AIFM directive could impact secondaries

The pending EU legislation could have the unintended consequence of blocking certain sales or bidders for LP interests, depending on the final text's definition of 'marketing'.

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?

Simon Crown

“Imagine if you were an LP looking to sell your LP interest; a common next step would be for you to be required to go to the fund's manager to arrange the sale,” said Simon Crown, a partner at law firm Clifford Chance. “The question for the [fund] manager is: When looking for a replacement LP to take up the committed capital, are you now subject to the marketing restrictions in the directive?’’

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.

Simon Currie

He noted there is a lack of clarity as to what “marketing” means in the current texts beings debated by the European Parliament and the Council of the European Union together with the European Commission. “Are we to assume that sales in the secondary market are caught by the marketing restrictions? If so, managers will have to start revising the procedures which govern their role as intermediaries in the secondaries market,’’ said Crown.

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.