Private Equity and

Venture Capital Guide

2015

Featuring
Allen & Overy
Alvarez & Vicens
Angel Capital Association
Bain Capital
Debevoise & Plimpton
Emerging Capital Partners
EVCA

IFLR
Freshfields Bruckhaus Deringer
Gattai Minoli Agostinelli & Partners
Udo Udoma & Belo-Osagie
Walder Wyss international financial law review
SURVEY PARTICIPANTS

DOMINICAN REPUBLIC GERMANY ITALY

NIGERIA SWITZERLAND UNITED STATES

GLOBAL

ANGEL CAPITAL ASSOCIATION BAIN CAPITAL

EMERGING CAPITAL PARTNERS EUROPEAN PRIVATE EQUITY AND VENTURE CAPITAL ASSOCIATION

IFLR
international financial law review
 INTRODUCTION

Putting funds
to work
A
strong end to the year for private equity lies ahead. Many funds have cash – and they
are looking to put it to work. Most are seeking opportunities to increase returns and
4 & 8 Bouverie Street, London EC4Y 8AX are becoming more willing to try new approaches, strategies and partners to do so.
e-mail: [initial][surname]@euromoneyplc.com
Customer service: +44 20 7779 8610 They are facing competition, however. A growing number of pension funds and other
institutional investors are adopting PE tactics to their own ends. The number of cross-border
EDITORIAL
Managing editor: Tom Young
transactions is likely to increase too, as firms look to get away from some stagnating or faltering
tom.young@legalmediagroup.com markets.
+44 207 779 8596
This will likely mean even more emerging market activity, where funds will have to face
Editor: Danielle Myles
dmyles@legalmediagroup.com more risk as well as the need to overcome potentially unfamiliar political and regulatory hurdles.
+44 207 779 8381
In 2014 the market saw an increase in partnerships between PE, pensions and sovereign
Asia editor: Ashley Lee wealth funds. As these increase and move forward, both sides must have an understanding of
ashley.lee@euromoneyasia.com
+852 2842 6915 how to form these partnerships, share liabilities and craft exit routes.

Americas editor: Zoe Thomas

“
zoe.thomas@euromoneyny.com
+1 212 224 3402

Staff writer: Lizzie Meager

elizabeth.meager@legalmediagroup.com
A growing number of pension
+44 207 779 8030

Managing director: Tim Wakefield

funds are adopting PE tactics to
Head of sales: Richard Valmarana
Production editor: Richard Oliver their own ends
Sub editor: Maria Crompton

ADVERTISING
Associate publisher: Latin America
Roberto Miranda Structural developments continue apace too. In Asia, increased regulation and limited
rmiranda@euromoneyplc.com partner needs has led to longer, and highly negotiated side letters. Meanwhile, in Europe,
+44 207 779 8435 regulators are becoming more open to private equity investing in financial institutions. But
Associate publisher: APAC & Africa
William Lo
successful investments require navigation of the complex regulatory landscape.
william.lo@iflrasia.com
+852 2842 6970 Because of this IFLR’s private equity guide examines recent trends and new developments
Business development: Europe, Middle East & North America in the sector. Articles and Q&As by industry leaders explore structural and regulatory changes
Liam Sharkey
lsharkey@iflr.com that will impact private equity over the coming year.
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SUBSCRIPTIONS AND CUSTOMER SERVICES We hope this guide will give you a clear and in-depth look at major changes and offer
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International Financial Law Review
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International Financial Law Review 2013 ISSN 0262-6969.

IFLR SURVEY | PRIVATE EQUITY AND VENTURE CAPITAL 2015 1

 CONTENTS

Contents
Market overviews Country reports
AFRICA
Angel Capital Association Africa’s dry powder 13
A missed Danielle Myles, IFLR editor

opportunity DOMINICAN REPUBLIC

4 Removing the chains

Francisco Vicens De León and
Carolina Figuereo Simón
15

Alvarez & Vicens

Bain Capital
A shifting landscape GERMANY
Winds of change 20
Markus Käpplinger and Roman Kasten
Allen & Overy

6 GLOBAL
A force for good in FIG? 22
Emerging Capital Partners David Higgins, Sarah-Jane Mulryan and
Emma Rachmaninov
Opportunity Africa Freshfields Bruckhaus Deringer

ITALY
A bright new day 25
8 Bruno Gattai and Cataldo G Piccarreta
Gattai Minoli Agostinelli & Partners

EVCA NIGERIA
Blazing the trail 28
A better Folake Elias-Adebowale, Christine Sijuwade and Joseph
union Eimunjeze
Udo Udoma & Belo-Osagie

10 SWITZERLAND
Attractive structures 32
In-house compliance Luc Defferrard and David Hadad
Dual-hatted Walder Wyss

woes UNITED STATES

Staying a step ahead 35
12 Jordan Murray and David O’Neil
Debevoise & Plimpton

WWW.IFLR.COM IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 3

 EXPERT ANALYSIS ANGEL CAPITAL ASSOCIATION

A missed opportunity
US regulators have lifted the ban on general solicitation by funds, but market uncertainty has stalled
its use. Marianne Hudson from the Angel Capital Association explains why

I
n 2013, the US Securities and Exchange Commission (SEC) issued rules
allowing entrepreneurs to publicly advertise private investment offerings.
Lifting the ban on general solicitation has altered the landscape for start-
ups and investors, and has led to inconsistent legal advice. Lawyers repre-
senting international issuers looking to raise capital in the US should ensure
that their clients are aware of the general solicitation rules; so that they un-
derstand their pros and cons and decide whether or not to take advantage of
general solicitation before they begin contacting angel investors.
General solicitation is one of five initiatives in the Jobs Act Congress
passed in 2012 to help startups access more capital for growth and job cre-
ation. The new general solicitation rules, although not discussed as much as
equity crowdfunding, have significantly impacted American angel investors
and entrepreneurs – and not in the way Congress intended.
Today, fewer startups are using general solicitation than predicted. Instead,
many continue to seek investments privately. Why? The rules come with a
catch. Startups that solicit investment publicly must take reasonable steps to
verify that all purchasers are accredited investors. Before this rule, accredited
investors signed a self-certification form for any private investment. Now,
most startups and investors assume that reasonable steps to verify requires
using safe harbours such as tax returns, W-2s, and brokerage statements for
review by issuing entrepreneurs or a third party such as a lawyer, accountant
or broker-dealer.
The impact? Many lawyers not only advise entrepreneurs not to take ad-
vantage of general solicitation, but they also advise angel investors not to
invest in generally solicited offerings. Entrepreneurs who fail to properly
verify that investors are accredited could face severe penalties, which in-
creases the angels’ risk in an already risky asset class.
SEC clarifies general solicitation confusion
Fortunately, in the midst of this confusion, Keith Higgins, SEC director of
the corporation finance division, brought some clarity to angels,
entrepreneurs and lawywer when he spoke at the 2014 Angel Capital
Association (ACA) Summit. In regard to the reasonable steps section of the
rule, Higgins stated: “one could almost be under the impression that the
rule requires that an accredited investor produce his or her tax returns or
brokerage statements in all circumstances. Of course, this is not true… It is
important to recognise there are actually two paths for complying with the
rule’s verification requirement”.
One path is the set of safe harbours, but Higgins explained the second
path: “the principles-based verification method in which the issuer would
look at the particular facts and circumstances to determine the steps that
would be reasonable to verify that someone is indeed an accredited investor”.
He further explained that this principles-based methodology (PBM) means
that less documentation is needed when the issuer knows that the investor
is accredited with such membership in an established angel group.

Naturally, most angel investors aren’t interested in sharing their personal Since Higgins’ speech, ACA developed a certification process for estab-
balance sheets in this way. Beyond privacy issues, it is time consuming, ex- lished angel groups (EAGs). In short, angel investors that are members of
pensive, and would have to be repeated too often (third party verifications certified EAGs provide documentation of their membership in these groups
are only good for one calendar quarter). rather than documentation of their wealth or income to entrepreneurs or

4 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015

 ANGEL CAPITAL ASSOCIATION EXPERT ANALYSIS

third parties. The EAG concept is catching on. To date, 17 angel groups Another complication hindering the widespread use of general solicita-
representing hundreds of angels have been certified. tion is that its existing definition appears to include so-called demo days.
These are university business plan competitions and venture forums by eco-
William Carleton, a lawyer who chairs ACA’s public policy advisory nomic development agency accelerators that have been going on for 20 years
council elaborated further on Higgins intent: He mentioned the EAG as an without issue. To address this complication, angels, accelerators and venture
example of PBM. Providing this process helps entrepreneurs because it says capitalists are working with US Senator Chris Murphy (D-Conn) and a bi-
`when you deal with someone who is a member of an EAG, you know many partisan group of congressmen on the Halos (Helping Angles Lead Our
things about that person that are pertinent – the group has a code of ethics, Startup) Act which would stop demo days from being considered general
represents that members are accredited based on long relationships, and was solicitation.
formed for long term investing, not as a one shot deal in the heat of the

“
pressure of a particular opportunity’.

Carleton encourages more people to consider any type of PBM, noting
that the PBM was developed before the SEC issued the final rules with the
safe harbour provisions.
Where does this leave angels and entrepreneurs?
Although some lawyers like Carleton have signed off on PBMs such as EAGs
and advise client startups to apply such methods to satisfy the verification
burden of the new rules. Others advise entrepreneurs to only use the safe
harbours to avoid possible penalties down the road or offer private
placements that don’t require the financial verification process, defeating
the purpose of general solicitation.
This is apparent with angel groups, which invest in almost no generally
solicited offerings, and through online accredited platforms such as Angel-
List and CircleUp (which offer both generally solicited and private deals).
Both platforms said last year that less than 20% of their deals were adver-
tised. Issuers are selecting not to advertise in large part because of regulatory
concerns, such as verification issues, although Carleton also points out
lawyers are also concerned about proposed SEC rules that would require
considerable reporting by startups, and would carry heavy penalties for non-
compliance.
The new general solicitation
rules have significantly
impacted American angel in-
vestors and entrepreneurs –
and not in the way Congress
intended
The rules will become increasingly clear as the market adapts, and more
deals will be done through general solicitation. In the meantime, it is im-
portant for angel investors and entrepreneurs to make their own decisions
about whether or not they will invest in or use generally solicited offerings
– and to get advice from their own lawyers. There are more questions to ask
of entrepreneurs about how they are navigating the new world of general
solicitation and more reasons for all parties to protect themselves with good
legal advice.

Marianne Hudson About the author

Executive director, Angel Capital Marianne Hudson leads the Angel Capital Association (ACA), the
Association world’s leading professional and trade association focused on fuelling
T: 913-894-4700 the success of accredited angel investors and portfolio companies in
E: mhudson@angelcapitalassociation.org high-growth, early-stage ventures. ACA provides professional
development, public policy advocacy and significant benefits and
resources to its 12,000 individual accredited investors, including 220
angel groups throughout North America.
Hudson led the angel initiative at the Kauffman Foundation that
resulted in the founding of ACA’s sister organisation, the Angel
Resource Institute and also oversaw many of the Foundation’s
entrepreneurial education and mentoring programmes designed to
ensure that more entrepreneurs develop sustainable, innovative
businesses. An angel investor herself, Hudson is a member of the
Women’s Capital Connection and Mid-America Angels in her home
base of Kansas City. She has worked in the entrepreneurial support field
for more than 25 years. She holds a BA in economics and political
science from the University of Kansas and an MA in public policy from
Rutgers University.

