The EU's directive on Alternative Investment Fund Managers could have a significant impact on the private equity secondaries market – including blocking certain transactions or bidders – depending on how the language of the incoming law is interpreted, according to market participants.
The directive – which in theory is meant to protect European investors from making overly risky investments – will potentially restrict some non-European GPs from “marketing” their funds to investors inside the EU without obtaining a passport to do so from one or more regulatory bodies. This could have an impact on the buying and selling of secondary fund interests.
Are we to assume that sales in the secondary market are caught by the marketing restrictions?
If the Commission draft wins through with getting the definition of marketing to be wide, then sellers or even an intermediary on behalf of the seller, would be precluded from marketing funds to EU investors.
One European advisor also raised concerns as to how the potential rules could affect the sale of a large portfolio of fund interests. If one or more fund interest is not associated with an AIFM-compliant fund manager, then the portfolio could have to be broken up, or European investors could be ruled out of the bidding.
Covington & Burling partner Simon Currie voiced similar interest concerning the draft directive’s broad language. ‘‘If the Commission draft wins through with getting the definition of marketing to be wide, then sellers or even an intermediary on behalf of the seller, would be precluded from marketing funds to EU investors,’’ Currie said.
The September issue of Private Equity International will feature a special section on the secondaries market.