AIFM still poised to hamper secondary trading

Placement agents or GPs selling LPs’ fund stakes on their behalf may need to split the offer between AIFM-compliant and non-compliant funds.

Recently approved regulations over private equity in Europe seemingly prohibits intermediaries (such as placement agents or GPs acting on the behalf of a seller) from marketing LPs stakes in funds noncompliant with the directive’s requirements, cautions Simon Currie, a partner at Covington & Burling, a law firm.

The recently passed Alternative Investment Fund Managers directive will introduce new restrictions on the ability of non-EU fund managers or funds to solicit investors across the 27-member bloc. Unless language is clarified in follow-up rulemaking, the rules may in certain instances force an intermediary to split the selling LP’s interests between compliant funds held by the LP and non-compliant funds.

The effect of the directive, although substantially better than originally proposed, will inevitably mean that marketing a secondary transaction will be more complex for sellers using intermediaries and looking to market their interests to EU investors

Simon Currie

At any rate “the effect of the directive, although substantially better than originally proposed, will inevitably mean that marketing a secondary transaction will be more complex for sellers using intermediaries and looking to market their interests to EU investors”, Currie said.

Originally market sources raised concerns the directive’s marketing restrictions were so widely drawn that both sellers and intermediaries would have been unable to market LPs’ fund interests to EU investors. 

The directive’s final language, passed late last year, clarified sellers would not be caught by the marketing restrictions. “Clearly, this would have substantially adversely affected the secondary market in Europe”, added Currie.

For more on the legal concerns faced by players in the secondaries market, see the “Active Portfolio Management” supplement to the May edition of Private Equity International.