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 5

 EXPERT ANALYSIS BAIN CAPITAL
A shifting landscape
Sean Doherty, general counsel at Bain Capital, discusses the biggest concerns for the
private equity market
T
he private equity environment is changing. Regulations and en-
hanced scrutiny are forcing firms to rethink the way they raise funds,
invest and interact with their investors. Sean Doherty, general coun-
sel of Bain Capital discusses the effects of these changes and the ways firms
are meeting the challenges.
What are the biggest challenges facing private equity investments
right now?
I think the biggest challenge is sourcing; finding the right deals, in the right
parts of the world, in the right industries and in the right economies. Some of
the markets around the world are a little bit choppy. The US has been pretty
strong, but it could be stronger and other economies are a lot less certain.
Finding businesses that will thrive through these cycles is really the chief
challenge.
We have to search for the right opportunities, so we are not necessarily put-
ting the most money to work, but the right money to work for our investors.
Then we need to work to build these businesses. Many companies may look
like a good investment, but the nature of the economies around the world nowa-
“
We welcome transparency
with investors and regulators,
but those things are best
done privately
6 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015
days is such that you have to work hard to build them. So sourcing a company
is really just the beginning of a very long journey. It’s really not that different
than it has been for decade, but it is more acute now.
What are the legal challenges on the horizon for private equity?
I think there are a few challenges that are front of mind for us. The first are the
continuing regulatory developments in the US, as the Securities and Exchange
Commission (SEC) has increased its attention on this industry. It’s something
that requires a lot of time and attention. This is something that is true of regimes
around the world, particularly in Europe where they are moving into the
Alternative Investment Fund Managers Directive (AIFMD) and those securities
regulations. But we are seeing it in other countries as well, including all across
Asia.
The second issue that I think will remain a focus around the world, and is
indicative of a choppy macro economy, is taxation. Globalisation has led com-
panies to operate across borders almost all of the time. Taxation regimes are al-
most always country by country. Many of these sovereigns have real revenue
needs. When you put these two things together, it leads to great complexity and
often a lot of unpredictability.
Since the financial crisis have you seen a change in the structure of
investments or exits? What are the differences and how do they affect
investment strategies?
Structuring remains a huge focus, largely because of tax regimes all around the
world. We need to make sure that we are able to invest through this complicated
web. Our business depends on our ability to receive capital from around the
world and deploy it in companies that almost never operate in only one country.
And we need to make sure that we have a structure that will work for everyone.
 BAIN CAPITAL EXPERT ANALYSIS

With many small and mid-sized companies there is some trouble getting ac- to get in an illiquid class like this.
cess to debt capital. Sankaty Advisors, Bain Capital’s credit affiliate, provides
capital into mezzanine and smaller deals because there is often a lack of regular How has banking regulation affected private equity investments in the
bank debt capital for these deals. This is a residual effect of the financial crisis. US? Are the days of massive leveraged buyouts over, and if so, what
Good companies and companies with great potential are able to raise capital, might take its place?
but it just may take a little longer. I don’t think that banking regulation, per se, has affected Bain Capital’s business.
The restraints on debt capital from the banks have had some effect on the
Bain has made some interesting investment choices that set it apart industry, but we have been able to find other sources of capital to help us invest
from other private equity firms, including its purchase of 50% of Toms. in deals.
How do you protect the investment objectives of a fund, while staying
true to the goals and outlook of a company like this? As to larger leveraged buyouts, our funds are set up so we can selectively go
What made Toms so attractive is part of what makes it so successful. Its approach after small to medium-size deals, or large deals, through other mechanisms. We
to the market and its approach to philanthropy are extremely appealing to its haven’t seen as many large deals over the last several years, but that doesn’t mean
target demographic. In the specific case of Toms, this already works together, we wouldn’t be interested in select, larger deals that fit our investment criteria.
which is what makes it so exciting to us as an investment. At the end of the day, the main thing we are focussed on is getting the right
amount of return, over a reasonable time for our investors.
We look into environmental, social and governance (ESG) issues with all of
our portfolio companies. Toms happens to have a philanthropic mission at the How has additional disclosure scrutiny affected private equity firms?
core of its business mission. ESG is a factor in our normal investment process Are there steps that firms can take to offer more transparency while
because that is a part of what we are buying for our investors. It is really a dili- still protecting their proprietary strategies?
gence inquiry more than a structuring process. I think the biggest impact of the increased scrutiny comes down to the amount
of resources we have to devote to such efforts.
What are the most important aspects of a fund’s governance
structure? We devote a lot of time now – certainly more than we did 10, 15, or 20 years
One change we have experienced since the financial crisis is more engagement ago – focussing on the development of communications material. We spend a
by limited partners, and we welcome it. It is a much more robust and transparent lot of time on compliance. Senior investment professionals make sure we are
engagement then it has ever been. reaching out to investors and explaining things thoroughly.

Our investors are asking how are we helping junior members of our team All of this takes time and resources, but it’s money well spent. It’s part of the
develop and how are we giving them responsibility, how are we thinking about maturation of this business. Our investors are our sources of capital; they are
the capital structures of the companies we buy, and how we are managing our our customers, they are our partners and we believe it’s an important evolution.
fund structures and fees. Right now, it is a very open dialogue and we have gov-
ernance structures like advisory boards that give us a framework for that dia- This is a balance between transparency and propriety strategy, from my point
logue. But this is something that continues to evolve on a weekly basis with our of view. The transparency that we should have is with our investors and regula-
investors. tors. By law, we provide information to our regulators, and by relationship, we
provide it to our investors. This is an asset class that requires sophisticated in-
Many of the things regulators are asking for are the same things investors are vestors. This is not a retail strategy; it is something only sophisticated investors
already requesting, and that general partners (GPs) like us are happy to do. They invest in. The money is illiquid for many years.
are asking to have an open and transparent dialogue about the ways we do busi-
ness, the way we earn money, the way investors earn money, how we choose our We welcome transparency with those investors and with our regulators, but
companies and how we structure our investments. The regulatory interest in those things are best done privately. One of the benefits of owning companies
more disclosure is aligned with our interest of having a dialogue with our in- privately is that you are not focused on weekly and quarterly results. Instead,
vestors and with our investors’ interest in learning more about the asset class. you are focussed on the ways to optimise and transform companies, building
them for the long term.
What has been the impact of excess dry powder in the market?
Our approach is to only raise the amount of capital we can profitably employ
on our investors’ behalf over a given cycle. We raise funds of a size we can invest
with good returns over a period of several years. These choices are based in part
on the amount of dry powder in the market. The amount of available capital
helps shape our view regarding the optimal investment pace around the world.

The goal isn’t to accumulate as many assets as we can. The goal is to work
for our investors, to get them the kind of returns we think they should be able

Sean Doherty About the author

Managing director and general counsel, Sean Doherty joined Bain Capital in 2005 and is a managing director
Bain Capital and general counsel of the firm. In his role, Doherty is responsible for
Boston, US all of the firm’s legal, compliance, communications and community
W: www.baincapital.com engagement activities through Bain Capital Community Partnership.
Earlier in his career, Doherty worked at Ropes & Gray and was a clerk
for a federal judge in Boston. Prior to law school, Doherty was a
Lieutenant in the US Navy, in which he served on a Middle East Force
frigate from 1990 to 1994. Doherty received a JD, magna cum laude,
from Harvard Law School and a BA magna cum laude from Harvard
College. In addition to his work at Bain Capital, Doherty serves as
president of the New England chapter of JDRF, a charity focussed on
research and eradication of type 1 diabetes.

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 7

 EXPERT ANALYSIS EMERGING CAPITAL PARTNERS

Opportunity Africa
Africa is a market ripe with opportunity, but still riddled with challenges. Carolyn Campbell,
managing director at Emerging Capital Partners, discusses how many of these can be
overcome with a local insight

T
he presence of private equity in Africa has been steadily growing for What do you think has been the most important change in private
the last decade as investors become more familiar with the land- equity investment in emerging markets in the last five years?
scape. Some risks, including political stability and poor corporate One recent development in the African private equity space that has
governance still persist. But a deeper understanding of the markets and more momentous potential for the industry is the changing of regulations
established regional connections are helping firms overcome these miscon- governing the investment of pension funds in certain countries, including
ceptions. New laws are creating more opportunities to invest in the region, Kenya, Nigeria, Namibia and South Africa. Each of these countries has
injecting greater liquidity and capital into the market. As the economies in recently made changes to the asset allocation rules of its state pension fund,
Africa expand, so will the opportunities. Carolyn Campbell, managing di- allowing for investment – of up to 15% in some cases – of pension assets
rector at Emerging Capital Partners (ECP) discusses some of the challenges into private companies.
of tapping this still developing market, and some of the greatest misconcep-
tions of investing in the region. As a result, we are seeing African investors increasingly investing in
African private equity. Moreover, as pension fund regulators and adminis-
What are the biggest misconceptions about private equity trators become more familiar with the benefits of private equity, this will
investment in Africa? present an opportunity to increase the level of capital available to the private
A common misconception is the categorisation of Africa as a single uniform sector. This local support should also build the confidence of international
market. The continent consists of 54 countries, all of which offer their own investors to invest further in African private equity.
unique investment opportunities and challenges. Knowledge and
understanding of the local business environment is important for successful What sectors are you most focussed on at the moment? Do any of
private equity investment. them present specific regulatory challenges?
Rapid urbanisation, along with increased GDP per capita, is creating a
Misconceptions also exist about the impact of political risk on private sizeable consumer class across Africa. This group has increasing disposable
equity investment. In the aftermath of the Arab Spring, for instance, in- income it wants to spend. This has made consumer retail attractive (such as
creased concerns have arisen about political risk in North Africa and the fast moving consumer goods), as well as financial services banking and
possible impact on GDP growth. More sophisticated investors, however, insurance services, where penetration is still low. ICT and telecoms also
treat each country on its merits and seek to understand the political and present opportunities, both from a retail perspective (such as ECP’s
economic developments in each country. Another misconception held by investment in pay-TV and broadband provider Wananchi) and from an
some investors is that Africa has a weak exit environment. infrastructure perspective (such as our investment in IHS, the largest African
towers company).

8 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015

 EMERGING CAPITAL PARTNERS EXPERT ANALYSIS

Within some regions, regulatory obstacles impede investing in particular At ECP, ESG considerations are embedded into all steps of the invest-
sectors. For example, foreign investors are banned from investing in telecoms ment process from pre-screening to exit. We have adopted the IFC Perform-
and financial services sectors in Ethiopia. Therefore, a thorough understand- ance Standards as our ESG framework and continuously engage with
ing of the various commercial and legal landscapes is an essential first step stakeholders on best practices in risk management. In addition, we are sig-
when investing in any sector in Africa. natories to the United Nations Principles of Responsible Investment
(UNPRI).
How important are investment partnerships? What are your biggest
considerations when entering into them? What recent reforms or reform proposals are affecting your
As the African growth story continues to attract attention, many investment strategy most?
institutional investors are looking at co-investment as a route into the African governments, realising the increasing potential of private equity
market. Investment partnerships are particularly important among limited investment, continue to implement business friendly policies and reforms.
partners who are looking to tailor their investment portfolio, enhance I would reiterate the point about changes in local pension fund regulations
performance and gain access to a new space with a trusted manager who as one example to illustrate this.
has a demonstrated track record, while employing international best
practices. Moreover, regional trade linkages continue to provide opportunities for
portfolio company expansion. With regional communities such as the Eco-
The biggest consideration when entering into such a partnership is the nomic Community Of West African States (ECOWAS), the Southern
establishment of strong and trusted relationships, as they determine the African Development Community (SADC) and the East African Commu-
long-term success of the investment. nity (EAC) ensuring an expanding marketplace, it is possible to seek out
target companies with opportunities for regional expansion, which allows
What types of investment structures are you seeing used most for years of top-line growth.
often and are there ones best suited to African investing? Have you
seen any new structures developing? What form of exits are most suitable for emerging market?
In addition to traditional, long-term fund structures, new fund managers The majority of successful exits in the Africa region have been strategic sales
or fund managers with little experience investing in Africa may seek to operators and company sponsors. However, plenty of other options exist
investment through a co-investment structure on a particular investment, for exits, including: international equity markets; African equity markets
or may raise funds on a deal-by-deal basis. These structures are becoming (while historically characterised as lacking depth, general partners are
more common for first-time fund managers, as they reduce the relative risk achieving such exits, for example the ECP listing of SAH on the Tunisian
for investors compared to the traditional fund structure, and can often help Stock Exchange in December 2013); and, structured exits.
build the fund manager’s track record, investment reputation and investor
relationships. How active a role can or should a private equity fund take in
emerging market companies? What are the factors in determining
How much of a role should environmental, social and governance this?
(ESG) guidelines play in investing? What is the best way to Once invested in a company, we employ a proactive, hands-on approach
incorporate them? that seeks to add value to our investments in numerous ways beyond simply
It is increasingly clear that leaders in ESG performance deliver alpha for providing investment funds. Examples of these activities include, working
equity investors. Investing in companies that are not only high performing, with management teams to revamp company reporting using international
but also adhere to high ESG standards mitigates risk and increases value. standards and creating management incentive programmes.
This increase in value also directly relates to the exit process, which is
significantly easier and shorter when selling a transparent company with Each investment is unique in its opportunities and a range of factors as-
high standards. sociated with the management, sector and location of the company will have
an effect on how active a role ECP takes within the organisation.

