1. Asian
GPs
Could
Run
Afoul
of
AIFMD in Europe
Private Equity
Analyst
Sonja
Cheung
October 29, 2013,
(c) 2013 Dow Jones & Company, Inc.
Regulations governing fund marketing may stymie Asian private equity firms seeking
capital from European investors, adding another obstacle to an already challenging
fundraising environment.
European fund managers are working hard to comply with the Alternative Investment
Fund Managers Directive, which was introduced by the European Commission to
help protect investors when choosing a fund. To comply with the directive, for
example, private equity firms are supposed to safeguard assets and keep more
transparent records and reports.
However, few Asian firms are following their European peers in embracing the
directive's requirements. At worst, breaking the AIFMD could be considered a
criminal offense and may entitle limited partners to revoke their investment, said a
Hong Kong-based private equity attorney.
A growing network of cooperation agreements between regulators from the European
Union and other parts of the world to enforce the directive means Asian fund
managers face increasing pressure to comply. At the same time, Asian general
partners must navigate national rulings set up alongside the AIFMD in different EU
countries, such as France.
Compliance with the regulation differs in each European country. In the U.K., for
instance, a private equity firm would be required to hold an authorized "marketing
passport" before embarking on actively marketing a new fund, or conduct business
via a private placement.
"The individual country regimes vary widely within Europe, and some of them are
difficult to understand and/or are themselves very onerous. We would like to comply
fully [with the AIFMD], but full compliance is very onerous and not many general
partners in Asia are thinking about taking that route," said a Hong Kong-based
general partner that invests across the Asian region.
As a result, some Asian managers are finding other ways to circumvent the AIFMD to
attract European capital. Reverse solicitation, in which a prospective investor initiates
contact with a general partner rather than the other way around, is a key way to get
around the restrictions, say industry participants.
Reverse solicitation is likely to remain a practice for EU investors that don't have the
ability to establish themselves outside of the region, said John Fadely, a corporate
partner at Weil Gotshal & Manges LLP . He added that larger European LPs will
likely set up shop outside of Europe to allow them to engage in activity with non-EU
managers. Other Asian GPs may avoid European LPs altogether.

2. Although some European investors active in Asia, including London-based Hermes
GPE, have a presence in the region, others could lose out on Asian investment
opportunities. "The biggest losers ultimately could be the very European investors
whom the AIFMD was originally intended to protect…. Asian and other non-EU
managers are increasingly choosing not to direct marketing efforts into the EU, given
the complexity and costs of complying with the AIFMD," said Mr. Fadely.
Clifford Chance Partner Matthias Feldmann contends the directive could have a
negative impact on European limited partners, resulting in a greater focus among
Asia's general partners in tapping U.S. and other Asian investors. However, other
industry participants disagree.
"Can I ignore Europe? If as a GP I had a super-performing fund and had investors
falling all over me, then I might just forget about Europe. But most GPs obviously are
not going to be in that camp," said the Hong Kong-based fund manager. "As such, it
would be risky to completely ignore Europe in a fundraising, in this environment."
Over the years, Continental Europe has become the largest source of capital outside of
the U.S. for private equity firms in marketing mode across the globe. European
investors accounted for 36% of capital raised outside of the U.S. in 2012 by general
partners that participated in a recent Dow Jones Private Equity Analyst Sources of
Capital Survey. The U.K. contributed another 13% of the money raised from non-U.S.
investors, according to the survey.
Adding to challenges Asian GPs' face, more global LPs have begun to question how
much they're willing to commit to Asia amid concerns about a slowdown in the pace
of exits from Asian GPs, especially those with sizable investments in China, where
fewer companies are going public. Meanwhile, regulatory changes in Europe,
including Basel III, alongside the region's economic woes have slowed the investment
pace of many European investors.
Even private equity giant TPG Capital has had a tough time securing new capital for a
sixth pan-Asian fund, for which it has had to slash its overall goal to around $3.5
billion, from an original target of $4 billion.
European capital is, however, particularly important for first-time fund managers, said
Niklas Amundsson, a partner at private placement agent MVision Private Equity
Advisers, noting that they "rarely see any capital from Asian LPs aside from more
strategic cornerstone commitments from the sovereign wealth funds in Southeast
Asia."
Newer firms could find themselves burnt by the AIFMD, which most industry
participants in Europe, let alone Asia, agree is confusing. An Asian "GP might be
thinking that they are having a friendly coffee with a [European investor] based in
Hong Kong or Singapore, but this may still be considered solicitation in some
jurisdictions under the new directive," Mr. Amundsson added.
Asian general partners are likely to pay greater attention to the AIFMD when there's
more clarity in implementation, according to these industry participants.

3. "Conceived by politicians who, in general, didn't particularly care about or understand
the private equity industry, the AIFMD applies a set of poorly drafted rules to a
complex industry. Predictably, the result is a mess …. Their implementation has been
complex and opaque," said Weil's Mr. Fadely.