European Private Equity Blog

Welcome to our European Private Equity Blog.

We update this page with regular pieces discussing the latest trends and issues in the private funds market across Europe. The authors come from our team in Europe, as well as from our other offices, with occasional guest posts from our friends within the private equity community.

If you’d like to receive monthly round-ups of new posts on the blog, you can sign up here.

If you have any questions concerning anything covered in the blog, please do get in touch with the team.

New Luxembourg Guidance Calls for Urgent Action from UK Alternative Fund Managers

14 October 2019

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.

Private Equity and The Need To Sustain The UK’s ‘Competitiveness Trinity’

9 October 2019

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?

Delays to New EU ESG Rules for Investment Funds

4 October 2019

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.

Giving Priority to Tax in UK Insolvency Law

27 September 2019

Christopher Boyne, Alan J. DaviesGeoffrey KittredgePatricia VolhardJohn W. Rife IIISimon 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. 


The UK’s Senior Managers and Certification Regime

20 September 2019

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.

The Fiduciary Duties of Company Directors

13 September, 2019

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

This week, the PRI (Principles for Responsible Investment – an international network of investors supported by the United Nations) published a set of recommendations focused on the responsibility of boards of directors in private equity-backed companies. The PRI’s recommendations were based on a legal memorandum prepared for the PRI by Debevoise & Plimpton, which was published at the same time. The Debevoise note considers the duties of the directors of UK private companies to consider relevant long-term environmental, social and governance (ESG) issues when making decisions, and it is available for download here.

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.

Moving Away from LIBOR

6 September 2019

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.

Preparing For a Hard Brexit (Again) … and Autumn’s To-Do List

26 July 2019

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.

Improving Transparency in the UK – But at What Cost?

19 July 2019

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.

Investment Limited Partnership Reform in Ireland

11 July 2019

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.

Encouraging Shareholder Engagement in the European Union

5 July 2019

Geoffrey KittredgeJohn 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”.)

The Nebulous Concept of Fiduciary Duty

28 June 2019

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.)

Private Fund Restructurings: The Maturing Market

21 June 2019

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.

Ensuring Good Governance Across the GP, Funds and Portfolio Companies

19 June 2019

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.

Capital Increases On The Way for Many UK-Based Private Equity Firms

14 June 2019

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.

Fund Manager Governance Requires Constant Review: The View from AfricInvest

11 June 2019

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.

The Importance of (Economic) Substance

7 June 2019

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.

What do the European Parliament Election Results Mean for Private Equity?

June 4, 2019

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?

Preparing for Halloween 2019 … and beyond

31 May 2019

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.

Reporting Fees and Expenses for Private Equity Funds

24 May 2019

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.

European Sustainability Regulation Moves into Second Gear

17 May 2019

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.

Proposed Regulations on Foreign Partner’s Interest Sale — What Sponsors Should Know About Withholding

15 May 2019

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.

ESMA Confirms Work on Sustainability Standards and Performance Fees

14 May 2019

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.

EMIR Refit Regulation – Impact on Asset Managers

13 May 2019

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.

Governance in Emerging Markets Private Capital

13 May 2019

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.

U.S. Expands Scope of National Security Review of Inward Investment

10 May 2019

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.

The UK Bribery Act: A Good Model for New Corporate Offences?

3 May 2019

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”.

EU Raises the Bar for Third-Country Access

12 April 2019

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.

No-Deal Brexit This Week? Some EU Transitional Regimes for MiFID Firms May Require Immediate Action

8 April 2019

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.

Invest Europe Updates Its ESG Due Diligence Guide

5 April 2019

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.

European Commission Gives European Insurance Companies More Reasons to Invest in European Funds

29 March 2019

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

27 March, 2019

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.

Highest European Court Holds Parent Companies Liable for Cartel Damages of Subsidiaries

22 March 2019

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.

How to Make Private Equity (Somewhat) More Scalable

15 March, 2019

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.

Significant Progress on Harmonisation of EU Fund Marketing Rules – But Will There be a Cost For Non-EU Managers?

15 March 2019

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.

How Can Private Funds Attract More Capital from UK Pension Funds?

8 March 2019

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.

Why Private Equity Sponsors Matter in Insurance

6 March 2019

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.

GDPR and Data Breach News: Are you Ready?

5 March 2019

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.

What Public Company Boards Can Learn from Private Equity

1 March 2019

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.

No-deal Brexit: The EU’s Patchwork Approach to Transitional Provisions

22 February 2019

Jin-Hyuk JangGeoffrey KittredgeJohn W. Rife IIIPatricia VolhardJohanna WaberSimon 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.

Dissecting ESG: Ethics and Profitability

22 February, 2019

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

EU Agrees Harmonised European Rules on Whistleblowing

15 February, 2019

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.

The UK’s New Senior Managers and Certification Regime

15 February 2019

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.

Responsible Investment: An Opportunity for Private Equity

8 February 2019

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.

FCA and ESMA announce agreement of co-operation arrangements in the event of a Hard Brexit

4 February 2019

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.

