PPM slowdown

Fundraising has already slowed to a glacial pace this year; now proposed regulations in the European Union might just slow it down even more.

Private equity's complaints against the European Commission’s “Directive on Alternative Investment Fund Managers” are already numerous, but few have mentioned one unintended consequence of the directive that could create some major delays in fundraising for European general partners.

A panel at last week’s PERE Real Estate CFO’s Forum in New York identified another unforeseen consequence of the directive: any amendments by a fund to a private placement memorandum or a limited partnership agreement would require the approval of the regulator in the fund’s home jurisdiction. As PPMs especially are often changed frequently during the fundraising process to address the concerns of the various LPs, this could place a major time burden on GPs.

“It would certainly cost you time because there is a waiting period of around two weeks once you file something with the regulator before you can use it to go marketing with,” said James Ford, a partner in the Investment Funds and Securitisation practice of O’Melveny & Meyers. “It could create some difficult issues around meeting with potential investors during that two week period if you knew you were going to update the marketing documents but you hadn’t had your updated document approved yet.”

Ford said this is likely not the Commission’s intent, and that it is unlikely that regulators would seek to amend or disapprove such documents to any great extent. Rather, the potential headaches are more a result of bad drafting of the directive.

“In the context of what they are trying to achieve, which is to manage systemic risk by making sure that the funds are registered and the regulators know who those  funds are marketing to, it doesn’t make any sense that you have to update the  regulator every time you change the terms because it doesn’t address the risks,” Ford said. “It is quite clearly disproportionate to the objective.”

Ford shares the skepticism of other commentators in Europe who doubt the directive will be implemented in its current form. Even Sharon Bowles, the new chair of the European Parliament’s economic and monetary affairs committee, has said it will be substantially amended. While it was expected to be debated and voted on in the European Parliament by the end of this year, Ford says the intense lobbying campaign has likely slowed down that timetable.

“I think the pushback to the draft that was presented has been a lot higher than the people pushing it forward anticipated,” he said. “I’ve heard that the best guess as to when it might come into force is 2012, a year later than originally anticipated. So it’s not likely to be relevant to people who are fundraising now, except that they may need to register existing funds. We’re not advising anything other than potentially building in flexibility to their structures to deal with changes in law that may happen.”