EMPEA Private Equity Masterclass. June 6, 2018

Transcription

1 EMPEA Private Equity Masterclass June 6, 2018

2 Today s Presenters & Contact Information JON ADLER Partner jadler@debevoise.com ALEXEI BONAMIN Partner abonamin@tozzinifreire.com.br JOÃO BUSIN Partner jbusin@tozzinifreire.com.br 2

3 Notices The contents of this presentation should not be construed as legal, tax, investment or other advice The information in this presentation regarding market data and market trends is a general overview prepared based on selected funds. The data generally does not distinguish funds based on industry focus, nor does it distinguish between funds raised by institutional and independent sponsors. These and other considerations may cause fund terms to deviate significantly from the general trends noted in this presentation. None of the information presented herein should be held out as representing the views of Debevoise & Plimpton LLP and TozziniFreire Advogados. Copyright 2018 Debevoise & Plimpton LLP - All rights reserved. TozziniFreire Advogados - Todos os direitos reservados. 3

4 Agenda Topic Slide Key Market Trends 5-6 Structuring Considerations 7-15 Recent Brazilian Legal and Regulatory Updates Negotiation Focal Points Certain Legal and Regulatory Considerations

5 Key Market Trends 5

6 Overview Fundraising activity has increased, but the market remains challenging Recent inquiries by Brazilian tax authority has immediate implications for global fundraising Institutional investors continue to trim their stable of managers, focusing on name brands and top performers Many investors are looking for opportunities to go direct ; fee free coinvestment is a common demand Increased focus on transparency, ESG 6

7 Structuring Considerations 7

8 Alternatives to Blind Pool Funding Pledge Funds Opt in / Opt out Mixed with blind pool Deal-by-Deal Funds Single investment opportunity ( cost sharing agreement?) Stepping stone to traditional fund Separate Accounts Single investor fund ( fund of one ) 8

9 Structuring Considerations Fund vehicle entity type and domicile may vary based on the fund s investment focus Objectives are tax-transparency at the fund level, flexibility at the investment level and responsiveness to investor requirements Some funds targeting LatAm use Canadian and Delaware partnerships due to historic tax haven concerns in certain countries Funds investing in Brazil will often be structured as three or more parallel funds that collectively invest through a FIP structure 9

10 Fund Structure Typical U.S. sponsor fund structure Fund Sponsor Investors Fund Sponsor GP LPs Various jurisdictions Manager Management Fee Fund (Limited Partnership) Tax efficient jurisdiction Advisory Fee Holding Company Treaty network or other jurisdiction Adviser Portfolio Company Portfolio Company Portfolio Company Key sponsor jurisdiction / investment jurisdiction Investment jurisdiction 10

11 Fund Structure Typical Brazilian Private Equity Fund Structure (overview) Investors Brazilian Managing Company CVM authorized administrador and gestor Investment Advisory Agreement FIP -- Fundo de Investimento em Participação Portfolio Companies 11

12 Fund Structure Typical Private Equity Fund Structure with a Single FIP (Cayman) Non-Brazilian Investors General Partner Entity [Brazilian Ltda.] Feeder Fund 1 L.P. [Cayman Islands] Feeder Fund 2 L.P. [Cayman Islands] Feeder Fund 3 L.P. [Cayman Islands] Delaware, USA LLC 1 LLC 2 LLC 3 Brazil 4373 (Former 2689) Account* 4373 (Former 2689) Account* 4373 (Former 2689) Account* Brazilian Managing Company CVM authorized administrador and gestor Investment Advisory Agreement FIP (Brazilian and non-brazilian investors) Brazilian Investors Note: * Shares of FIP held for feeder Funds by a Brazilian financial institution in foreign investor accounts under CMN Resolution N. 4,373/14. Portfolio Companies 12

13 Fund Structure Typical Private Equity Fund Structure with a Single FIP (Ontario/Delaware) Non-Brazilian Investors General Partner Entity [Brazilian Ltda.] Feeder Fund 1 L.P. [Ontario] ** Feeder Fund 2 L.P. [Ontario] ** Feeder Fund 3 L.P. [Ontario] ** Offshore Brazil 4373 (Former 2689) Account* 4373 (Former 2689) Account* 4373 (Former 2689) Account* Brazilian Managing Company CVM authorized administrador and gestor Investment Advisory Agreement FIP (Brazilian and non-brazilian investors) Brazilian Investors Notes: * Shares of FIP held for feeder Funds by a Brazilian financial institution in foreign investor accounts under CMN Resolution N. 4,373/14. ** The feeder Funds may be Delaware LLCs if so requested by investors. Portfolio Companies 13

