard, Simon Witney, Jin-Hyuk Jang, John Young, Gabriel Cooper-Winnick, Clarisse Hannotin, Eric Olmesdahl, Philip Orange, Johanna Waber

As we have reported before, a number of European Union countries have established temporary relief for UK-based firms providing investment services under the MiFID passport. Firms benefitting from this transitional relief will be able to ensure some degree of continuity for their operations after a hard Brexit (i.e., one with no transitional period), which – although unlikely—could come as early as this Friday (12 April). In some countries, urgent action is needed if a firm wants to rely on the local transitional regime.

Unfortunately, there is no harmonised temporary regime in Europe, and any UK-based firm currently using a MiFID passport (which includes many private equity “adviser/arrangers”) should look at the different regimes in each EU member state where it currently provides investment services.

Katherine Ashton, David Innes, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney

Companies face a pincer movement when it comes to “responsible investment”: there is increasing pressure from all sides, including from regulators and investors, to ensure that environmental, social and governance (ESG) issues are addressed by any business of significant scale. As enlightened, active owners – with a keen interest both in maximising returns and keeping their key stakeholders happy – private equity fund managers have responded very positively to the shifting landscape. Most have ESG policies, and have become used to answering investor questions on the subject. Many others have signed up to the UN PRI, whose six principles help to inform a firm’s investment decisions and the ways in which it exercises ownership rights.

But one problem for firms is deciding which ESG issues to focus on, and when and how they can be addressed. The range of issues that falls within the category of “responsible investment” has rapidly increased in recent years, and many of these could have a very material effect on exit value and saleability. Data security, for example, has jumped up the list of material risks that many companies face, and is now often regarded as an ESG issue. Similarly, as societal expectations have changed regarding supply chain due diligence, many businesses have re-doubled their efforts to ensure their products are ethically sourced. And while environmental considerations have always been important, the growing expectation that carbon emissions will be subject to significantly increased taxes has elevated this issue in energy-intensive industries.

But firms cannot focus on everything, so identifying the most important ESG risks, and deciding in which order to tackle them, is critical.

Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Jin-Hyuk Jang, Clare Swirski, Simon Witney

Earlier this month, the European Commission announced a change to the capital weightings that will apply to EU-regulated insurers holding long-term investments in European companies – including holdings in certain European private equity and venture capital funds. This is a very welcome step, and an important victory for the European private equity industry associations after a lengthy campaign. The change should herald a boost to private equity and venture capital funding.

By proposing to amend the Solvency II rules, which have provided the prudential and supervisory framework for EU-regulated insurers since 2016, the Commission has accepted that a risk weighting of 22% is more aligned with the risk profile of longer-term equity investments. That is significantly lower than the 39% that has applied to many European private equity and venture capital funds in the past, and the 49% weighting that can apply to other holdings in private equity by default. The hope is that insurers – who traditionally contribute less to private equity funds than pension funds and other long-term asset managers – will recognise that an allocation to diversified portfolios of equity holdings is an attractive way for them to deliver returns, whilst matching their liquidity requirements.

Guest article by Gurpreet Manku, Deputy Director General and Director of Policy at the BVCA

Building Trust in UK Business

If you are looking for, or really need, a breather from Brexit you have come to the right place. Whilst the Brexit process and political situation has taken up a huge amount of bandwidth in Whitehall, the UK government department responsible for business (BEIS - Department for Business, Energy and Industrial Strategy) has been working on other areas that affect UK companies and M&A. I have been referring to this recently as the Building Trust in Business agenda and this is not aimed at the private equity industry, but the business community more broadly in the United Kingdom.

Timothy McIver, Anne-Mette Heemsoth, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney

In an important ruling last week, the European Court of Justice (the ECJ) – the EU’s highest court – held that a parent company’s liability for damages in a civil follow-on action follows the same path as liability for antitrust fines. The Court’s judgement on this previously unresolved question has wide-ranging consequences for private equity fund managers and their investors, who may find themselves unexpectedly responsible for a breach of European competition law.

Guest article by Ross Butler, CEO of Linear B Media and founder of Fund Shack

• At the World Economic Forum 13 years ago, the then head of Apax Partners, Martin Halusa, predicted the emergence of $100bn private equity funds. Since then, the aggregate amount of capital raised by private equity managers has ballooned, but the median fund size is barely above $500m. Most mega buyout funds are comfortably below $20bn despite more than a decade of ultra-low interest rates and benign economic growth.
• This shouldn’t be so surprising, since private equity investing is not particularly scalable. This is as true for fund managers as for fund investors.