Carolyn Campbell About the author

Managing director and founding partner
Emerging Capital Partners (ECP)
Carolyn Campbell is a managing director and founding partner of
Emerging Capital Partners (ECP), where she serves on the executive
committee and investment committees. ECP is one of the leading
private equity managers focused on Africa, with seven funds and over
$2 billion under management. Campbell provides management
oversight of the firm’s operations and investments.
Prior to joining the ECP team in 2000, Campbell was a senior associate
at White & Case in the firm’s Warsaw, London, and Washington, DC
offices. She was also an associate professor at George Washington
University National Law Center, lecturing on international
negotiations.
Campbell is a member of the Council on Foreign Relations. She
graduated summa cum laude from the University of Connecticut with a
BA in economics and French and an MA in economics. She received
her JD from the University of Virginia Law School and a PhD from
Oxford University in politics.

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 9

 EXPERT ANALYSIS EVCA

A better union
Michael Collins of the EVCA explains how private equity and venture capital can play a key role
in Europe’s Capital Markets Union. But only if regulations support investment in long-term assets

T
he publication in February 2015 of Capital Markets Union (CMU)
green paper is a clear signal that Europe’s policymakers want a
regime that encourages investors to participate in funding the small
and medium-sized companies (SMEs) that are the continent’s lifeblood.
European Commission president Jean-Claude Juncker sees significant
additional investment in European businesses and infrastructure as vital to
tackling the twin problems of anaemic economic growth and high unem-
ployment. Along with Jonathan Hill, the commissioner for financial stability
at the Financial Services and Capital Markets Union, Juncker has launched
a plan that could bring billions of euros of equity and debt investment into
critical infrastructure, and provide funding to companies that have been
struggling to raise money since the financial crisis.
high standards required by Alternative Investment Fund Managers Directive
(AIFMD). Nevertheless, it is inevitable if policymakers decide that more
EU rules are needed in some areas. The challenge will be to ensure that new
regulation achieves that fine balance: to promote stability, without stifling
creativity and tying up financial markets.
Proposals to use regulatory policy to boost institutional investor partici-
pation in funding the European economy are complemented by a drive to
use EU funding more creatively. The European Fund for Strategic Invest-
ment unveiled just before the outline for the CMU earmarks €21 billion
($23 billion) of European funds for deployment. The Commission hopes
that private investment will multiply this seed capital many times over to
create a war chest of more than €300 billion.

The plan will take years to finalise and implement, and will require adapt- The need for investment in Europe is huge. The Commission estimates
ing the regulatory regime to function. But it could unlock cheaper financing that €1 trillion is required for critical infrastructure, such as transport, en-
for thousands of SMEs and enable them to create jobs and act as engines ergy and telecoms networks alone by 2020. Institutional investors have the
for Europe’s flagging economy. capital, but the need to navigate an inordinate number of constantly chang-
ing regulatory and tax regimes is a serious disincentive. Stability and appro-
New financing sources for Europe’s companies priate harmonisation across the 28 member states is essential.
Financing for business has long been the preserve of Europe’s banks. But
through the CMU, policymakers want Europe to follow the example of the Private equity at the heart of Europe’s capital market
US, where other forms of finance play a much larger role. The Commission’s consultation document on the CMU identifies private
equity, including venture capital and infrastructure funds, as an important
Securitisations – loans made by banks and packaged and sold to investors source of direct financing. Indeed, between 2007 and 2014, European
– as well as bonds, peer-to-peer lending, direct infrastructure finance, and private equity and venture capital invested almost €350 billion in 28,000
private equity are all part of the Commission’s thinking. Many non-bank companies, employing seven to eight million people. That means it is a vital
providers of finance are already appropriately regulated and supervised and connection between investors with capital and companies in need of finance.
this is certainly the case for European private equity, which operates to the

10 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015


Yet European and global private equity and venture capital firms fre-
quently encounter regulatory and administrative obstacles when raising cap- creasingly finding that they do not have access to the best international
ital in the EU. That means investors cannot always access the best fund private equity and venture capital funds because of the impediments the Di-
managers, and companies can miss out on investment.
The EVCA identifies three areas for reform that would enable the indus- money in Europe.
try to help deliver the ambition of the CMU. These are: (i) unlocking €12
trillion of institutional investor capital with a regulatory regime that encour-
ages investment in long-term assets; (ii) ensuring EU rules help fund man-
agers to raise capital and access companies needing investment across
national borders; (iii) promoting a healthy initial public offering (IPO) mar-
ket, which supports both investors and companies.
Delivering pension investor capital into Capital Markets Union
Pension funds are the largest investor group in European private equity and
venture capital. They accounted for 35% of capital flowing into the industry
last year, and have invested €73 billion over the last four years. While
proposed amendments to the Institutions for Occupational Retirement
Provision (IORP) Directive governing them do not place higher risk
weightings on private equity, we need to be watchful. Any reform to their
capital requirements will affect private equity.
Similarly, we are monitoring the European Insurance and Occupational
Pensions Authority’s (EIOPA) new risk-based framework for pension funds,
dubbed the Holistic Balance Sheet. The EVCA has responded to EIOPA’s
recent consultation, focusing on the suitability of a market-consistent ap-
proach for private equity funds. If the value and risk are not measured ap-
propriately, pension funds will be discouraged from investing in private
equity.
Ensuring fair access to funds and investments
Despite the implementation of the Alternative Investment Fund Manager
Directive two years ago, some countries delayed their implementation;
others are creating barriers for managers from other member states. We have
identified at least a dozen member states where fees or other barriers to entry
exist, like the requirement to appoint a local paying agent. We feel that such
practices are contrary to the letter and spirit of the AIFMD and must be
addressed if we are to make the CMU a reality, given the disincentives they
create to cross-border activity. The European Commission is investigating
these allegations and we continue to press the case, providing further
information as we get it.
Michael Collins
Deputy chief executive and public affairs
director
European Private Equity and Venture
Capital Association
W: www.evca.eu
IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015
EVCA EXPERT ANALYSIS
The AIFMD also creates a challenge for European investors, who are in-
rective imposes. Until full implementation of the third-country passport, it
is vital that national regimes allow non-EU players to continue to raise
“
Private equity and venture
capital firms frequently
encounter regulatory and
administrative obstacles when
raising capital in the EU
Repairing Europe’s damaged IPO market
Despite some recent large IPOs – many of them private equity-backed
businesses – Europe has been following the international trend of declining
IPO activity. In the 10 years from 2001 to 2011, the average number of
IPOs was 670 in OECD countries, compared with an average of 1,170 a
year between 1993 and 2000. This matters because IPOs not only help
companies raise finance but also drive job creation – 92% of the
employment growth in a company comes after listing. By lowering the costs
of listing and increasing the benefits for businesses that do so, we can
increase the numbers coming to public markets. Simultaneously, we need
to ensure that there is healthy demand for IPOs from investors, whether
institutional or retail. EU policy has a role to play in all these issues. The
CMU recognises that financing should not be locked behind national
borders. Now, European and national policymakers must ensure that
regulation encourages capital to flow to where it is needed most, for the
benefit of companies and investors alike.
About the author
Michael Collins is the deputy chief executive and public affairs director
at the European Private Equity and Venture Capital Association
(EVCA). He represents the private equity industry at the highest levels
of government. Based in Brussels, Collins covers both regulatory issues
and wider EU political developments in the industry.
Collins moved to EVCA in 2013 from Citigroup, where he was
managing director for European government affairs.
Prior to Citigroup, Collins spent four years with the UK Foreign and
Commonwealth Office in Brussels, as financial counsellor at the UK
Permanent Representation to the EU.
Collins has 15 years’ experience in the UK civil service, working in
Edinburgh, London and Brussels, including five years at HM Treasury.
11
 IN-HOUSE COMPLIANCE

Dual-hatted woes
Combining the general counsel and chief compliance officer roles can
streamline a firm’s legal concerns. But as IFLR Americas editor Zoe Thomas
explains, a push by US regulators to keep the roles separate could leave the
CCO out of the loop

I
n January this year a small, Indiana-based private equity (PE) firm was
issued a cease-and-desist order by the Securities and Exchange Com-
mission (SEC) for failure to effectively disclose compensation agree-
ments and the conflicts of interest that arose from them.

The firm, Shelton Financial Group, along with its president and one time
chief compliance officer (CCO) Jeffery Shelton were charged with having
inadequate compliance policies that led to the disclosure failure.

The period under investigation included the time when Shelton served
in both roles and investigators found the new CCO, who was also the chief
operating officer, had also failed to improve the compliance programs at the
firm.

Following the administrative proceeding, the regulators ordered that for a “The decision to have a GC also serve as a CCO should be left for each
period of five years the person serving at Shelton Financial’s CCO could not firm to decide given the unique facts and circumstances of that firm’s structure,”
hold any other role. Additionally, they required the CCO to undergo 30 hours says Mulvihill.
of compliance training and that the firm to appoint an external compliance
auditor, approved by the SEC to monitor its programme. The SEC has made no explicit policy on the division of these roles, but de-
cisions like the one in Shelton Financial and statements by staff members have
The size and relative lack of prestige of this fund meant that the tale of Shel- made their preference clear. In a speech to the Private Equity International
ton Financial registered only a blip on the radar of most industry participants. Conference in May, Marc Wyatt, acting director of the SEC’s office of com-
But the SEC’s remedy could provide an important signal about the regulator’s pliance inspections and examinations, told the crowd the separation of the
thinking towards dual hatted CCO and general counsels (GC). CCO into its own role by many firms was seen as a positive step.

The roles of the GC and CCO are ones that can easily overlap. The decision “We are seeing greater resources being devoted to compliance, including
to combine them is personal to the firms and often depends on the size and the splitting of the CCO function into its own separate role from a combined
needs of the funds. Several large scale firms employ multiple CCO to manage role with the CFO [chief financial officer] or general counsel,” says Wyatt.
the compliance needs of different funds with varied investors and strategies. Sighting this and the growing integration of CCOs into PE firms’ business
models he added, “We believe this often leads to more effective policies and
New regulations targeting funds generally, which have caught PE in its net, procedures.”
are also increasing the amount of work for both positions. “With this expansion
of the regulatory landscape applicable to private equity, the already essential The regulators preference doesn’t necessarily turn into enforcement action
roles of a firm’s GC and CCO have become even more important,” says Jason or hard rules. According to one GC at a PE fund familiar with the pitfalls of
Mulvihill, GC for the Private Equity Growth Capital Counsel. the dual hatted role: “The SEC picks low hanging fruit and hopes the people
in the area see this as an example and make their own changes accordingly.”
For smaller firms though, combining the roles can help to streamline the
creation and management of compliance programs. It can also be an econom- Since 2012, the SEC has taken a greater focus on compliance issues, partic-
ical choice for firms with smaller staffs and fewer investor demands. ularly around fees and perceived transparency gaps. According to the GC this
is exactly why appointing a person to be the dual hat of CCO and GC or CFO
Having two people performing the similar tasks can risk creating miscom- is a good strategy.
munication that can lead to inefficiencies. Worse still, CCOs can sometime be
left out of important conversations all together. A GC may be brought into “Because of the reality of the SEC’s focus it makes sense to have a dual-
discuss legal question about limited partnerships agreements or acquisition hatted CCO/GC or CFO they will have access to information by virtual of
documents, while the CCO is excluded. This can leave the CCO leaving un- their positions,” says the GC. Regardless of the route a firm takes, the regulators
aware of compliance matters around fees or other disclosures. are likely to be satisfied if it is clear the compliance programme was robust and
whoever was preforming the CCO role had enough support.

12 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015

 AFRICA

Africa’s dry powder

The boom of private equity funds focussed on Africa has created a battle for suitable assets the
market may not be able to cope with. IFLR editor, Danielle Myles takes a look at the risks the
situation is creating

T
here are concerns that African businesses are not ready to absorb the “It’s a very important and exciting dynamic that is happening. But my
growing volume of private equity (PE) funds dedicated to the con- concern is that there has been a big push of private equity into Africa, and
tinent. the demand side hasn’t yet responded,” said Intellidex chairman Stuart
Theobald at the Loan Market Association’s Developing Markets Conference
A recent study revealed that fund managers targeting Africa have raised in London.
$3.4 billion over the first three months of 2015, up from $1.4 billion over
the course of last year. While the continent’s public sector is struggling to attract funds to plug
its infrastructure gap, the corporate sector is experiencing a very different
General and limited partners (GPs and LPs) are adapting their strategies dynamic. Just last month Development Partners International closed an
to local market needs, including by investing via quasi-debt instruments Africa-focussed fund 45% above its target.
and committing to longer-term fund cycles.
“There is a great deal of liquidity looking for opportunities in the private
But while the corporate governance and management improvements syn- sector – particularly tertiary in financial services, telecoms and retail – but
onymous with PE promise to further Africa’s growth story, it may be a case there is a real shortage of quality companies that are capable of absorbing
of too much too soon. that type of capital,” said Theobald.