14 Fund Structure Typical Private Equity Fund Structure with Parallel FIPs Non-Brazilian Investors General Partner Entity [Brazilian Ltda.] Feeder Fund 1 L.P. [Ontario] ** Feeder Fund 2 L.P. [Ontario] ** Feeder Fund 3 L.P. [Ontario] ** Offshore Brazil 4373 (Former 2689) Account* 4373 (Former 2689) Account* 4373 (Former 2689) Account* Brazilian Investors Brazilian Managing Company CVM authorized administrador and gestor Investment Advisory Agreements Non-Brazilian Investor FIP Brazilian Investor FIP Notes: * Shares of FIPs held for feeder Funds by a Brazilian financial institution in foreign investor accounts under CMN Resolution N. 4,373/14. ** The feeder Funds may be Delaware LLCs if so requested by investors. Portfolio Companies 14

15 Fund Structure Typical Private Equity Fund Structure with one FIP per Deal Non-Brazilian Investors General Partner Entity [Brazilian Ltda.] Feeder Fund 1 L.P. [Cayman Islands] Feeder Fund 2 L.P. [Cayman Islands] Feeder Fund 3 L.P. [Cayman Islands] Delaware, USA LLC 1 LLC 2 LLC 3 Brazil 4373 (Former 2689) Account* 4373 (Former 2689) Account* 4373 (Former 2689) Account* Note: * Shares of FIPs held for feeder Funds by Brazilian a financial institution in foreign investor accounts under CMN Resolution N. 4,373/14. Brazilian Investors Brazilian Managing Company CVM authorized administrador and gestor Investment Advisory Agreements Investment FIP 1 Investment FIP 2 Investment FIP 3 Portfolio Company 1 Portfolio Company 2 Portfolio Company 3 15

16 Recent Brazilian Legal and Regulatory Updates 16

17 Recent Brazilian Legal and Regulatory Updates Recent inquiries by Brazilian tax authorities into beneficial ownership of FIP structures Background Implications for fundraising Other Brazilian tax updates Updates to CVM Rules governing FIPs 17

18 New Rules on FIPs CVM Rule 578/16 CVM issued Rule 578 on August 30, 2016, addressing the formation, management and operation of private equity funds, revoking CVM Rules 209/94, 391/03, 406/04 and 460/07 CVM Rule 579/16 CVM issued Rule 579 on August 30, 2016, addressing the preparation of FIP s financial statements and outlines the accounting criteria for recognition, classification and measurement of assets and liabilities Rule 579 provides that FIPs must value their assets and liabilities by using their fair value 18

19 Highlights of CVM 578/16 Investment in non-convertible debentures Law No /07 Allowed the Investment in non-convertible debentures (debêntures simples) for FIPs-IE e FIPs-PD&I. Now any FIP can invest in non-convertible debentures up to the limit of 33% of the subscribed capital. Advances for Future Capital Increase (known in Brazil as AFAC ) FIPs can make Advances for Future Capital Increase in corporations, provided that: - the FIP holds shares of the company that will receive the AFAC; - the FIP is expressly allowed to make the AFAC by its by-laws; - the AFAC is made as an irrevocable and irreversible commitment by the FIP; - the AFAC must be converted into capital increase in the invested company within 12 months. 19

20 Highlights of CVM 578/16 New categories of FIP s (i) Seed Capital; Companies with annual gross revenue up to R$ 16 million in the year immediately prior to the FIP s first investment. (iv) Research, Development and Innovation (FIP-PD&I); Companies in the field of research, development and innovation. (ii) Emerging Companies; Companies with annual gross revenue up to R$ 300 million in the year immediately prior to the FIP s first investment. (v) Multi-strategy. Those which does not fit in the other categories. (iii) Infrastructure (FIP-IE); Companies that develop projects in the industries of energy, transportation, water and sanitation, irrigation and any other industries. 20