Clarisse Hannotin, Jin-Hyuk Jang, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney

Although the Alternative Investment Funds Managers Directive (AIFMD) offered an EU-wide passport to authorised firms operating within the bloc, operation of that passport to market funds seamlessly has proved to be more troublesome that it should have. One of the main issues, frequently raised with European regulators, has been the different definitions of “marketing” adopted by national law in each member state. That definition circumscribes what level of market-testing and investor discussion – so-called “pre-marketing” – can take place before an application for the marketing passport is made. In some countries, near-final draft documents can be sent to prospective investors without engaging the definition of marketing; in others, even general discussions about a proposed fund cannot be undertaken without first having acquired the passport. That is obviously problematic for an EU manager planning their marketing strategy – but may also have wider consequences for non-EU managers seeking to approach the European market. For further information, please click here.

After years of deliberation, the European legislators are now very close to publishing agreed rules that would harmonise the meaning of marketing throughout the EU (actually, the EEA: the EU plus Norway, Iceland, and Liechtenstein). The proposals, first published by the European Commission in March 2018, have now been agreed at a political level and could take effect in 2021. On the face of it, the revised text (repeated in a Regulation that will apply to venture funds within the EuVECA regime) looks helpful and – thanks to the unstinting efforts of our industry associations – represents a significant improvement on the original Commission proposal.

Katherine Ashton, Geoffrey Kittredge, John W. Rife III, Clare Swirski, Patricia Volhard, Simon Witney, John Young

For good reason, pension funds are highly regulated and decision-makers are understandably cautious. Beneficiaries, most of whom are not themselves sophisticated investors, have to know that their savings are invested prudently and in accordance with their liquidity needs. However, it is crucial to get this regulation right, because an overly conservative approach could depress returns, concentrate risk and make it harder for socially valuable long-term investment projects to get funding.

This is especially relevant in the United Kingdom now. The market is rapidly moving away from “defined benefit” schemes, where an employer and its pension fund trustees effectively assume responsibility for paying out pensioners a pre-agreed sum, and towards “defined contribution” (DC) schemes. In DC schemes responsibility shifts to the beneficiaries – and those who manage money on their behalf – to ensure that expectations can be met in retirement. There are a number of reasons why private fund managers (and other illiquid asset classes) have found it hard to access this growing pool of capital in the past, but regulation is certainly one of them. Now there are laudable efforts to change that, given extra impetus by the Patient Capital Review, published by the UK Treasury in 2017 and led by Sir Damon Buffini.

Jonathan Adler, Mark S. Boyagi, Daniel Priest, Alexander R. Cochran, Kristen A. Matthews, Rebecca J. Sayles

Private equity sponsors are playing an increasingly important role as managers of insurance company assets, which has implications for both the insurance M&A market and the private equity fund investment space. Read why in this article.

Read the full article >

Luke Dembosky, Jeremy Feigelson, Antoine F. Kirry, Jim Pastore, Dr. Thomas Schürrle, Jane Shvets, Alexandre Bisch, Ceri Chave, Christopher Garrett, Fanny Gauthier, Robert Maddox, Dr. Friedrich Popp

As data security breaches make headlines, companies must take the associated legal challenges seriously. Recent enforcement actions by some EU data protection agencies are reminders that non-compliance with data breach obligations and other GDPR requirements may expose companies to heavy fines. Here is a refresher of the main topics that GDPR-compliant breach response plans should cover.

Katherine Ashton, Geoffrey Kittredge, John W. Rife III, Jeffrey J. Rosen, Patricia Volhard, Simon Witney

Many argue that at least part of the reason for private equity’s sustained success is its approach to portfolio company governance. Industry insiders (and some academics) point to the sector’s superior decision-making structures, and the aligned incentives of the main protagonists, as driving value creation in private equity-backed companies. But the question has always been: why don’t other companies – especially public companies – capture the same benefits by emulating those structures?

A recent academic paper suggests why that has been difficult in the past, but explains how a new approach could help larger companies to satisfy their widely dispersed and increasingly institutional and engaged shareholders, and to make more informed operational and strategic decisions.