There is some speculation that the funds could be diverted into infra-

“
structure. There are examples of PE capital being mobilised this way, most
notably firms such as Actis investing in South Africa’s multi-billion dollar
There is a real shortage of renewable energy programme.

quality companies that are But these investments’ relatively low returns mean they won’t take up sig-
nificant portions of any GP’s allocations.
capable of absorbing that Instead, it’s hoped that local entrepreneurs will rise to the challenge and
type of capital embrace the influx of capital looking to help them grow.

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 13

 AFRICA

Bridging the gap
For their part, GPs and LPs are being flexible. The usual 10-year PE fund
life cycle is not necessarily appropriate for early-stage portfolio companies.
While this forces some funds to shy away from frontier markets, others are
adjusting their tactics accordingly.
The appeal of this model has increased in the wake of Edcon’s recent re-
financing difficulties. The South African food retailer was the subject of a
pre-crisis highly leveraged buyout. Its owner, Bain Capital, is reportedly ne-
gotiating with bondholders to restructure the notes, with creditors poten-
tially facing losses.

“I know at least one well-known fund whose investors are looking for “I think a lot of funders are now fairly nervous about seeing high leverage
long-term hold and long-term returns, so there is no pre-determined exit,” in these deals,” said Theobald. He believes this is why Africa is starting to
said Sanjeev Dhuna, a partner with Allen & Overy in London. “So what see hybrid instruments that do not feature in more mature markets.
some see as challenges are viewed by others as opportunities to revise their
strategies.” Barriers
There are, however, other commercial and logistical barriers to matching
Investment structures have also adapted to address the misalignment of supply and demand.
interests between traditional PE strategies and local owners.
Lack of developed local capital markets mean initial public offerings
(IPO) are not a feasible exit opportunity.

“
There has been a big push Allen & Overy partner Karan Dinamani said that as more PE investors
enter the market, we may start seeing more secondary buyouts. “That will
of private equity into Africa, be interesting as it will have an immediate impact on market practice and
could have a dramatic effect on how the African M&A market works,” he
and the demand side said.

hasn’t yet responded While this increases exit opportunities, it could also mean that funds be-
come more specialist, focussing on secondary or tertiary targets, further min-
imising their viable targets.
Small companies are often reluctant to hand over management of their
operations. “Family run businesses aren’t looking for a five-year flip,” said PE should be looking to diversify away from typical markets such as
Allen & Overy’s Phillip Bowden. “They want to retain control generation Nigeria. Not only would this expand the number of potential portfolio com-
after generation, so the investor often has to hold a minority stake,” he panies, it also acts as a hedge against investments in resource-rich countries.
added.
But implementing it is difficult in a nascent market.
GPs must be open to a partnership-style arrangement. They need to be
on the ground developing relationships with the company and local business “That sounds great on paper,” said Dhuna. “But given the majority of
environment. deals are $1 million to $10 million, and are very country or sector specific,
how do you roll out a PE strategy that spans sectors and geographies, and
Investment structures are also changing, although this could benefit all hedges your resource exposure?”
involved. Until 2008, PE investments in Africa were traditionally highly
leveraged with very little equity. Theobald said this is no longer the case. “That is quite difficult given the deal sizes and where we are in the growth
cycle of many of these companies,” he added.
“We now see private equity creating quasi-equity instruments as their
main funding mechanisms – preference shares and other types of structures. East Africa is growing in popularity, especially as the market harmonises
In east Africa we have seen them investing via debt instruments,” he said. to create a regional play. “Potential monetary union, political reform and a
“That may seem a little odd, but it is one way of managing exposure is by trading bloc is making investment there a lot easier,” said Sanjeev.
having your domestic partner saddled with the equity risk, but you also get-
ting some pretty good yields.” But diverging national interests is hampering integration, particularly in
relation to the regional stock market initiative.
This can maintain the owner’s equity stake, for the short-term at least,
while also reducing the fund’s potential exposure.

14 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015

 DOMINICAN REPUBLIC

Removing
the chains

Francisco Vicens De León and Carolina Figuereo Simón of Alvarez & Vicens explain how
the Dominican Republic has shed the constraints of an anachronistic companies law

P
rivate equity as an investment strategy developed during the 1980s local operations that were not subject to regulation (even though the Capital
and the 1990s in more developed markets and economies of the Markets Act of the Dominican Republic had been enacted in 2000). How-
region, while local and foreign investors in the Dominican Repub- ever, in 2005, brokerage houses, a stock exchange, and a clearing and deposit
lic dealt with an anachronistic companies law. The Commercial Code of securities firm began operating with increasing participation from both the
the Dominican Republic, which was enacted on April 16 1884, had not private and public sectors. In 2008, a new corporations law was enacted, fi-
been subject to adequate reform since its enactment, and did not provide nally updating the corporate vehicles incorporated under Dominican law;
for flexible vehicles or strategies to encourage the raising of capital in pre- and by 2010, the participation of the brokerage houses and stock exchange
existing businesses. Legal and tax consultants recommended offshore cor- began to show signs of significant growth: the market then began to reflect
porations and trusts due to favourable tax treatment, as well as flexible laws relevant operations.
that facilitated diversity in investment strategies and in the composition of
the shareholder structure of each vehicle. However, private equity invest- Investment funds remained an unexplored mechanism during this pe-
ments were isolated and not available to the general public. riod. Investment funds and investment fund managers were created under
the Capital Markets Act of 2000; however, the legal provisions under which
During the first decade of the 21st century, capital markets were consid- fund managers and investment funds could interact (and guarantee that
erably underdeveloped. This was mainly because of the outdated corpora- such investment funds would represent separate entities from the fund man-
tions law, but also because of the unavailability of reliable data concerning agers) did not exist. It was not until the enactment of the Mortgage Market
and Trust Law in 2011, which expressly stated that fund managers, corpo-

“
rations regulated by the Capital Markets Act and the Superintendence of
Securities had fiduciary duties towards the investment funds they manage,
During the first decade of that an appropriate legal structure able to regulate the relation between in-
vestment funds and fund managers came about. Indeed, due to the absence
of said regulation, the process of filing for a fund approval had not been
the 21st century, capital properly set out until 2012.
markets were considerably Available regulations did not refer to private equity funds as a type of
fund, but allowed funds to make equity investments in private companies
underdeveloped issued according to the laws of the Dominican Republic. The main require-
ment for these investments was that the fund had to implement mechanisms
to be informed of the financial situation of the target.

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 15

 DOMINICAN REPUBLIC

However, in 2013 the National Council of Securities issued a new regu- In this regard, Regulation R-CNV-2014-22 also contains requirements
lation to improve investment funds operations, which contained an entire on diversification. A private equity fund cannot invest more than 20% of
section dedicated to private equity funds (Regulation R-CNV-2013-33- its assets in equity of one company. Even though the Superintendence of
MV). Such regulations were confirmed in 2014, when the National Council Securities may extend that limit to 40%, this authority is discretionary and
of Securities modified the regulation related to managers and investment exceptional, and must be based on a detailed report made by the investment
funds (Regulation R-CNV-2014-22-MV). committee of each fund. Companies with the potential to be profitable are
few. In those circumstances, the said limit represents a major obstacle in the
The necessity of new products for investors in the Dominican capital development of private equity funds.
market has encouraged managers to identify new options that allow for di-

“
versification. Private equity investment is a great example of an innovative
product that allows investors to diversify risks. Nonetheless, Regulation
CNV-2014-22-MV has established specific rules that do not always take
into account the reality of Dominican markets. They take a very conservative
approach to private equity funds, imposing restrictions and limits that will The Dominican Republic has a
represent obstacles in the development of the industry. Notwithstanding,
this regulation may serve as an opportunity to assist private entities to im- limited range of new industries
prove their corporate governance rules, operating structures, and supervision
methods, to be able to access public funds via the securities market. or industries in growth
It is important to point out, however, that Regulation R-CNV-2014-22
allows funds to invest in companies that are incorporated as corporations
or limited liability companies, and that are domiciled in the Dominican Re-
public. A broad interpretation of this text may suggest that companies with Regulation R-CNV-2014-22 establishes criteria to protect investors,
the characteristics of a corporation or a limited liability company incorpo- which, in addition to transparency, is one of the objectives of the Superin-
rated in other jurisdictions, and domiciled in the Dominican Republic can tendence of Securities. Nevertheless, it is important that a certain flexibility
receive investments from the public through private equity funds. This in these restrictions is considered, to allow more institutional and sophisti-
would represent an opportunity for private equity funds to succeed locally cated investors to participate in these funds. If investors with greater expert-
in obtaining lucrative investments and also to open the road for further in- ise and knowledge make riskier investments, more investors with less
vestment in such funds and increase the interest of local entities to improve expertise and knowledge may also participate, and thereby assist in the
their structures to obtain funds via private equity funds. growth and diversification of the capital and securities market.

On the other hand, although this broad interpretation may be acknowl-
edged by our regulators, our experience to date is that the Superintendence
of Securities has a restrictive interpretation of Regulation R-CNV-2014-22.
As a result, further efforts in obtaining a formal position from the regulator
on this matter would assist in defining the strategies for private equity funds
in the near future.
It is important to point out that, despite the situation of some other na-
tions in the region, the Dominican Republic continues to grow its economy,
and is set to continue providing that economic, political and social stability
remain. This plays greatly in assisting the growth and stability of the capital
and securities market. Until 2013, only three investment funds had been
approved and only one was operating; within the last 12 months, seven have
been approved and six are operating. This shows an improvement by the
regulator in providing proper supervision, and by our investment fund man-

“
agers in participating in the capital and securities market.

Private equity investment is a This improvement is accompanied by a process of discussion and analysis
between the public and private sectors of a new Capital and Securities Law;
great example of an innovative six different versions of the new law have been reviewed. The new law looks
to define certain tax incentives, address some operating hurdles which have
product that allows investors resulted naturally from a market that is still in its early stages, as well as to
restructure the National Council of Securities, the Superintendence of Se-
to diversify risks curities, and establish new requirements for the participants in the sector.
The law seems to have the backing of the relevant parties (both public and
private), is likely to be enacted within the next 12 to 24 months, and serves
as both a threat and an opportunity, whereby certain aspects of the regulat-
In addition, private equity fund managers must establish the investment ing structure may be amended in an adverse manner. It may also serve to
strategy by deciding, in detail, which geographic area, economic sectors and improve and correct many aspects and clarify the application of incentives,
type of companies they will invest in. This task often proves to be difficult. which are limited under the existing legislation.
Restricting the investment to a geographic area, or to a specific economic
sector is likely to limit the ability of the fund to generate attractive returns The challenge presented by the discussion of the new law and the con-
of investment, considering the size of Dominican market. As a developing tinuing growth of capital markets in the Dominican Republic represent an
country, the Dominican Republic has a limited range of new industries or important opportunity in incorporating private equity funds. It is also an
industries in growth. For example, the Dominican Republic’s main areas of opportunity to reduce the time between the enactment of legislation and
growth in recent years have been tourism, financial services, energy and con- its amendment, to enable the enactment of legislation which adapts to the
struction, all areas which are linked directly in their respective industries, needs of the market and assists in its growth.
and which are represented by few important players, thereby reducing the
possibility of appropriately diversifying investment.

