A general counsel does more than ever, so PEI's sister title private funds management collected four in-house GCs and one private practice lawyer to discuss the changing nature of their roles, what's currently occupying their time and what potential controversies they foresee.
The GC participants represented a cross-section of the private equity universe: a fund investor, a mid-market private equity firm, a deal-by-deal shop and a global multi-asset class alternatives manager.
Here are three key takeaways:
1 BEPS will be a big deal
The OECD's global initiative to prevent base erosion and profit shifting is in the early stages of being transposed into local law. The 15 base erosion and profit shifting 'Action Points' do not necessarily apply neatly to private equity and related asset classes. As Shannon Stafford, head of tax for The Carlyle Group, recently told pfm: “BEPS… is written for multinational corporations… things like treaty provisions, country-by-country reporting… these have left a lot of people in our industry scratching their heads.”
But its significance is only just starting to be felt. As one of the GCs, Geoffrey Bailhache, managing director of Blackstone's legal and compliance group, put it: “BEPS may prove to be one of the most important things that is going to impact our industry in the next decade.”
2 Red flags on the horizon
Where is the next industry controversy likely to hit, and what will be under the microscope?
John Atherton, general counsel at Adveq, brought up the allocation of investment opportunities. If a manager has overlapping products, how do they apportion opportunities fairly? While firms might only occasionally have blind-pool funds that compete with each other for opportunities, if they manage several separate accounts, then the situation will come up more frequently.
Andrew Panayides, general counsel at Duke Street, mentioned the risk of accidentally turning a Europe-focused mid-market firm into a broker-dealer, which would put it in the regulatory sights of the Securities and Exchange Commission. “A deal may be put to you, which the team is not keen on pursuing. They may, however, know a house in the US who may want to pursue that deal. You can't simply 'pass on' the deal to the US house in exchange for a commission, as you would likely need to register with the SEC in advance of doing so.”
3 AIFMD has some grey areas
Under AIFMD rules, managers are supposed to disclose any preferential treatment received by an investor, such as in a side letter. Managers are, however, sometimes reluctant to do this.
It is not uncommon to see a Most Favoured Nation provision (where side terms agreed with a specific investor are offered to all other investors) to be tiered by investor size, not only for which LPs are offered those terms, but even whether those terms are disclosed, says Ted Craig, a partner with law firm MJ Hudson. This means only an investor of the same size or larger will be told what side terms have been agreed with a specific investor. This appears to contradict the AIFMD requirement for fund terms to be disclosed to all investors.
“As part of our practice working with LPs, we have challenged this and have had to ask managers if they are comfortable that they are AIFMD compliant,” Craig adds.