Jin-Hyuk Jang, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Johanna Waber, Simon Witney

As the scheduled date for the UK’s departure from the EU draws nearer – and just as speculation increases that the UK will not actually leave at the end of March, but will instead ask for its leaving date to be deferred – some European legislators have started to think about how to minimise the disruption that would ensue if the UK did leave suddenly, without having agreed a deal, in just over one month’s time.

The UK has been working on its own transitional regime for financial services for some time, and EU firms are now able to notify the regulator, the Financial Conduct Authority (FCA), that they intend to make use of it. But regulators and policy-makers elsewhere in the EU have been reluctant to follow suit. At last there are signs that this is changing, but the approach differs from country to country, meaning that UK investment firms who want to make use of any transitional relief (only necessary if there is a “no-deal” Brexit) will have to navigate a patchwork of different regimes – most of which will require a notification to be given to the relevant regulator before Brexit.

Guest article by Rosie Guest, Global Marketing Director at Apex Fund Services

There are a wide spectrum of ethically focused investment strategies around, various ways of referring to them and a lot of acronyms. Divesting, ESG, Negative Screening, Shareholder Activism, Shareholder Engagement, Positive Investing, Impact Investing, SRI, Ethical Investing, Faith based Investing, Norms-based Investing, Values-based Investing, Thematic investing, Philanthropic investing…the list goes on. Environmental, Social and Governance (ESG) – the three core factors for measuring the sustainability, responsibility and ethical impact of an investment. To understand the importance of the ESG strategy, where it sits on the spectrum and the reasons for its rise to the top of the strategy popularity contest, we must first differentiate it from other similar types of ‘ethical’ investment strategy.

This is a guest blog from Apex Fund Services, and is a shortened version of an original article on the Apex blog, available here

Geoffrey Kittredge, Andrew Lee, Dr. Friedrich Popp, John W. Rife III, Patricia Volhard, Simon Witney

Last week, the European Parliament approved new, wide-ranging rules to protect “whistleblowers” – those who reveal information concerning breaches of EU law. Political agreement on these rules had already been achieved among the EU’s legislative bodies, which means that the new rules are now likely to be implemented across the European Union in 2021. In some countries, that will herald a major upgrade in the protections available to those who blow the whistle on illegal practices.

As the European Parliament highlighted, several recent scandals have come to light following the actions of insiders who revealed information to the authorities or to the media, and a 2017 study by the European Commission argued that the economic case for stronger whistleblower protection for those engaged in public procurement was strong. But the European institutions are keen to encourage increased reporting of rule-breaches in order to improve enforcement and deter wrongdoing generally, and the new law will therefore apply across a wide variety of EU policy areas, including financial services, anti-money laundering, competition law, corporate tax rules, and personal data and privacy laws.

Geoffrey Kittredge, Philip Orange, John W. Rife III, Patricia Volhard, Simon Witney, John Young

Any private equity firm with a regulated presence in the UK will be familiar with the UK regulator’s “Approved Persons” rules. These rules are supposed to ensure that regulated firms only employ people in senior roles who have the necessary attributes for their job, with those senior personnel approved by the Financial Conduct Authority (FCA) and listed on its public register. But, in December this year, that system is radically changing. The Senior Managers and Certification Regime will soon apply to most asset managers – and many firms are now trying to understand how big that change will be.

Matthew Dickman, Delphine Jaugey, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney

European private equity fund managers are well aware that demonstrating a commitment to responsible investment is becoming an essential component of a smooth and successful fundraising. Regulation is only one of the drivers for that change, but it is an increasingly significant one, and two recent developments are characteristic of the changing regulatory landscape. They also highlight an opportunity for private equity fund managers – many of whom are already focused on ESG (“environmental, social and governance”) considerations when making and managing portfolio investments.

By Jin-Hyuk Jang, Patricia Volhard, Simon Witney, and John Young

Last week, the FCA (the UK’s regulator) and ESMA (the pan-European supervisor) announced that a multilateral Memorandum of Understanding (MoU) has been agreed to facilitate exchange of information between regulators in the event of a hard Brexit. This is excellent news for firms that have been making contingency plans for a hard Brexit at the end of March – an outcome that remains very much on the table. However, firms must wait for publication of the MoU before being able to confirm its scope. For a private fund manager, there are three main circumstances in which this MoU may be crucial.