16 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015


Francisco Vicens De León
Partner, Alvarez & Vicens
Santo Domingo, Dominican Republic
T: 809 562 6534
F: 809 562 6540
E: f.vicens@av.com.do
W: www.av.com.do
Carolina Figuereo Simón
Associate, Alvarez & Vicens
Santo Domingo, Dominican Republic
T: 809 562 6534
F: 809 562 6540
E: c.figuereo@av.com.do
W: www.av.com.do
IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015
DOMINICAN REPUBLIC
About the author
Francisco Vicens De León is a partner at Alvarez & Vicens. He
obtained his law degree from the Universidad Iberoamericana
(UNIBE), and completed his Master’s degree at the Escuela de Alta
Dirección y Administración (EADA), Barcelona, Spain, with a specialism
in tax law. He completed an additional post-graduate degree in strategic
negotiation at the Instituto de Educación Continua de la Universitat
Pompeu Fabra, Barcelona, Spain.
De León has over 14 years’ experience in business law, and particularly
in corporate and financial law. He is a member of the board of directors
of the Pioneer Sociedad Administradora de Fondos de Inversión, and is a
legal advisor to the Association of Fund Managers of the Dominican
Republic (ADOSAFI), as well as other leading fund managers and
leading private investment groups in the Dominican Republic. De León
advised and structured the first public real estate investment fund of the
Dominican Republic and on the incorporation of other investment
funds using the strategy of investing mainly in government debt. He
has directed and participated in some of the leading business
transactions in the country, including the restructuring and merger of
leading insurance and banking institutions, as well as complex financial
transactions involving leading members of the tourism, food and
beverage industries.
About the author
Carolina Figuereo Simón is an associate at Alvarez & Vicens. She
obtained her law degree (summa cum laude) from the Pontificia
Universidad Católica Madre y Maestra (PUCMM), Santo Domingo in
2010 and completed her general LLM in Georgetown University,
Washington DC, in 2013. She has focused her practice on business law,
particularly on corporate, financial and securities law.
Simón advises leading fund managers and leading private investment
groups in the Dominican Republic. She has also participated in the
structuring of complex financial transactions involving commercial real
estate, tourism and food and beverage, representing lenders as well as
debtors.
17
 GERMANY
Despite a wealth of opportunities, strategic buys and cultural mistrust could foil potential
German deals. Markus Käpplinger and Roman Kasten of Allen & Overy explain why
A
wave of big ticket deals has been hitting Germany, as both private
equity (PE) and strategic buyers vie for the best. The amount of
dry powder in the local market and the strong dollar are also help-
ing to drive the seller’s market. As small, large, niche and diverse funds fight
for opportunities, at times cultural ideology remains a stumbling block for
the industry.
What have been the most significant developments in private equity fluence on both rising multiples and driven continuing activity. Bank debt
in Germany during the last 24 months? is available again. In addition, debt funds are the new kid on the block as
The most significant development has been the return of big ticket deals,
such as the sale of fire protection manufacturer Minimax by IK Investment
Partners, the acquisition of Siemens Audiology Solutions by EQT or the
most recent acquisition of Douglas Group by CVC from Advent, to name
just a few. As always, the small and midcap market remains active but very
competitive. We also noticed that it has become increasingly difficult for
PE houses to source proprietary deals outside auction procedures or to find
targets not already owned by another PE house. It is therefore no surprise
that secondary or tertiary buyout activity remains strong. The lack of pro-
prietary deals will make it more challenging for PE houses to fulfill the re-
turn expectation of their investors, as typically such deals play very
favourably to the sweet spot of PE houses (creating value by improving the
respective operational and financial performance of an under-performing
company).
Strategic bidders represent a formidable force. At the same time, there is
still an abundance of so-called dry powder (committed but undrawn funds).
PE houses therefore feel the pressure that their investors must invest. This
leads, in an auction environment, to increased competition between PE
houses and strategic bidders and ultimately to an upward price spiral for as-
20 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015
Winds of
change
sets. Sellers like this of course, but PE houses as buyers find themselves losing
out more and more against strategic bidders; they cannot match, against
their return expectations, the prices that a strategic bidder is able to pay,
particularly when taking into account any synergy effects.
What about the debt market?
Not surprisingly, the low interest rates in European markets have a huge in-
finance providers for private equity deals. Therefore, there is increased com-
petition among banks to get into pole position for a deal. As a result, banks
tend to cut down their covenants catalogue (so-called covenant-lite financ-
ing) and PE houses use their leverage to negotiate very attractive debt fi-
nancing packages.
We have also seen various deals in which banks are willing to provide,
on signing the deal, a full finance commitment by way of an interim financ-
ing agreement until the senior facility agreement and respective security
package come into place. This represents, for me, a clear sign of increased
completion for a deal by the banks. On top of this, high-yield bonds with
their higher returns are coming back and playing an important role in deal
financing.
Let’s talk about the German Mittelstand. What makes it so special in
terms of deal-making?
The Mittelstand is still at the heart of the German economy and has been
a steady source of innovation. You will find many global niche players there,
with very attractive margins and growth potential. The businesses are usually
family-owned, with steady cash-flow and potential for operational improve-

ments. This is why the German Mittelstand is still a very attractive target
for PE funds. However, owners are usually reluctant to sell their businesses
as they can comfortably rely on dividend payments. In addition, there are
still hidden cultural resentments against PE buyers. It is important to un-
derstand such cultural gaps and to bridge them when negotiating a deal with
the owners of a Mittelstand business.
What are your impressions: who benefits from the current market?
The market is clearly still a seller’s market, with high levels of competition
in auction procedures. It is, therefore, a viable strategy for PE funds to
mainly focus on portfolio work and to pursue a buy and build strategy by
finding add-on targets. Such add-ons enable PE funds to generate synergies
with their portfolio companies and ultimately to compete with strategic
buyers.
Describe the role of co-investment. How has this affected fee and
deal structures?
Co-investments are more and more common in German deals, such as EQT
teaming up with a big German family office in connection with the acqui-
sitions of the Siemens Hearing Aid division. Our experience is that PE
houses are in general fine with such development, as it limits the equity de-
ployment of the funds and ultimately increases the return on the equity. It
is also attractive for a co-investor. It saves management fees that would oth-
erwise have to be paid when investing through the fund. Sure, the complex-
ity of a deal is increased, but this is a mere technical issue which can easily
be handled.
Markus Käpplinger
Partner, Allen & Overy
T: +49 69 2648 5681
E: markus.kaepplinger@allenovery.com
W: www.allenovery.com
Roman Kasten
Senior associate, Allen & Overy
T: +49 69 2648 5507
E:roman.kasten@allenovery.com
W: www.allenovery.com
IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015
GERMANY
What are the typical structures used by private equity sponsors to
acquire portfolio companies in your jurisdiction?
Deal structures have not been changed during the last years. We still fre-
quently see multi-tier LuxCo structures with German BidCo at the bottom
of the structure.
Equity is usually funded by a mix of straight equity injections and share-
holder loans or, in Luxembourg, preferred equity certificates (so-called
PECs). Management usually participates only indirectly as a limited partner
via a GmbH & Co KG, which is basically a limited partnership. The general
partner of such partnership is controlled by the PE house so that ultimately
the GmbH & Co KG is also controlled by it. From a tax point of view, on
the basis of recent case law, it has become increasingly challenging to struc-
ture management equity participations in a tax efficient way for managers.
Looking ahead: what is the outlook for the German PE market in
2016?
Because of the strong dollar, I would not be surprised to see more and more
US PE funds embarking on a shopping tour of Europe and Germany. The
competition among PE houses will further intensify with the abundance of
dry powder that needs to be invested. It will be crucial to see how interest
rates develop in the context of the crisis in Greece. A rise in the interest rates
will undoubtedly have a negative impact on the buyout market. However,
with its strong industrial base, and its political and financial stability, I expect
Germany to continue to be a very attractive market for PE.
About the author
Markus Käpplinger is a partner in the private equity department of
Allen & Overy. He is admitted as German Rechtsanwalt and as
attorney-at-law (New York).
Recently, Käpplinger advised 3i on the acquisition of Weener Plastic
Group, ECM Equity Capital Management on the acquisition of the
German tour operator Leitner as well on its sale of Kamps Group, funds
of Deutsche Beteiligungs on the acquisition of Cleanpart and WERU’s
management on the sale of the company to HIG Capital.
Käpplinger is an author of a standard case book on German corporate
law, editor in charge and author of a commentary on the German Stock
Corporation Act, and a lecturer at HfB Business School Frankfurt. He
earned an LLM degree from the University of Chicago and a doctorate
degree from Humboldt-University at Berlin.
About the author
Roman Kasten, a German Rechtsanwalt, is a senior associate at Allen &
Overy. He joined the Frankfurt office in 2013 in the corporate and
M&A practice. He specialises in cross-border and domestic M&A
transactions with a focus on private equity transactions and in corporate
law.
Prior to joining Allen & Overy, Kasten worked with two other
international major law firms and as a secondee for an international
investment bank in 2012. He regularly writes on corporate and capital
markets law and is a co-author of a commentary on the German Stock
Corporation Act.
Recently, Kasten advised ECM Equity Capital Management on the
acquisition of the German tour operator Leitner as well on its sale of
Kamps Group, 3i on the acquisition of Weener Plastic Group and Deb
Group / Charterhouse on its acquisition of the Skin Care Business held
by Evonik Industries.
21
 GLOBAL

A force for
good in FIG?
Regulators are becoming more open to private equity investing in financial institutions.
But it requires buyers to navigate the complex regulatory landscape

F
inancial institutions groups (FIG) are proving fertile ground for
proactive private equity firms. The sector is large and broad, cov-
ering retail banking and consumer finance, to insurance and in-
vestment banking, and everything in between. This variety leads to
differences in business models, capital intensity, level of regulatory over-
sight and conduct risk.
This pressure to divest, along with today’s low interest rate environ-
ment, has presented private equity firms with an opportunity to make
sustainable returns from targeted investments in the sector. The dearth
of available capital in the sector post-crisis has been well documented,
but the role private equity firms play in injecting much-needed, alterna-
tive funding has not.

Value creation for investments in the sector therefore requires naviga- And perhaps it isn’t just private equity capital that is welcome in the
tion of a complex maze of ever-changing regulatory requirements and sector. Value creation for private equity can go hand in hand with im-
rigorous oversight. provements for FIG businesses seeking efficient operating models and
better use of capital.
Why give a FIG?
Stringent regulation post-financial crisis, in particular regulatory capital Fertile ground
requirements, has put pressure on banks to reduce their activities and dis- Several private equity firms have developed sophisticated and experienced
pose of non-core assets to release capital. teams focusing on FIG. This strategy has enabled those firms – including
Blackstone, CVC, Cinven, Permira, Warburg Pincus, Advent and TPG
– to make multiple investments in the sector or specific sub-sectors. Cin-

“
ven’s deal activity in the insurance sector is a good example.
Clarity on what is too great a As well as this sector specialism, many financial services businesses,
cost for regulatory approval, such as consumer finance and wealth management, lend themselves to
so-called buy and build strategies that maximise opportunities for en-
and the ability to withdraw hanced returns through synergies achieved from bolt-on acquisitions.

from an acquisition, is Permira’s acquisition in 2014 of Bestinvest, followed by its acquisition

of Tilney, is an example of such a strategy. Through bolt-on acquisitions,
essential for buyers such as Tilney onto Bestinvest, Permira expects to benefit from the ad-
vantages of increased scale, and to capitalise on the opportunities emerg-
ing from recent regulatory change. Another example is the acquisition of

22 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015

 GLOBAL

Skandia by Cinven and Hannover Re as a bolt-on Global private equity investments in financial services
to the consortium’s acquisition of Heidelberger
Leben, the German life insurance provider, from 70.0 500
Lloyds Banking Group. 436
450
60.0
389 400
Changing perceptions 361
But how comfortable are regulators with private 332 343
50.0 350
equity buyers of FIG assets?
40.0 300
Regulators are encountering private equity buy- 239
250
ers (and other financial investors) more frequently
30.0
due to the retreat of banking and insurance groups 200
from non-core markets, and the withdrawal of 150
20.0
many traditional FIG asset acquirers due to the fi-
nancial climate. 30.7 33.8 28.1 40.5 47.2 57.4 100
10.0
50
That is not to say that financial investors should
be considered investors of last resort. Rather, they 0.0 0
May 1 2009 - May 1 2010 - May 1 2011 - May 1 2012 - May 1 2013 - May 1 2014 -
are proving to be not only reliable sources of funds
Apr 31 2010 Apr 31 2011 Apr 31 2012 Apr 31 2013 Apr 31 2014 Apr 31 2015
to the sector (see chart opposite), but also are in-
creasingly able to demonstrate to regulators a track Value ($bn) Count of deals
record of expertise in the sector, and that they are *Values represented in the graph reflect total deal value where this has been disclosed
‘fit and proper’ custodians of these businesses. ** Data sourced from Preqin

