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On the minds of general counsels

A sneak preview of our upcoming in-house lawyer roundtable: BEPS, AIFMD and the private fund industry’s next big controversy.

This week pfm gathered four in-house general counsels and one renowned private practice lawyer to discuss the changing nature of their roles, what’s occupying their time now and what potential headaches are coming down the track.

Around the table our general counsel participants represented a cross-section of the private fund universe: a fund investor, a mid-market private equity firm, a deal-by-deal shop and a global multi-asset class alternatives manager.

The roundtable will be published in full in our October edition – a legal special – but in the meantime, we thought we would share some of the headlines.

BEPS will be a big deal for private funds

The OECD’s global initiative to prevent base erosion and profit shifting (BEPS) is in the early stages of being transposed into local law. While most in the industry welcome efforts to prevent tax avoidance by multinational corporations, the 15 “Action Points” laid out in BEPS do not necessarily apply neatly to the funds industry. As Shannon Stafford, head of tax for The Carlyle Group, recently told pfm: “The concern for us has always been that we are investing as a fund with the goal of tax neutrality. BEPS, meanwhile, 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.”

What is clear is that its significance is only just starting to be felt. As one of our general counsels around the table put it: “BEPS is the most important thing that is going to impact our industry in the next decade.”

The days of reverse solicitation could be numbered

In the post-AIFMD world, private fund managers trying to raise money within the EU without a marketing passport are reliant on reverse solicitation. In other words, they can market their funds only to investors who have approached them first. Some firms are understood to be including provisions in PPM’s or subscription documents stating that the investor is soliciting more information on the manager’s subsequent funds. Essentially it is the institutional investment equivalent of ticking the box that says, “Yes, I would like to hear about more exciting offers.”

“At some point [the regulators] may decide to look more deeply into whether reverse solicitation is valid or not,” said one of our GCs. Another around the table said that, with AIFMD compliance relatively straightforward to achieve, reverse solicitation was not worth the time and risk. “A month after filing for a new AIFMD fund with the FCA, we received responses from French and German LPs, with no worries about reverse enquiries.”

Red flags on the horizon

With five leading legal minds around the table, we were keen to find out what issues were giving them cause to take advice and give careful guidance to their teams. In other words: where is the next industry controversy likely to hit, and what will be under the microscope?

One lawyer 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. 

“It is important to make sure the investment committee takes into account all the relevant vehicles and decides which pool the investment should be made from,” said one of the GCs.

Another mentioned the risk of accidentally turning their Europe-focused mid-market firm into a broker-dealer, which would put it in the regulatory sights of the Securities and Exchange Commission. “If a deal is put to you, and the team is not keen on pursuing it but they know a guy in the US, for example, at a different house who wants to pursue it; they can’t pass it on and charge a fee to the US house, because then we become a broker-dealer for SEC purposes.”

Watch out for our general counsel report coming up in our October edition. In the meantime, our September edition is out now.