Katherine Ashton, David Innes, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney

The Walker Guidelines – standards for disclosure and transparency in the private equity sector set by Sir David Walker in 2007 – are now an established part of the UK’s landscape. These guidelines apply to the largest UK portfolio companies and their private equity owners, and (among other things) require affected companies to prepare annual and mid-year reports that (broadly) meet the same standards as their publicly listed counterparts. The Guidelines were initially developed in response to concerns expressed by politicians and the media that private equity-backed companies were less transparent than their public equivalents, and that their private equity owners were deliberately secretive. The Guidelines have gone a long way towards addressing that concern, especially since compliance is comprehensively reviewed on an annual basis by the Private Equity Reporting Group – a body that consists of a majority of independent members and which is currently chaired by Nick Land, former Chairman of Ernst & Young. This year’s annual report was published at the end of last year and makes for interesting reading, especially when read alongside the accompanying Good Practice Guide.

Karolos Seeger, Andrew Lee

In a long-awaited but widely-expected development, the UK Financial Conduct Authority (“FCA”) has issued a new consultation paper proposing that Heads of Legal do not need to be designated as Senior Managers under the Senior Managers Regime (“SMR”). Ever since the introduction of SMR in 2016, the FCA has delayed formally confirming whether heads of legal should be allocated the SMF18 role (Other Overall Responsibility Function).

The FCA came to its position in light of the potential difficulties created by legal professional privilege. A fundamental principle of the SMR is that if a firm breaches a FCA requirement, the Senior Manager responsible for that area can be held accountable if they did not take reasonable steps to prevent the breach from occurring (the so-called ‘Duty of Responsibility’). This could lead to a conflict of interest in which a Head of Legal wishes the firm to waive privilege to help him or her avoid personal liability, while being professionally obliged to advise the firm not to waive privilege where this is not otherwise beneficial for the firm.

Guest article by Michael Jonas, Counsel with Arendt & Medernach

The Luxembourg law of 13 January 2019 on the register of beneficial owners was recently published and will come into force on 1 March 2019. The register applies to Luxembourg investment funds as well as companies. The law creates a central register of beneficial owners of companies and other entities to implement the last element of the fourth EU Directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing into Luxembourg law, as amended by the AML 5 Directive.

The AIFMD doesn’t have many fans in the private equity community. Often portrayed as a knee-jerk response to the financial crisis, it imposed strict pan-European rules on private equity fund managers (along with the managers of hedge and other private funds), and its regulatory objectives were not always easy to discern. Now, because the AIFMD included provisions for its own review, policy-makers have the chance to review how it is operating in practice, and decide whether changes should be made. The scope and scale of the review is largely unknown, although relatively limited changes seem more likely than a rewrite.

The Directive itself required the European Commission to start its review by July 2017, but the first sign of concrete output came this month, when a report commissioned from KPMG was published. Although the report does not reflect the Commission’s own views, it is likely to influence its deliberations – especially since it includes a survey of 478 market participants drawn from 15 member states and additional data provided by national regulators, fund managers and industry bodies.

Guest article Ian Conlon and Jennifer Murphy, from the Dublin office of Maples & Calder

Limited partnership law in Ireland is to undertake significant reform in 2019. The Irish Government recently approved the drafting of the amendment to the Irish investment limited partnership legislation and it is understood that the Investment Limited Partnerships (Amendment) Bill 2018 will be published shortly. This is the boost that the Irish funds industry has been looking for in its efforts to establish Ireland as a European domicile for private equity funds.

Sarah Hale, David Innes, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney

In the past, the UK has generally adopted a “hands-off” approach to corporate governance in private companies. It is true that there are some mandatory directors’ duties baked into company law, but these set fairly weak standards and are hard for outsiders to enforce. The rationale, of course, is that corporate governance is largely a matter for the managers and the shareholders to agree and – while in public companies, shareholders may need assistance from regulators to strike an acceptable bargain – investors in private companies can be expected to look after themselves. But that logic is increasingly less convincing to governments around the world, who regard good governance as playing a part in protecting stakeholders and society more broadly. The UK government apparently agrees and, from the beginning of this year, many UK-based private companies will have to get to grips with new disclosure obligations.