Traditionally, regulators have been wary of the fit

between private equity’s strategies for value creation and the stability of As a result, regulatory conditions in sale and purchase agreements must
financial institutions. Yet their increased experience with private equity be carefully negotiated to anticipate costs and any requirements regulators
buyers has in many jurisdictions led to an attitude change. Certainly, key may impose as part of obtaining approval. Clarity on what is too great a
hurdles remain to regulatory approvals; the impact of leverage on the fi- cost for regulatory approval (and the ability to withdraw from an acqui-
nancial soundness of regulated firms, for example. But there are recent sition) is essential for buyers. In contrast, sellers will seek deal certainty
examples of private equity deals in the European banking sector (typically and will be nervous of mechanisms that allow buyers a wide regulatory
the most highly regulated and protected EU FIG sector) that demonstrate ‘out’.
this attitude change in the region. Indeed, some jurisdictions, such as
Spain, have actively welcomed private equity into the sector. Deal timing
FIG transactions typically take longer to execute than many other sectors
While regulators should, and in many cases do, welcome the fresh cap- due to the need for regulatory approvals. Even where regulators have
ital, investment expertise and competition that private equity brings to statutory timetables in which to approve changes in control, there are
the sector, there are important considerations on FIG deals that private often formal and informal mechanisms they can use to delay or pause the
equity firms should be alive to. timetable to allow further questions or information requests. These mech-
anisms are being used more frequently by regulators. It can be difficult
Key considerations to accelerate the process, and early engagement with regulators is crucial
Heightened regulatory scrutiny to identifying potential concerns about the acquisition. As a result,
Financial soundness is a key policy driver that shapes the FIG sector. Reg- longstop dates are being pushed out.
ulatory concerns about the impact on financial institutions – particularly
banks and insurers, of what is perceived to be the traditional private eq- Investor disclosure
uity investment model – regularly leads to enhanced scrutiny of private Regulators often require a lot of information about the entities and indi-
equity buyers’ business plans, investment time horizons, acquisition struc- viduals who will control regulated firms. In private equity, this can lead
tures (including leverage) and governance arrangements for the firms. In to information being required from both limited partners and general
some cases this can result in regulators requiring commitments from pri- partners’ corporate groups. It is not uncommon for information to be
vate equity buyers on, for example, the length of investment, leverage disclosed by senior individuals in private equity firms who are deemed
and holding structures before granting approvals. to have control over the regulated entity through the role of the fund’s
general partner.
The complexity of relationships between regulators in supervising fi-
nancial institutions can make getting regulatory approvals more challeng- Recent trends for acquisitions by multiple financial investors (such as
ing and time-consuming. Examples include the European Central Bank’s that by Blackstone and GIC of a majority stake in Rothesay Life acquired
approval requirement for acquisitions of banks in the eurozone, dual reg- from Goldman Sachs), even when not acting as a consortium, further
ulation of banks and insurers in the UK, and global colleges of supervisors complicate this. Separately held interests can in certain circumstances be
of significant financial institutions. aggregated for regulatory purposes, leading to disclosure being required
from minority investors whose investment would not otherwise trigger
Regulatory capital the need for change in control approval.
Regulators’ concerns about firms’ financial soundness can play out in ac-
quisitions in the sector. On occasion, regulators use change in control Governance
processes to bolster regulatory capital in regulated firms, by requiring Governance is a hot topic in the FIG sector. Perceived governance failures
buyers to either inject further capital or commit to maintaining specific have led to increased personal accountability in the sector generally, and
levels of capital in the regulated firm (or both). in the banking sector particularly. The new regime for senior managers
to be introduced in the UK in March 2016 is one example.

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 23

 GLOBAL

Regulators are questioning the size, expertise and independence of the Which way to the exit?
boards of those firms. This can affect the number of investor-appointed There are a growing number of examples of private equity exits from FIG
directors, but also raises the need for relevant sector experience of these assets. Examples include Bregal Capital’s sale of Canopius to Sompo
directors. Can they demonstrate they have sufficient knowledge of the Japan Nipponkoa, Apax’s sale of the Travelex group, and a number of
sector to be appointed to the board? high-profile sell downs through public offerings such as that of Saga, Part-
nership Assurance and Just Retirement.
In addition, regulators will also scrutinise the scope of veto rights for
investors and the extent to which shareholders can direct the investee With an increasing number of private equity investments in FIG assets
company. coming to the end of their investment cycle, questions over the preferred
exit route for financial investors should begin to be answered.
Due diligence
Due diligence in the FIG sector is as much about looking forward to pro- On entry into investments, private equity firms have often benefitted
posed regulatory changes that affect the business of the relevant firm, as from substantial indemnity protections from trade sellers against known
to historic issues that firm may have with regulatory compliance. industry risks, such as mis-selling. However, granting these protections
on exit is against the clean exit principles private equity craves. Options
Given the conduct risks that FIG businesses face (take payment pro- often deployed to bridge this risk allocation gap between buyer and seller
tection insurance, for example), in-depth regulatory diligence is vital to (such as warranty and indemnity insurance) do not lend themselves to
any investment decision in the sector. This is to make sure that isolated indemnities against known industry risks.
issues with a target are not part of a wider systemic problem, as well as
to assess the risk of regulatory fines and customer redress programmes. It remains to be seen if private equity firms will move away from their
historic reluctance to give warranties and indemnities on sale as the ac-
Indemnities cepted price of achieving the best return on exit, or whether initial public
In many FIG subsectors, wide-ranging indemnities for general industry offerings (IPO) will instead become the preferred route, providing a
issues, such as mis-selling, are the norm. These indemnities usually go cleaner exit.
hand in hand with complex conduct provisions.
The answer may lie in dual-track processes, the simultaneous launch
Where indemnities relate to customer claims, there will be a significant of an IPO and sale process. Financial investors favour dual-track processes
focus on conduct as a result of the tension between the buyer’s interest as their preferred exit option. By seeking to maximise exit proceeds and
in the continuing relationship with the target customers, and the seller’s increase transaction certainty, competitive tension is created between the
interest in minimising pay-outs. Conduct in relation to customer claims two parts of the process, mitigating issues that might otherwise be caused
is further complicated by regulatory obligations and restrictions on claims by market conditions or bidder appetite.
handling and management.
Taking the example of known industry risks, bidders in an auction
Valuation that is part of a dual-track process will need to focus on whether market
Fixed price deals are less prevalent for FIG targets than for other sectors. standard indemnities will need to be sacrificed in their offer to success-
Completion adjustments set by reference to net asset value, regulatory fully compete with the alternative IPO option.
capital triggers, assets under management or revenue run rate are fre-
quently seen. This trend is influenced by extended pre-closing periods Moving forward
and complex intra-group arrangements. However, completion accounts The success of deals like the acquisition of Heidelberger Leben shows a
can be avoided on loan portfolio and asset management transactions or greater openness on the part of regulators to consider financial investors
on clean carve-outs. as reliable buyers.

Deferred consideration or earn-out mechanisms are the norm for asset
management transactions and management spin-outs to bridge the value
gap. For example, on asset management deals, post-closing run rate rev-
enues or assets under management are often used as the basis for calcu-
lating deferred consideration. This often leads to a tension between the
buyer’s desire to integrate the target portfolio onto its existing portfolio,
and the seller’s desire for the target portfolio to be held separately during
the measurement period to facilitate calculation of the run rate revenues
or assets under management.
Today’s environment demonstrates significant opportunities for sus-
tainable returns and successful transactions. However, the challenge for
private equity firms will be to make sure they can make these investments
while successfully navigating the complex regulatory landscape that the
changing financial environment generates.
By Freshfields partner David Higgins, senior associate
Sarah-Jane Mulryan and associate Emma Rachmaninov
in London

24 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015

 ITALY

A bright new day

The financial crisis hit the Italian private equity market hard. But new players and creative
financing structures are having a positive impact. Bruno Gattai and Cataldo Piccarreta
of Gattai Minoli Agostinelli & Partners discuss the future

E
conomic uncertainty in Italy and across the Eurozone has made for a that in 2015 more deals will be completed. On the one hand, the appointment
transformative private equity market. New players have taken advantage of the new Government in 2014, the significant number of reforms enacted
of the opportunities the downturn created, while traditional investors (such as the Italian Jobs Act) together with the heavy reduction of the spread
flee to more stable shores. The financial crisis also spurred the creation of fi- between Italian BTP (Italian government bonds) and the German bund yield
nancing models that steered away from banks. Several years away from the indicated that the country was ready to react. On the other hand, the super-
downturn these new structures have become the norm and the changes brought abundant level of money available on the market (especially after the European
on by the crisis are creating a dynamic and more diverse market. Central Bank launched the €1.1 trillion quantitative easing programme) and
the relatively small pool of potential targets around the world, generated the
What have been the most significant developments in private equity in need for private equity funds to explore new markets, in terms of the geography
Italy over the last five years? and type of assets. At that point, considering the insufficient number of large
The private equity industry in Italy has undergone dramatic changes in recent assets, SMEs represented an interesting alternative for investors. And Italy is,
years. On the one side, a number of international private equity firms closed undoubtedly, the SME capital of Europe.
their operations in Italy and started to cover the Italian market essentially from
London. On the other side, in the last two years international private equity According to a 2014 Cerved report, in Italy there are 143,542 incorporated
funds that almost never considered Italian assets in the past have begun to ac- SMEs (società per azioni, società a responsabilità limitata and società in accomandita
tively pursue them, especially in the SME (small and medium enterprise) sector. per azioni), with a total turnover in 2012 of €851 billion. Of these SMEs,
Italian funds remained active, focusing on mid-market transactions. 25,000 are medium-sized enterprises – potential targets for private equity (PE)
funds.
These apparent contradictory trends are driven by a number of factors. The
2008 crisis in Italy was the most severe since World War II. Since 2010, chronic Further, other factors worked together to bring international investors back
instability in the Italian political system together with the dramatic economic to Italy.
crisis put Italy’s position in the European Union in danger. Too big to fail was
the position of some. Others predicted that Italy was hopeless and doomed to First of all, the valuation of Italian assets remained generally cheaper com-
exit from the European Union. The majority of international investors left Italy, pared to similar investments in other EU countries (in terms of multiple of val-
where possible. uation). Secondly, even small assets (sometimes with an urgent need for a
generational change in terms of ownership) could represent the ideal target of
But 2014 was the year in which the general climate changed in Italy. Accord- portfolio companies of PEs. Organic growth was hard to come by in a difficult
ing to AIFI (Italian Private Equity and Venture Capital Association), in 2014 economy and mergers and acquisitions of cheap assets was a good opportunity
91 buy-outs were completed with a total investment of €2.1 billion. It is likely to grow.

