Latin Lawyer Private Equity Conference--Fund raising structures and regulatory outlook

Transcription

1 Latin Lawyer Private Equity Conference--Fund raising structures and regulatory outlook Daniel Miranda (Mattos Filho) Guillermo Morales (Morales & Besa ) Luis Nicolau (Ritch Mueller, S.C.) Glenn Sarno, Moderator (Simpson Thacher & Bartlett LLP) September 22, 2011 Notice These materials are for educational and illustrative purposes only and do not constitute legal, tax, regulatory or accounting advice. All information used herein was derived from publicly available sources. 2 1

2 Fundraising Overview Fundraising environment today continues to be robust and gaining momentum. Similar trend in acquisitions and exits by funds. Expectation is for further growth in commitments to funds, separately managed accounts ( SMAs ) and other vehicles targeting Latin America (e.g., asset-specific vehicles). Offshore investors entering into relationships with local PE firms. Brazil, Chile, Mexico fundraising activity and environment. Special incentives? 3 Fundraising Process Protracted LP negotiations Lengthy diligence process Institutional commitment process Complexity of integration of local fund structures, FIPs and similar vehicles Need for close working relationship with local counsel on a countryby-country basis Lead-time and coordination issues 4 2

3 BRAZIL CASE STUDY: BASIC OFFSHORE FUND/FIP STRUCTURE Individual Principals Advisor (Brazil or Offshore) Advisor for Fund and Parallel Funds (Management Fee) General Partner (Carry Interest ) General Partner (Brazil or Offshore) Offshore Feeder Fund and Parallel Funds (Cayman) Non-Brazil Investors Brazil Investors LLC (Delaware) FIC, FIM or Other Brazilian Feeder Funds Local FIP (Brazil) Portfolio Companies and Assets 5 Drivers of Fund Structures & Terms Global institutional investor base Tax; ERISA (US); Other Regulatory Demands of Global Investor Base Pressure for Funds to Conform to Market Terms Fee pressure; European vs. U.S. style carry; key man; no-fault remedies; cause remedies; reporting; confidentially carve-outs; etc. ILPA 2.0 Principals (LP Wish List ) Governance; Economics; Fiduciary Duties; Transparency; Conflicts Management; Role of LP Advisory Committee Bespoke terms for Anchor LPs Diversification; opt-out/veto rights; priority or residual coinvestment rights; managed account terms; economic concessions; separate vehicles/smas; etc. 6 3

4 Drivers of Fund Structures and Terms (cont d) Challenges to adapt local funds to: (i) accept new types of investors; (ii) conform to market terms ; and (iii) operate in lock-step with offshore feeder funds Common LP advisory committee for local feeders and offshore feeders w/r/t conflicts; approvals; etc. Investment opt-out rights and fund withdrawal rights given pro rata nature of common local master fund Recycling of capital issues in light of local taxes (e.g., Brazilian IOF) 7 Local Pension Fund Considerations 8 Participation of pension funds in PE funds Brazil Recent directives & liberalizations Inbound and outbound investments Chile & Mexico Status and recent developments Challenges to structuring, terms negotiations and process Veto rights on entire fund s participation in deals; economic concessions; seat on investment committee; transparency; training of personnel; enhanced/custom reporting; co-investment rights; local political/policy drivers re investment selection, etc. Strategies for integrating these investors into the typical PE fund Investment allocation issues; most favored nations issues, etc. Easier to structure prior to fund s first closing 4

5 Regional Obstacles Requiring Attention Case Study: Chile Chilean PE funds raising funds offshore Tax disincentives: 19% VAT payable on management and advisory fee; 35% withholding tax on capital gains & dividends; tax compliance Chilean PE funds raising funds onshore Cultural issues; no special incentives (tax); unavailability of AFPs (largest institutional) Development of local funds of funds Non-Chilean PE funds not accessing the local market Lack of private offering safe harbor (yet); AFPs practically unavailable; local family offices invest predominantly offshore Underdevelopment of the PE industry Distortions in the local capital market 9 United States Dodd-Frank Wall Street Reform and Consumer Protection Act Adviser Registration In reliance on the private investment adviser exemption (the 15 client rule ) under the U.S. Investment Advisers Act of 1940 (the Advisers Act ), private fund advisers generally were not required to: register with the SEC (or) comply with certain related reporting, recordkeeping and other burdens, including pay to play rules On July 21, 2011, the Dodd-Frank became effective, which amends certain provisions of the Advisers Act relevant to non-u.s. advisers, namely: creation of three limited exemptions: (i) venture capital exemption, (ii) foreign private adviser exemption and (iii) private fund adviser exemption established reporting requirements for exempt reporting advisers amended the Pay to Play Rule 10 5