Guest article by Tim Hames, Director General of BVCA

The irony of the idea of introducing electronic voting in to the House of Commons is that it would make voting there less electric. The sheer theatre of what occurred last night was spectacular. The scale of the Government’s defeat, at the extreme end of expectations, was stunning. The joust that followed between Theresa May and Jeremy Corbyn was captivating. If Brexit were merely a drama or a fiction, it would be exceptional entertainment. In the real world, however, it is deadly serious. What next? Here are five observations which might prove of some value.

Patricia Volhard, Simon Witney, Jin-Hyuk Jang, John Young, Philip Orange, Gabriel Cooper-Winnick, Johanna Waber, Eric Olmesdahl

As part of its preparations for a potential “no-deal” Brexit, the UK’s Financial Conduct Authority has established a temporary permissions regime for non-UK firms using their home state “passport” to market funds domiciled in the EEA in the United Kingdom, provide services on a “cross-border” basis into the United Kingdom or operate a UK branch. The FCA has now announced the opening of the notification window for EEA firms and fund managers wishing to enter the temporary permissions regime.

Jin-Hyuk Jang, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney, John Young

Legal and compliance teams at European private equity and venture capital firms might have been relieved to see the end of 2018 – with GDPR and MiFID II implementation projects largely completed – but 2019 seems unlikely to be a quiet year. So, what is on the regulatory “to-do list” for the next 12 months?

Guest article by Michael Collins, CEO of Invest Europe

Michael Collins, CEO of Invest Europe, explores what 2019 will hold for private equity and venture capital firms in Europe. Among other topics, he discusses the impact of Brexit, the European Parliament elections, and the moves towards AIMFD II.

Jonathan Adler, Andrew J. Ceresney, Julie M. Riewe, Jonathan R. Tuttle, Norma Angelica Freeland, Kenneth J. Berman, Robert B. Kaplan, Rebecca F. Silberstein, Gregory T. Larkin

On December 13, 2018, the U.S. Securities and Exchange Commission announced a settled enforcement action against private equity adviser Yucaipa Master Manager for alleged negligent failure to disclose conflicts of interest and misallocation of fees and expenses to the funds it advised. The action originated from concerns raised by staff from the Office of Compliance Inspections and Examinations. Yucaipa paid nearly $3 million to resolve the case.

Geoffrey Kittredge, Philip Orange , John W. Rife III, Patricia Volhard, Simon Witney, John Young

This week saw some welcome news for users of UK limited partnerships, although unfortunately the industry’s relief has to remain somewhat qualified. A long-awaited announcement of the outcome of a consultation on changes to limited partnership law has side-stepped the most damaging of the original proposals, but still leaves a number of unanswered questions.

Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Wendy J. Miles, Nicola Swan, Simon Witney

Many in the private equity sector will be familiar with the UK’s complex and burdensome CRC scheme. Introduced in 2010 as the Carbon Reduction Commitment (later amended and renamed CRC Energy Efficiency Scheme), CRC comprised both a tax and a reporting requirement. It was particularly problematic for any private equity fund with investments in the UK because of its expansive grouping rules, and there was considerable relief when its abolition was announced in 2016 (although, of course, most of the costs of complying with the scheme had already been incurred by then). CRC has not yet been consigned to history – the final reports are due by 31 July next year – but firms now need to focus on its various successor schemes, which will build on both the tax and reporting elements.

Gabriel Cooper-Winnick, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney, John Young

Agreement by the European Union’s leaders of a Withdrawal Agreement on Sunday ought to have been a moment of certainty for European private equity and venture capital firms. In truth, of course, it would only ever have postponed the uncertainty, because the long-term future arrangements between the UK and the EU still have to be negotiated. But the Withdrawal Agreement includes a transitional period, and that would ensure a smoother ride into the next decade.

Unfortunately, however, the EU’s approval of the Withdrawal Agreement has had the opposite effect. As things stand, the UK Parliament looks likely to reject it on 11 December, and the EU negotiators now say that it cannot be re-negotiated. Sunday’s EU summit has therefore increased the likelihood of a disorderly, “no-deal” Brexit in March next year.

The sentiment in Parliament may yet change. Or, if the deal is rejected in the UK, the EU negotiators may actually be willing to look again at some aspects of it despite what they now say. Several other outcomes are also possible – including another referendum. But a no-deal Brexit, even if it still seems unlikely, is the default outcome if nothing else can be agreed. According to UK law and the EU treaty, the UK is leaving the EU on 29 March and it would take new legislation, and (probably) agreement from all other EU member states, to change that. Firms cannot afford to assume that will happen in time. They need to step up their preparations, or at least they need to check that they really can afford to wait yet another month before activating their contingency plans.