21 Highlights of CVM 578/16 Classes of shares with different economic/financial rights Rule 578 has permitted the FIP s bylaws to grant different economic/financial rights to one or more classes of shares with respect to: (a) administration and management fees; and (b) priority order with respect to payment of earnings, amortizations or the fund s liquidation balance. The previous regulation only allowed different economic/financial rights in connection with administration and performance fees. Possibility of investments abroad FIPs may invest up to 20% of its subscribed capital abroad. Multi-strategy FIPs target at professional investors may invest up to 100% of its subscribed capital abroad. 21

22 Highlights of CVM 578/16 Investment in limited liability companies - Seed Capital FIP; - Emerging Companies FIP; - Limited liability companies that are invested by FIPs will be exempted from complying with certain governance requirements set forth in Rule

23 Negotiation Focal Points 23

24 Alternative Management Fees Increased prevalence of variable rates Management fee is lower for LPs investing at first closing ( early bird discount )» Fund A offers a 10% reduction in headline MF rate for first closers» Fund B offers a 5% reduction in headline MF rate for first closers» Fund C offers a 5% reduction in headline MF rate and a 5% carried interest discount for first closers Management fee varies based on size of LP s Commitment» Fund offers specified discount on headline MF rate for all LPs with Commitments in excess of specified amount (or tiers of increasing discounts for tiers of increasingly large Commitments) Management fee payable by all LPs varies based upon aggregate Commitments» Fund D s MF rate is 2% of aggregate Commitments up to $1bn or 1.25% of aggregate Commitments above $1bn Carried interest discount ranging from 5% to 15% for early large investors 24

25 Negotiation Focal Points Economics Management Fees Carried Interest waterfall issues» Carry clawback and protections Fee income offsets Expenses Organizational Expenses Partnership Expenses» Manager/Fund allocations» Fund-Fund allocations Reporting, internal policies and procedures 25

26 Negotiation Focal Points (cont d) Reporting Increased transparency demands ILPA Investor-specific reporting requirements Borrowing Increased prevalence of Fund-level credit facilities Heightened scrutiny from investors 26

27 Negotiation Focal Points (cont d) Governance/Conflicts Conflict clearance process/affiliate transactions Successor fund restrictions, investment allocations Key person provisions and devotion of time covenants No fault rights» GP removal» Dissolution» Termination of Investment Period 27

28 Negotiation Focal Points (cont d) Side Letter issues Proliferation of side letters as a practice MFN implications Key pitfalls to watch out for 28

29 Certain Legal and Regulatory Considerations 29

30 Certain Legal and Regulatory Considerations US: Securities Act of 1933 private placement, no general solicitation Reg D, accredited investors 506(c) JOBS Act general solicitation US: Investment Company Act of 1940 no general solicitation 3(c)(1), 100 beneficial owners 3(c)(7)), qualified purchasers US: Investment Advisers Act of 1940 US: Blue Sky 30

31 Certain Legal and Regulatory Considerations (cont d) European Economic Area: Alternative Investment Fund Managers Directive (AIFMD) Affects the management and marketing of alternative investment funds ( AIFs ) by managers of AIFs ( AIFMs ) Marketing : a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares in an AIF it manages to or with investors domiciled or with a registered office in the EU More onerous obligations to satisfy to market funds in the EEA Non-EEA managers must generally rely on national private placement regimes or reverse solicitation Rest of World: World Sky 31

32 Certain Legal and Regulatory Considerations (cont d) Anti-Bribery Considerations Key Risks for EM Managers» Fundraising (e.g., SWFs)» Using third parties (e.g., placement agents, consultants)» Deal sourcing» Governmental approvals for transactions» Governmental approvals for business operations U.S. Foreign Corrupt Practices Act UK Bribery Act 32

33 Certain Legal and Regulatory Considerations (cont d) Mitigating Risks Adopt and enforce tailored compliance policies (sponsor-level, portfolio company-level)» Identify local and industry-specific risks Risk-based due diligence on counterparties, intermediaries, potential investments, JV partners» Liability for deliberate ignorance Contract provisions (R&W, indemnity, audit right) Training, periodic assessment, documentation 33