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 25

 ITALY

The new political situation, the large presence of SMEs in Italy and interna- To reduce the level of finance resources provided by banks, another very fre-
tional investors’ interest in mid-market assets, the lower prices of assets and a quent way to finance acquisitions was vendor loans (sometimes subordinated
vast pool of potential adds-on for portfolio companies created the perfect climate to certain internal rate of return – IRR – levels achieved by the PE funds at exit),
for the return of international private equity investors in Italy. that are now typical of acquisitions from individuals and non-financial sellers.
The reason why this instrument was used is twofold: first, it gave the opportunity
What is the appetite of private equity funds for minority investments? to raise unsubordinated debt with almost no covenants, increasing the possibility
In 2014, private equity funds generally made majority investments in Italy. In for the investors to reach higher IRR; second, it represented a solid and liquid
fact, it was extremely rare for private equity funds to consider acquisitions of collateral for possible indemnities due in case of breach of the representations
minority stakes, with the remarkable exception of the 20% acquisition of Gianni and warranties given by the vendor.
Versace by Blackstone.
Thanks to the quantitative easing measures, the situation seems to be chang-
In the past, it was common to see PE funds acquiring minority stakes (gen- ing. Quantitative easing led to an increase in bank lending and interest rates of-
erally through capital increases), whilst majority stakes remained with the fered by banks are competitive. Banks are now more open to consider traditional
founder or entrepreneur. The rationale behind this kind of deal were various, financing structures (such as secured senior loans) and it is likely that we will
for example to provide companies with fresh capital to fulfill growth plans, to not see many HY acquisition bonds in the near future. Levels of leverage in
acquire outside expertise and international relationships in new regions, to have LBOs remain, however, very far away from those seen during the pinnacle of
on board investors with experience in taking businesses, often family owned, to 2006 and 2007.
the capital markets through IPOs (initial public offerings), or to leverage the
credibility of independent shareholders. In fact, the IPO was the most natural In addition, it is likely that portfolio companies (especially those acquired
possible exit for this kind of investment. Complex governance structures were during the crisis, with high interests and heavy conditions of the LBO financing)
negotiated in order to prevent conflicts among shareholders, whereby private will take advantage of the currently favourable debt markets, and negotiate better
equity funds could pay a lot of attention to veto rights on the financial side of conditions with banks so as to lower their cost of borrowing or lighten covenants.
the business and to extraordinary transactions, whilst day-to-day management It is also likely that sponsors will negotiate further financing to pull equity out
remained with the entrepreneur. of assets (through leveraged recapitalisation) that may need more time to be
ready for the exit.
However, these deals were generally not very successful. The clash between
different cultures, unsophisticated or first generation self-made entrepreneurs What is the trend in terms of price structure?
on the one side and PE funds on the other, often led to failure. At times, PE In the presence of a still fragile economic recovery, PE funds showed a tendency
funds would not understand the motivations and intentions of majority owners to protect their money from overestimated valuation, especially when sellers
and founders. Quite often, the latter were averse to the control of minority share- were trying to leverage future growth or possible unexpressed synergies to obtain
holders. higher prices. The typical way was to provide, as an important component of
the purchase price, an earn-out in order to remunerate the actual Ebitda (earn-
Over the last years, PE funds have preferred to have full control over their ings before interest, taxes, depreciation and amortisation) realised by the target
portfolio companies and entrepreneurs and founders are requested to maintain during the year of the acquisition and in the following one or two years. This
minority stakes to ensure continuity and commitment (in terms of support to instrument was perceived by PE funds as a valid incentive to ensure the com-
management) over the years until exit. mitment by the sellers who remained involved in the management of the com-
pany (directly as managers or indirectly as shareholders).
In addition, minority stakes of sellers sometimes represent a security (direct
or indirect) for possible indemnities due where there is a breach of representa- Another important trend in the Italian market in recent years is the use of
tions and warranties given by the seller. locked-box clauses rather than proper purchase price adjustments based on net
financial position at closing. The general perception of the market is that, espe-
The reality is that there is value with founders of the target companies, espe- cially with SMEs, it is difficult to really monitor the working capital and to
cially when the brand of the target and founder are perceived by the market as avoid, through interim management clauses, possible manoeuvres intended to
an indissoluble bond. Ensuring continuity in brand perception and management manipulate the net financial position at closing. The locked-box mechanism
(especially in the fashion sector, where the style is distinctive) is perceived as an provides clarity for the benefit of all the parties.
important ingredient for the success of an investment. Recent examples of this
strategy are the 90% stake acquisition of Roberto Cavalli by a consortium of What are the main notifications to be made to Italian authorities in
investors led by Clessidra and the 80% stake acquisition of Dainese by Invest- case of acquisitions? What is the average time required in order to
corp. 10% of Roberto Cavalli and 20% of Dainese remain owned by the re- complete acquisitions?
spective founders, Roberto Cavalli and Lino Dainese. In 2013, the legislator simplified the antitrust legislation in terms of approval
by the Italian Antitrust Authority of acquisitions. As a consequence, filing with
A significant exception to this trend is represented by the investment strategy the Italian Antitrust Authority is now required when domestic turnover of the
of Fondo Strategico Italiano (indirectly controlled by the Italian government and target exceeds €49 million and Italian turnover of the combined groups (pur-
Bank of Italy) that operates by acquiring mainly minority interests in companies chaser and target) exceeds €492 million. Notification to the Italian Antitrust
of significant national interest. Authority is required when both conditions are met. In the past, such conditions
were alternative and, therefore, purchasers being parts of big groups had to file
What about acquisition finance? How did the Italian market react to the also in case of small acquisitions.
crisis?
Before the quantitative easing measures by the ECB (European Central Bank), If no antitrust filing is required, the acquisition process usually takes three to
banks’ business lending was weak and Italian banks were very reluctant to pro- four months (including due diligence). Exceptions are made in specific sectors
vide senior loans for acquisitions. Business shifted away from commercial banks. where consent must be obtained; generally speaking, no permits are required to
Therefore, over recent years, a number of structures were used to finance acqui- put in place acquisitions.
sitions. In particular, PE funds used more sophisticated structures in order to fi-
nance deals in Italy, such as high yield (HY) bonds. For example, CVC Describe the role of co-investment.
completed the acquisition of Cerved with the first ever leveraged buy-out (LBO) Recent developments in the Italian market included the return of limited part-
in Italy financed by means of a HY bond. ners, that are now more comfortable in investing alongside general partners in
Italy. Family offices or similar entities are also looking at Italian investments.

26 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015

 ITALY

Considering the relatively small equity check of investments in Italy, co-in- panies aimed at the acquisition of Italian SMEs involved in niche areas of tech-
vestments remain an instrument used only in specific situations such as: (i) (rare) nology or products.
big equity checks, in order to share the risk with other investors; (ii) re-invest-
ment upon exit alongside with buyers, to ensure continuity and equity; (iii) eq- In the fashion sector, important maisons that became famous during the
uity needs, usually for avoiding risk concentration on a single asset (fund 1980’s thanks to their founders and creative directors are now facing the needs
mandates and regulation often cap a fund from investing more than a certain of a generational change. These companies are moving from a genius-based
percentage of the fund size in a single portfolio company) or a single country; model to a more structured model.
and, (iv) the need of international PEs to have an Italian partner.
Financial institutions, in particular banks, will undoubtedly remain an im-
Usually co-investments provide that some co-investors are mere followers. It portant source of interest for PE in the next few years. Italian governmental au-
is quite unusual to see complex corporate governance rules in such cases. How- thorities are pressing for mergers of small banks. Notwithstanding the complex
ever, co-investors are typically vested with board representation, decision (or at
legal environment and the difficulty of using traditional LBO structures for this
least consultation) rights in the hiring or firing of key managers and extraordi-kind of acquisition (acquisition finance could affect supervisory capital), PE
nary corporate transactions and anti-dilution protections. funds seem to be very interested in Italian financial institution groups. Over re-
cent years, two significant deals have been announced in this sector: the acqui-
How did the crisis affect the holding periods? sition of Banca Farmafactoring by Centerbridge from Apax and the acquisition
It is likely that PE funds will remain opportunistic in terms of holding period, of ICBPI by Advent, Bain Capital and Clessidra from some Italian banks. Likely
depending on the time of the completion of the acquisition. others will come.

Acquisitions made during the crisis (with low valuation), could benefit from What do you expect in the near future?
the current positive economic situation. Investors could be attracted by the op-It is a great time to be a buyer. Italian banks are still reluctant to provide fresh
portunity to sell their assets at significantly higher values compared to their ac-
financing to Italian companies for ongoing operations and new investments.
quisition or book value (so-called quick flips). Therefore, PE investments are a good opportunity for companies to raise money,
avoiding complex discussion with Italian banks. Italian SMEs that survived the
However, holding periods were extended for acquisitions completed during crisis represent good assets for hungry PE funds. It is likely that, if the political
the boom years. High multiples paid for acquisitions and the long financial and situation in Italy and in the EU remains stable, the abundant global availability
economic crisis in Italy slowed down exit processes of assets acquired during of capital will cause PE funds in 2015 to dig deeper into the pool of undiscovered
such period. They will require more time to yield acceptable returns. opportunities in Italy.

Very quick IPOs will benefit from the positive turn of the market. For ex- In addition, some exits are expected in 2015 and 2016, especially from those
ample, the IPO of Cerved, that was acquired by CVC from Bain Capital in portfolio companies acquired during the boom years. Sponsor-to-sponsor trans-
2014, was completed just a year after the acquisition by CVC. actions will likely remain dominant, but IPOs could still represent a valid option.
In fact, in 2014 some IPOs were successfully completed (for example the men-
Which industries are receiving the most the private equity attention? tioned IPO of Cerved, the Italian leader in business information controlled by
In terms of sectors, it is likely that PE funds will consider Italian assets active in CVC or the IPO of Anima SGR). In addition, Italian PE funds remain very ac-
the luxury goods or other high value-added products or services, with commer- tive and a significant number of deals have been announced. Private equity in
cial exposure on non-euro denominated markets to benefit from the weakness Italy is still alive and kicking.
of the euro. Also expected is substantial M&A activity by foreign portfolio com-

Bruno Gattai About the author

Founder and managing partner, Gattai Bruno Gattai is the founder and managing partner of Gattai Minoli
Minoli Agostinelli & Partners Agostinelli & Partners, based in Milan. He specialises in corporate and
M&A transactions, with a particular emphasis on private equity. His
Milan, Italy clients include private equity funds targeting large deals or mid and
T: +39 0230323232 small cap companies, companies’ group, listed and non-listed
F: +39 0230323242 companies and family businesses concentrating on their holding
E: bgattai@gattai.it companies. In 2014, Top Legal (a leading Italian law magazine) named
W: www.gattai.it Bruno Gattai as Lawyer of the Year.

Cataldo G Piccarreta About the author

Partner, Gattai Minoli Agostinelli & Cataldo G Piccarreta is a partner at Gattai Minoli Agostinelli &
Partners Partners, based in Milan. He advises clients on corporate law, with a
particular emphasis on M&A and private equity. He advises leading
Milan, Italy international and domestic private equity funds and Italian and
T: +39 0230323232 overseas companies on acquisitions and sales of corporate interests.
F: +39 0230323242 After having spent his entire career in US firms, in 2012 he co-founded
E: cpiccarreta@gattai.it Gattai Minoli Agostinelli & Partners.
W: www.gattai.it

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 27

 NIGERIA

Blazing the trail

The Nigerian market is promising for investors that can navigate the bumps. Plotting the route
to success will require a thorough understanding of the landscape. Folake Elias-Adebowale,
Christine Sijuwade and Joseph Eimunjeze of Udo Udoma & Belo-Osagie explain how

“
conomic developments in Nigeria have helped boost the potential
for private equity (PE) development in country. While challenges
with fund formation and taxation persist, the use of adaptive struc-
tures to facilitate investment is increasingly common. Folake Elias-Ade-
One of the biggest challenges
bowale, Christine Sijuwade and Joseph Eimunjeze of the Nigerian law firm
Udo Udoma & Belo-Osagie consider options for taking advantage of the
for PE fund formation in
best local opportunities in this article. Nigeria is the restriction on
What have been the major developments affecting private equity’s
development in Nigeria over the past five years?
fund formation
Roughly 50% of an estimated $8.1 billion total PE investment in Africa in
2014 was invested in Nigeria. Among the major developments that have pos-
itively affected private equity over the last five years are economic reforms in- Other developments include the growth and prevalence of information
cluding the rebasing of its economy, which has led to Nigeria’s recognition as technology and the emergence of e-commerce platforms. One of the most
Africa’s largest economy and strategic sectoral reforms and developments such exciting developments in relation to exits is the establishment in July 2013
as in its telecommunications and financial services sectors. by the National Association of Securities Dealers (NASD) of NASD plc as
an alternative trading platform, an over-the-counter market for unlisted
Other key factors that have contributed to increased PE interest in Nige- bonds and securities, with the objective of improving transparency and liq-
ria are its population size and, in particular, the exponential growth of mid- uidity in the capital market. The resulting expansion of opportunities for
dle-class consumerism and the growth and involvement of its private sector. exits and secondary investments has been welcomed by the Nigerian PE sec-
All of these factors have contributed to economic growth and created unique tor, and is expected to further boost PE investment in Nigeria.
opportunities, which have attracted increased PE and foreign direct invest-
ment. The privatisation of some sectors previously controlled by the gov- What are the biggest challenges to fund formation, including any
ernment has also helped to open up potentially lucrative opportunities. For regulatory hurdles international investors may not be aware of?
instance, the privatisation of the Nigerian power sector has attracted invest- One of the biggest challenges for PE fund formation in Nigeria is the re-
ment into distribution companies and generating companies. striction on fund formation in the rules made by the Nigerian Securities