Patricia Volhard, Simon Witney, Philip Orange, Johanna Waber, Jin-Hyuk Jang, John Young, Eric Olmesdahl, Gabriel Cooper-Winnick

The German Federal Ministry of Finance has recently published a draft Act that introduces transitional arrangements to the German Insurance Supervision Act (Versicherungsaufsichtsgesetz) and the German Banking Act (Kreditwesengesetz) if the UK withdraws from the European Union on 29 March 2019 without having concluded a Withdrawal Agreement.

The Draft Act intends to mitigate the negative effects of a Hard Brexit in the German financial sector by authorising the German Federal Financial Supervisory Authority to grant UK insurance companies, credit institutions and financial service providers a temporary permission until, at the latest, the end of 2020.

Whilst helpful, the Draft Act is limited in scope and it will not relieve UK firms from the need to consider and start implementing alternative arrangements for their activities in Germany in the event of a Hard Brexit. In particular, it will not apply to UK-based private equity fund managers who are marketing their funds in Germany.

Katherine Ashton, Geoffrey Kittredge, Patricia Volhard, Matthew Dickman, John W. Rife III, Simon Witney

The UK government’s policy towards private equity and venture capital could, at times, be characterised as schizophrenic. For instance, in 2017 it finally responded to industry requests to update the UK’s main private fund vehicle, the limited partnership, with a helpful package of reforms. Unfortunately, the government also simultaneously announced a consultation on some unhelpful limited partnership law reforms (consideration of which is still ongoing). And, whilst apparently wanting to pursue policies that enhance the UK’s position “as a centre for asset management”, its implementation of tax rules does not always support that stated objective – and sometimes undermines it.

As part of its preparation for a possible “no-deal” Brexit in March 2019, the UK’s Financial Conduct Authority (“FCA”) recently published a consultation paper on proposed rules for its “temporary permissions regime”. The regime is designed to provide continuity for firms in the European Economic Area (“EEA”) that currently use their home state “passport” to cover the activities of a UK branch, for the provision of services on a “cross-border” basis into the UK, and for the marketing of EEA funds in the UK.

Simon Witney

More than 400 private equity and venture capital fund managers have signed the UN Principles for Responsible Investment (UN PRI) – together with around 250 of their investors – and it is quite clear that pressure to invest responsibly is ratcheting up across all asset classes. In most areas, the changes needed are manageable and evolutionary: a better and more effective approach to anti-corruption; more investment in health and safety and supply chain due diligence; and seeking and implementing expert advice on cyber-security, for example.

Simon Witney

At the end of last month, the International Private Equity Valuation Board (IPEV) issued a draft of the latest version of its valuation guidelines, which for many years have set the market standard in valuations for the private equity and venture capital industry. Established in 2005 by the British, European and French industry associations – and now operationally independent, with support from associations around the world – IPEV regularly reviews and updates its guidelines. The result is that they are widely respected by fund managers and investors alike.

Whatever the odds of the UK securing a deal with the EU in the coming months, it is important for private equity firms, and their portfolio companies, to understand how a no-deal scenario could affect their ability to attract and retain people, and the ability of those people to work freely across borders.

First, the good news. As part of its negotiations with the EU, the UK has already agreed that EU nationals and their family members (both already in the UK and seeking to come to the UK) will continue to have free movement rights until the end of the proposed transitional period on 31 December 2020. Of course, in principle that arrangement is contingent on the UK and the EU doing a deal along the lines currently envisaged. But it is highly likely that, even if no-deal is reached, these provisions will remain and continued free movement for EU citizens will be applied unilaterally by the UK to preserve the status quo for a limited period. Failure to do so would be unworkable and hugely disruptive.

On 24 October, Debevoise sponsored and spoke on a panel at the Fourth Annual European Fund Finance Symposium in London, hosted by the Fund Finance Association. We have summarised below a few of the key topics discussed during what was an enlightening day for all those in attendance.

In an interesting letter published last week, the FCA’s Megan Butler (Executive Director of Supervision – Investment, Wholesale and Specialists Division) has outlined how the FCA ensures that regulated firms take sexual harassment issues seriously and expects firms to respond to such allegations.