Depositaries unsure how to supervise GPs

Verifying private equity firms' ownership of assets is not a clear-cut exercise for depositaries subject to the AIFM directive, according to industry sources.

In most instances verifying a stakeholder's ownership share, or nominal share holdings, can easily be done by checking a company's share register, or asking for a sales certificate in the case of many assets.

But depositaries tell PE Manager that they wonder if that's enough when verifying ownership in the private equity industry. 

As part of the pan-EU Alternative Investment Fund Managers (AIFM) directive, depositories will act as an investor safeguard: responsible for safekeeping funds' financial assets, monitoring cash flows and ensuring a GP complies with its own governing documents. 

To fulfill their duties, depositaries must ensure a GP is able to easily verify its ownership claims, and keep internal records of the GP's portfolio of assets so that the depositary is able to perform its own verification. 

The problem rests in what “ownership” means in the private equity context, according to depositaries and regulatory lawyers speaking with PE Manager

Because GPs often use intermediate holding companies to acquire assets, depositaries wonder if they must verify a private equity firm's shares in both the holding company, and underlying portfolio company as well.

“How far down the chain of companies do you need to go?” said Justin Partington, commercial director of fund administrator Ipes – which will launch a depositary service in the coming months.

Partington said depositaries don't normally need to travel far down the chain of command to verify ownership, but that if portfolio companies are the entity where revenues are being earned, and employees hired, it would seem to make sense that GPs would have to provide records demonstrating their control over those assets.

According to Partington, the industry is also split on whether depositaries must verify the nominal amount of shares held by a GP, or if confirming their equity ownership percentage would be sufficient. 

The directive's rules on depositaries has long been a source of concern for the industry. GPs have for the most part griped about the costs involved in hiring a depositary, but lawyers are also advising firms to consider their record-keeping and information exchange duties under the bill. 

GPs must be able to provide depositiaries information without delay so that oversight duties can be performed, warn lawyers. To quickly release information, lawyers say this may likely result in GPs “shadowing” some depositary functions, for example preserving a duplicate set of ownership records sent to depositaries for verification purposes.