6 Exemption for Foreign Private Advisers New Rule 203(b)(3) of the Advisers Act exempts a foreign private adviser from registration. Adviser must meet all requirements in order to rely on exemption: 1. Adviser has no place of business in the U.S. 2. Adviser has fewer than 15 clients and investors in the U.S. in private funds advised by the adviser 3. Adviser has aggregate assets under management attributable to clients in the U.S. and investors in the U.S. in private funds advised by the adviser of less than $25 million 4. Advisor does not hold itself out generally to the public in the U.S. as an investment adviser 11 Implications of Foreign Private Adviser Exemption A non-u.s. adviser with an affiliated registered broker-dealer in the U.S. (e.g., offshore adviser) may be considered as having a place of business in the U.S. due to its solicitation activities in the U.S., and therefore may be ineligible for this exemption. Unlike a non-u.s. adviser relying on the private adviser exemption, non-u.s. advisers relying on the foreign private adviser exemption: o are not given a period within which to register with the SEC after becoming ineligible to rely on this exemption due to an increase in the value of private assets attributable to U.S. clients and investors in the U.S., and o do not need to comply with the reporting and examination requirements for exempt reporting advisers. Narrowly drafted exemption; significant expansion of extra-territorial application of the U.S. Advisers Act to non-u.s. Advisers Potential to effectively restrict access by U.S. investors to the services of non-u.s. Advisers who opt not to access U.S. investor base 12 6

7 Exemption for Private Fund Advisers New Rule 203(m)-1 of the Advisers Act exempts an adviser that solely advises private funds that has aggregate assets under management in the U.S. of less than $150 million. Adviser must meet all requirements in order to rely on exemption: 1. Adviser has no client that is a U.S. Person other than qualifying private funds 2. Any assets managed by the Adviser at a place of business in the U.S. are solely attributable to private fund assets valued at less than $150 million 13 Implications of Private Fund Adviser Exemption for Non-U.S. Advisers An adviser with its principal office and place of business outside of the U.S. ( Non-U.S. Adviser ) needs to count only private fund assets it manages at a place of business in the U.S. toward the $150 million assets limit. o Note: The final rule uses at, rather than from a place of business in the U.S. as proposed, to reflect the rule s territorial focus on the location at which asset management takes place. In contrast to the foreign private adviser exemption, a Non-U.S. Adviser relying on this exemption may have a U.S. place of business. The type or number of its non-u.s. clients or the amount of assets it manages outside of the U.S. would not be taken into account. Non-U.S. Advisers with a U.S. affiliate or U.S. office will need to determine whether they are managing assets in the U.S. for purposes of this exemption. (Specifically, the SEC noted that providing research or conducting due diligence at a U.S. place of business would not be viewed as causing assets to be covered if a person outside of the United States makes independent investment decisions and implements those decisions.) Unibanco principles not retracted; apply in the context of new exemptions. 14 7

8 Reporting Obligations of Exempt Reporting Advisers Advisers exempt from SEC registration in reliance on the private fund adviser exemption ( exempt reporting advisers ) would be required to file, and periodically update, the following portions of Form ADV, Part 1A items (as well as corresponding sections of the schedules to Part 1A): Item 1 (Identifying Information) Item 2.B. (SEC Reporting by Exempt Reporting Advisers) Item 3 (Form of Organization) Item 6 (Other Business Activities) Item 7 (Financial Industry Affiliations and Private Fund Reporting) Item 10 (Control Persons) Item 11 (Disclosure Information) New Form ADV, Part 1A expected to be available December 31, SEC Oversight of Exempt Advisers & Pay to Play Exempt reporting advisers would be subject to Section 204 of the Advisers Act and therefore: would be subject to reporting and recordkeeping obligations; and would be subject to SEC examination. The SEC currently does not intend to perform routine examinations of exempt reporting advisers, but it retains the authority to do so in its discretion. New amendments to the Pay to Play rule of the Advisers Act also apply to exempt reporting advisers and foreign private advisers. 16 8

9 What Does Investment Adviser Registration Involve? File Form ADV Part 1A and 2A with SEC electronically through IARD System Maintain Form ADV Part 2B Brochure Supplements Appoint Chief Compliance Officer Prepare and maintain Compliance Manual/Code of Ethics o There are annual and interim amendment requirements for Form ADV Part 1 and 2 o There are initial, annual and interim delivery requirements to clients for Form ADV Part 2A and certain delivery requirements applicable to Form ADV Part 2B Compliance with Recordkeeping Rule (Rule 204-2) o Maintenance of specified books and records o Surveillance or spot-checking of s/electronic communication o Litigation Concerns 17 What Does Investment Adviser Registration Involve? (cont d) Compliance Matters Compensation: Limitations on performance compensation Advisory Contracts: Restrictions on assignment of such contracts Advertising & Marketing Allocation: Review allocation practices Compliance with Advisers Act Rules: o Custody o Pay to Play o Proxy Voting o Solicitors o Privacy Policy o Antifraud provisions (apply to all communications with clients) Form PF Filing Requirement: o Small vs. large advisers (>$1 billion AUM) o Annual or quarterly filing, depending on size o Disclose strategy, operations, counterparty risk, clearing process, exposure, leverage, etc. o Many in the industry believe Form PF will be revised to take into account registrant and industry comments 18 9