Annual Reporting By Large UK Private Equity-Backed Companies

1 February 2019

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.

UK Financial Conduct Authority Puts Heads of Legal Outside the Senior Managers Regime

1 February 2019

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.

New Luxembourg Beneficial Ownership Register to go Live

29 January 2019

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.

Assessing the Alternative Investment Fund Managers Directive

25 January 2019

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

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.

Investment Limited Partnership Reform in Ireland

22 January 2019

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.

New UK Corporate Governance Disclosures for Private Companies

18 January 2019

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.

Unpicking the Brexit Chaos: What Next?

16 January 2019

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.

FCA Opens Notification Window for Temporary Permissions Regime for EEA Firms

15 January 2019

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.

Regulatory Developments To Watch Out For In 2019

11 January 2019

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?

Invest Europe: What Does 2019 Hold for Private Equity?

9 January 2019

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.

SEC Enforcement Against Private Equity Advisers Continues

18 December 2018

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.

UK Limited Partnership Law Reform

14 December 2018

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.

Reporting Emissions in the UK: Further Disclosures Coming

7 December 2018

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.

(Still) Planning for a No-Deal Brexit

30 November 2018

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.

Germany Proposes Very Limited Temporary Permission Regime in Case of a Hard Brexit

27 November 2018

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.

Unlocking UK Pension Fund Money for Private Equity

23 November 2018

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.

FCA Issues Consultation on Temporary Permissions Regime for EEA Firms Following Brexit

19 November 2018

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

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.

The Inevitable Policy Response to Climate Change

16 November 2018

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.

New Version of “Private Capital” Valuation Guidelines out for Consultation

9 November 2018

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.

Immigration and Mobility after Brexit: The Good, the Bad and the Ugly for Private Equity Firms

2 November 2018

Guest article by Nicolas Rollason, a partner at Kingsley Napley LLP

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.

European Fund Finance Symposium – a Ten Point Summary

29 October 2018

Almas Daud, Alan Davies, Daniel Horoborough, Pierre Maugue, Felix Paterson, Thomas Smith 

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.

UK Financial Conduct Authority Explains its Approach to Sexual Harassment Issues at Regulated Firms

26 October 2018

Andrew Lee, Natasha McCarthy, Karolos Seeger

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.

The Regulatory Implications of a “No-Deal” Brexit

26 October 2018

Simon Witney

Although the current impasse in the Brexit negotiations may yet be resolved, there does remain significant nervousness that the UK could be heading for a “cliff-edge”, disorderly Brexit in March next year. That anxiety is justified, and all sensible businesses have been preparing themselves for that outcome – or at least working out whether they can still afford to wait and see what happens over the coming months.

Sovereign Wealth Funds Respond to Climate Change Risks and Opportunities

19 October 2018

Simon Witney

Many of private equity and venture capital’s institutional LPs are already focused on ESG (environmental, social and governance) issues. They frequently negotiate side letters – or even provisions in the Limited Partnership Agreement itself – that impose ongoing obligations on the fund manager to maintain responsible investment practices, and to report regularly to LPs. For their part, fund managers have generally recognised that these practices will reduce risk and enhance returns (especially the value that can be achieved on exit), and that adopting intelligent and proportionate approaches to environmental and social risks and opportunities is therefore in their enlightened self-interest.

UK Legislation Addresses Brexit Implications of Alternative Investment Fund Managers Directive

12 October 2018

Gabriel Cooper-Winnick, Philip Orange, Patricia Volhard, Simon Witney, John Young

As things stand, it remains unclear whether the United Kingdom and the EU will be able to reach a Withdrawal Agreement in time for the United Kingdom’s expected departure from the European Union on 29 March 2019. If an agreement is reached, it will include a transitional period, which will effectively preserve the status quo for financial services regulation until the end of 2020. For that transitional period, UK-regulated firms will continue to operate under the same rules as now and passporting rights will continue for authorised investment firms or fund managers.

Marketing Private Funds to Individuals

12 October 2018

Simon Witney

For the most part, private equity and venture capital funds are for institutional investors. According to the most recent Invest Europe figures, less than 10% of funds raised in 2017 came from private individuals and, since that figure includes the GP’s commitment, even that overstates the importance of individuals as third-party investors. Pension funds, sovereign wealth funds, government agencies and insurance companies tend to dominate the investor lists of most European private equity fund managers.

The UK’s Proposed National Security Review for M&A Deals

5 October 2018

Simon Witney

Many countries have been looking again at their ability to block acquisitions when they threaten national security. For example, we reported on a change to German law in July last year, and a European Commission proposal (which would cover all EU member states) in October. Most recently, a new law in the United States has increased the power of the Committee on Foreign Investment (CFIUS) to block deals. Such rule changes – often triggered by a controversial foreign acquisition – are understandable, but investors need to know the process and timeline. Vague tests, long clearance procedures or excessive look-back periods can put off investment that would otherwise benefit the economy, and legislators must try to find the right balance.