Pfm: How did Silverfleet adjust to the regulatory changes that occurred between the close of Fund I and the launch of Fund II?
MacDougall: Here in Europe, we had to deal with the Alternative Investment Fund Managers Directive (AIFMD). It was new, and how people were dealing with it was emerging rather than established.
One tedious part was the premarketing. The new rules regarding what you needed to do in order to market a fund in each European country were far from clear. And what we defined as reverse solicitation wasn’t necessarily what the LP or their legal advisors would regard as reverse solicitation. That had to be ironed out.
Our legal advisors sent letters to the LPs to set up the reverse solicitation, but in some cases an LP responded: “You’re the only fund that we’ve encountered so far that’s actually asked us to send one of these letters.”
It was interesting because we were doing it by the book, and we wondered: “Does that mean everyone else is winging it?”
In Europe, we have LPs from Finland, Sweden, Norway, Demark, the Netherlands, Germany, Switzerland and the UK, and there was quite a lot of variation from investor to investor and from country to country.
As time has gone by, it has become more established what customer practice needs to be in each country. Once we were fully AIFMD approved and signed off by the Financial Conduct Authority, we had a passport and we were able to market.
What kind of challenges did you face bringing non-European investors onboard?
We were in contact with investors from Saudi Arabia and had to go through the right way to market to them, as well as some from Israel, and the way they’re regulated is unique as well. That produced some interesting negotiations in the LPA.
But I think the most surreal moment was when a US investor’s Employee Retirement Income Security Act of 1974 (ERISA) counsel was disagreeing with a European investor’s counsel on the interpretation of how ERISA should be documented in the LPA. So it’s not just Europe, there were some other places we had to think through carefully as well.
How do you navigate these in-depth LP negotiations, especially when your fund is nearly oversubscribed?
You try to minimize the set-up costs for your investors and you’re permanently torn, wondering: “Is this issue really essential and how much are we going to spend on it?” We had one investor who did a deep dive on everything, and it probably cost seven times as much as the average investor to settle their LPA comments. But it was a reasonable check in terms of size, so it was worth it.
We were lucky that from Fund I to Fund II, all the investors who were able to invest again did. Unfortunately, some who we worked with closely in Fund I didn’t have the money or couldn’t justify coming into a fund of our size, so it was a smaller re-up rate than you would expect, but those who did re-up were the bigger investors so the number of euros raised was quite significant. You can manage the situation so that the people who want to be in the fund can be in the fund and you don’t end up with LPs doing lots of work for no benefit.
What was one of the more heavily negotiated terms?
There’s much more sensitivity as to what the role of the LP advisory committee is. Nobody on the advisory committee wants to be sued, but they also want to have a fair amount of say in how the GP deals with certain situations, so there’s an inherent conflict.
This article appeared in pfm’s The Modern Fundraiser magazine, published in January 2016.