10 U.S. Regulation of Pay to Play Practices Introduction Rule 206(4)-5 (the Rule ) under the Advisers Act, addresses so called pay to play practices by investment advisers The Rule prohibits an investment adviser from doing the following: 1. providing advisory services for compensation to a government client for two years after the investment adviser makes contributions to certain candidates and officials (i.e., the two-year time out ) Six-month look-back on new hires De minimis exceptions exist ($350 if voting/$150 if not) May return discovered contributions in certain cases 2. making or agreeing to make payments to any person to solicit a government entity on behalf of such adviser unless such person is a regulated person (i.e., investment adviser or broker dealer) 3. engaging in bundling (i.e., coordinating or soliciting any person of P.A.C. to make certain contributions) 19 U.S. Regulation & the Effect on the Industry Strategies for registration and preparing for life as a registered adviser Hiring registration consulting firms and advisors Hiring chief compliance officers Compliance manual/policies Oversight and compliance in practice Effect on firm operations and culture Effect on decisions regarding fundraising from U.S. investors, location of offices and provision of services in the U.S

11 Dodd-Frank The Volcker Rule The Volcker Rule will, subject to limited exceptions, ban banking entities from engaging in proprietary trading and sponsoring or investing in private equity funds Banking entity is defined to include: 1. an insured depository institution (e.g., banks, thrifts, credit card banks, industrial banks, but excluding limited purpose trust companies that satisfy certain requirements) 2. any company that controls an insured depository institution (e.g., bank holding companies, savings and loan holding companies, and any company that directly or indirectly controls a nonbank bank, such as an industrial loan company or a credit card bank, including any private equity and industrial firms, such as BMW and General Electric, that control industrial loan companies or federal savings banks) 3. any company that is treated as a bank holding company under the International Banking Act (e.g., a foreign bank that has a U.S. branch, agency or commercial lending subsidiary, and any company that directly or indirectly controls such a bank) 4. any affiliate or subsidiary of any of these entities 21 Volcker Rule Exclusions The prohibition against a banking entity sponsoring or investing in private funds does not apply in the following circumstances: 1. Small business investment company investments 2. Sponsorship of, and investments in, private equity funds pursuant to Section 4(c)(9) or 4(c)(13) of the BHC Act by a banking entity that is not directly or indirectly controlled by a banking entity that is organized under U.S. law solely outside of the U.S. and provided that no ownership interest in such fund is offered or sold to a resident of the US 3. Private equity and hedge funds that are sponsored by the banking entity itself, subject to certain conditions 4. The regulators may also exempt from the Volcker Rule [s]uch other activity as the appropriate Federal banking agencies, the [SEC] and the [CFTC] determine, by rule...would promote and protect the safety and soundness of the banking entity and the financial stability of the United States

12 Volcker Rule Conformance Period The Volcker Rule is expected to take effect on July 21, 2012 Banking entities will have two years from the effective date to conform their activities (July 21, 2014) Extensions: Federal Reserve has the authority to provide up to three additional one year extensions of the conformance period a single extension, for up to five years, to individual banking entities with respect to investments in illiquid funds may be in addition to (and not in lieu of) the three separate one-year extensions illiquid fund is defined as a private equity fund that as of May 1, 2010, was principally invested in or was invested in and contractually committed to principally invest in, illiquid assets, such as portfolio companies, real estate investments, and venture capital investments Adoption of final regulations expected later this year 23 Volcker Rule Impact Much uncertainty until final regulations are adopted Illiquid fund exemption may allow some existing structures (i.e., those qualifying as illiquid funds ) to remain intact and raise more capital Strategies of covered institutions Spin-outs being considered Advisory role only (i.e., no investment of bank capital) Sponsor vehicles not comprising private funds No third-party capital; merchant banking activities Non-U.S. bank with only non-u.s. investors Limitations on U.S. and non-u.s. banks covered by rule to invest in private equity funds Less than 3% of fund; aggregate investments in funds less than 3% of bank s capital 24 12

13 Wish List / Potential Regulatory Reforms Chile: Deregulation of public investment funds Liberalization of pension fund restrictions Private offering exemption regulated Elimination of VAT on management and advisory fees Elimination of capital gains tax Brazil & Mexico/Rest of Region 25 13