28 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015


and Exchange Commission (SEC). The rules issued by the SEC (SEC
Rules), however, apply only to private equity funds with a commitment of
at least N1billion ($5 million) investor funds, and require that such private
equity funds must be registered with the SEC – irrespective of whether they
seek investments from the public or not.
Under the SEC rules, private equity funds are prohibited from soliciting
funds from the general public but are mandated to source funds from qual-
ified institutional investors such as bank and pension funds. Another regu-
latory challenge faced by SEC-registered PE funds is that after the fund has
been duly registered, only a maximum of 30% of the fund can be invested
in a single investment.
A major concern for most PE fund managers is the fact that a fund man-
ager must be licensed by the SEC before it can apply to register a fund. To
be eligible for registration, the fund manager of the PE fund is required to
have a minimum paid-up capital determined periodically by the SEC, which
now stands at N150 million. The registration process is fairly extensive and
involves: detailed documentation (particularly in relation to the key em-
ployees of the fund manager who will be registered as sponsored individuals);
clearance reports issued by the Nigerian Police Force; interviews by the SEC;
and, an inspection of the fund manager’s offices. PE fund managers are also
subject to extensive reporting obligations under the SEC rules.
The National Pensions Commission regulations permit the investment
of up to five percent of pension funds in PE funds that are SEC-registered
and managed by SEC-licensed managers. This is, however, subject to strin-
gent restrictions, such as that managers must also subscribe between one
and three percent (or higher) of the fund.
Another major concern for corporate international investors is that such
investors cannot be partners in a Nigerian fund that is structured as a part-
nership. They can only invest in funds structured as companies. In order to
invest in funds structured as partnerships, a corporate international investor
would first have to incorporate a company in Nigeria and, then, use that
company to invest in the fund. This is because, under Nigerian law, foreign
companies are prohibited from carrying on business in Nigeria unless they
incorporate a company in Nigeria. Although foreign companies can hold
shares in Nigerian companies, partnerships have no separate legal personality
under Nigerian law and, as a result, each partner is deemed to be carrying
on business in its own individual capacity.
Another issue is in relation to taxation. There is lack of clarity on the tax-
ation of the income of Nigerian funds structured as companies. This is be-
cause any dividends payable by a Nigerian investee company to a fund (as
a shareholder of that investee company) will be liable to withholding of tax
at the rate of 10%. Where such dividends are received by the Nigerian fund,
they should be regarded as franked investment income, and should not be
subject to further tax as part of the income of the fund. Where the dividends
received by the fund are to be paid out as dividends to its shareholders (re- In Nigeria, some of the common forms of divestment for private equity
distributed), and where the fund would be required to account to the tax
authorities for the tax that it is required to withhold from such dividends,
the fund may set-off any tax withheld by the company before it pays the
dividends to the fund. It will then have no obligation to further withhold
tax on the redistribution of the dividends to its shareholders. If the total
amount of dividends to be redistributed is, however, in excess of the fund’s
taxable profits, the tax authority may regard such dividends as the taxable
profits of the fund. As a result, the fund could be liable to pay tax on such pend on the type of company (i.e. whether or not the company is listed on
dividends (an ‘excess dividends tax) at the rate of 30%.
What are the most common structures for establishing a fund, and
why are they more preferable than others?
The common structures for establishing a fund in Nigeria are limited lia- identified investor but the sale would have to be effected on the floor of the
bility companies (under the Companies and Allied Matters Act Chapter NSE using an authorised broker.
C20 Laws of the Federation of Nigeria 2004), general or limited partner-
ships, or the newer limited liability partnerships under the provisions of the
Partnership Law of Lagos State 2009 (as amended). Many PE funds have been emerging and are set to increase with the SEC-licensed, self-regulating
IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015
NIGERIA
traditionally been structured as limited partnerships in which the general
partner is liable for all debts and obligations of the partnership and the lia-
bility of limited partners is limited to the extent of their respective contri-
butions to the fund. A fund structured as a limited liability partnership, on
the other hand, will be made up of at least two designated partners who
manage the fund, and other partners. Under the limited liability partnership
structure, the liability of all of the partners in the fund is limited to the ex-
tent of their respective contributions to the fund. The limited partnership
and the limited partnership structure are, however, only recognised in Lagos
State.
“
There is potential to increase
transparency and liquidity in
the market - a welcome
additional option for PE exits
The liability of the investors in a fund that is structured as a limited lia-
bility company (either private or public) is limited to the amount, if any,
unpaid on their shares. The limited liability company structure may be
preferable to some investors because a company has perpetual succession
and it is relatively easy to transfer the shares in a limited liability company.
What is the typical timing for an acquisition and what factors can
stall or delay a transaction?
From the time that a fund establishes an interest in acquiring the shares of
a company, the average timeline for the conclusion of the transaction is be-
tween two and six months. Some acquisitions can be completed fairly
quickly if the transaction is not complex and no regulatory approvals are re-
quired. Delays may, however, arise in the process of obtaining pre- and post-
acquisition regulatory approvals from the SEC and other sector-specific
regulators (such as the Central Bank of Nigeria, the National Pension Com-
mission, the National Insurance Commission, the National Agency for Food
and Drug Administration and Control, the Department for Petroleum Re-
sources, the Nigerian Communications Commission and the Nigerian Stock
Exchange where the target is a listed company): this is not uncommon in
the Nigerian PE transaction landscape. Delays also arise in the process of
raising finance for investments and in conducting legal and technical due
diligence, as investee companies sometimes provide inadequate information
or documents.
What is the most common exit strategy used in Nigeria? Do sellers
have residual liability after a divestiture?
funds is by private treaty and sales to strategic buyers including multina-
tionals. Funds may engage in a private arrangement with a prospective pur-
chaser for the sale of the investee company’s shares to another portfolio
company. In addition, where the articles of association of the investee com-
pany provide for pre-emptive rights or other constituting documents in
favour of other shareholders, the fund may offer to sell its shares to the other
existing shareholders. The manner in which sales are completed would de-
the stock exchange) and on the terms prescribed in the company’s articles
of association. Where the investment is in a public listed company, the fund
will sell its shares on the floor of the Nigerian Stock Exchange (NSE). It is
possible for the fund to negotiate and agree the terms of a block sale to an
In addition to stick market entries and exits, secondary buyouts have
29
 NIGERIA

entity NASD plc as an alternative trading platform for unlisted bonds and For instance, the apparent tax efficiency of a limited liability company
securities. There is potential to increase transparency and liquidity in the may be defeated if the tax authority deems that the excess dividends tax pro-
market for such securities, a welcome additional option for PE exits. vision of the tax statute applies to the profits of a company that redistributed
dividends, irrespective of whether the profit only came from dividends from
There are no laws or regulations that require sellers to have residual lia- investee companies that are franked investment income. These are some of
bility after a divestiture. The liability of sellers after divestiture depends on the tax issues that must be taken into consideration in structuring a fund
the terms of the contract of sale of the shares. for registration in Nigeria.

Describe the competition between international, regional and

“
domestic funds.
While many funds investing in Nigeria are registered in other countries, and
business opportunities in Nigeria abound across various economic sectors,
the recent prevalence of auctions and bids targeted at PE investors evidences
the increasing competition between international, regional and domestic
funds in Nigeria. The Nigerian market is full of
Foreign funds of varying size, capacity and focus have either established promising prospects for
or are considering a local presence while others seek co-investment with
local partners. International, regional and domestic funds are all seeking to private equity investors
exploit the same or similar opportunities in what remains a relatively small
– albeit evolving – market for quality opportunities.

There is, however, a discernible diversification in investment focus, with

sectors such as agribusiness and healthcare beginning to attract PE invest-
ment interest in Nigeria in addition to more traditional areas such as finan-
cial services, extractives and fast moving consumer goods. Which industries are receiving the most attention from private
equity firms? Are there any sectors in which private equity can’t
How have taxation issues affected investment and structuring invest, or in which they face significant regulatory hurdles?
decisions? The sectors that have received the most attention from private equity funds
Dividends made by funds structured as limited liability companies, after in Nigeria include financial services, telecommunications, extractives, real
having been subjected to 10% withholding tax by the investee company, estate, fast moving consumer goods and manufacturing. Retail, infrastruc-
are deemed franked investment income and are not liable to further tax. ture, agribusiness and healthcare also appear to be attracting PE firms.
The result is that the fund is not liable to pay income tax on such dividends,
and has no obligation to withhold tax before re-distributing the dividends Investment in companies operating within certain sectors require regu-
to its own shareholders. The fund may, however, be exposed to excess divi- latory approval. For instance, in the banking sector, an investment that will
dend tax if the dividends that it distributes to its shareholders are higher result in an investor holding five percent or more of the shares is required
than its taxable profit, or if it has no taxable profit for that year. The excess to be approved by the Central Bank of Nigeria. In the insurance sector, an
dividend tax issue will not arise if the only source of income for the fund is acquisition involving 25% or more of the shareholding (whether directly or
dividends from investee companies, in which case, the tax withheld by an indirectly held) requires the approval of the National Insurance Commis-
investee company will be regarded as the final tax on the income. sion. Other regulated sectors include the telecommunications sector and the
petroleum sector.
The tax liability of the partners in a fund structured as a partnership is
assessed and distributed among the partners under the Personal Income Tax Investments by local and foreign investors are, however, absolutely pro-
Act. Upon distribution, any partner that is a limited liability company is li- hibited in: the production of arms and ammunition; the production of and
able to pay tax at an aggregate income tax rate of 32% on any profits made dealing in narcotic drugs and psychotropic substances; and, the production
from the distributions. It must also, in re-distributing the profits made from of military and paramilitary wear.
the fund to its shareholders, withhold tax at the rate of 10%.

30 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015

 NIGERIA

Folake Elias-Adebowale About the author

Partner, Udo Udoma & Belo-Osagie Folake Elias-Adebowale is a partner at Udo Udoma & Belo-Osagie and
Lagos, Nigeria co-heads the firm’s corporate advisory, private equity, and energy and
T: +234 1 4622639 natural resources teams. Her specialisations include foreign investment,
+234 1 4622307-10 equity and asset acquisitions, corporate restructuring, private equity,
F: +234 1 4622311 and project finance for energy and industrial projects. She has advised
E: folake.adebowale@uubo.org on various private equity and foreign investments in the food, beverage,
W: www.uubo.org brewing, energy, and health sectors.
Elias-Adebowale has written and presented papers on private equity,
foreign investment and the local content requirements affecting
participants in the Nigerian petroleum sector, and is a regular
contributor to the International Law Office’s Energy and Natural
Resources Newsletter. She also co-wrote an article entitled The
Regulation of Private Equity in West Africa – Emerging Trends with
Norton Rose South Africa in the winter 2011/12 edition of the Legal &
Regulatory Bulletin of Emerging Markets Private Equity Association
(EMPEA). She represents the firm on EMPEA’s Legal and Regulatory
Council.

Christine Sijuwade About the author

Senior associate, Udo Udoma & Belo- Christine Sijuwade is a senior associate at Udo Udoma & Belo-Osagie.
Osagie She is a core member of the team that advises local and international
Lagos, Nigeria private equity firms on their equity investments in various Nigerian
T: +234 1 4622307-10 companies, including companies in the telecommunications, food and
F: +234 1 4622311 beverage and manufacturing sectors. Sijuwade has also advised on
E: christine.sijuwade@uubo.org international lending transactions, including syndicated loans, and has
W: www.uubo.org been involved in a diverse range of capital markets transactions including
private placements and, as part of her asset management and collective
investment practice, the establishment of private equity funds. In her
corporate advisory practice, Sijuwade participates in due diligence
reviews, in the course of which she evaluates regulatory compliance
practices and credit portfolios to assess the viability of targeted businesses
for merger, investment and financing transactions. She contributes to the
credit and security section of the World Bank’s annual Doing Business in
Nigeria surveys.

Joseph Eimunjeze About the author

Senior associate, Udo Udoma & Belo- Joseph Eimunjeze is a senior associate with Udo Udoma & Belo-Osagie
Osagie and a member of the firm’s banking and finance and tax teams. His
Lagos, Nigeria specialisations include taxation, corporate advisory, M&A and banking
T: +234 1 4622307-10 regulatory compliance. Eimunjeze has extensive experience in a range of
F: +234 1 4622311 capital markets (including eurobonds issuance by Nigerian corporates
E: joseph.eimunjeze@uubo.org and the Federal Government), oil and gas, private equity and financing
W: www.uubo.org transactions and taxation.
He advises clients on tax, including tax planning and structuring of
transactions, and devises tax-efficient transaction structures to achieve
compliance with Nigerian law. His extensive knowledge of financial,
commercial and tax laws, complemented by affiliations and
relationships with the various tax authorities and industry players.

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 31

 SWITZERLAND
Attractive structures
Luc Defferrard and David Hadad of Walder Wyss look at a pragmatic new framework for the
distribution of funds, which opens up the market to foreign fund providers
S
witzerland’s revised law on the distribution of funds has now be-
come a well-known and documented matter. The new framework
leaves the Swiss qualified investors’ market accessible to all types of
alternative investment funds and is therefore a natural fit for private equity
funds.
As these rules are relatively new and have been enacted with guidance on
only specific topics from the Swiss regulator, Finma, important questions
regarding the new fund distribution rules remain among Swiss representa-
tives of private equity funds, foreign fund providers and their legal counsels.
The principal issues relate to the timing and duration of appointments of
Swiss representatives and paying agents, appropriate supervision require-
ments of foreign placement agents and fund document requirements.
New fund distribution rules
Most private equity fund managers are well aware of the new Swiss rules on
distribution of foreign funds to qualified investors. Since March 1 2015,
the Swiss Federal Act on Collective Investment Schemes (Cisa) requires al-
ternative investment funds that are distributed to Swiss qualified investors
to appoint a Swiss representative and a Swiss paying agent. In addition, any
placement agent of a private equity fund active in Switzerland (or the fund
manager itself should no third party placement agent be appointed) must
be subject to appropriate supervision in its country of domicile and should
enter into a distribution agreement with the Swiss representative.
Private equity funds and their managers are only exempt from having to
comply with these new regulatory requirements in two situations. First, if
they solely market funds’ units to certain exempt qualified investors in with choosing the private equity fund’s Swiss representative. The Swiss rep-
Switzerland (regulated financial intermediaries such as banks, broker dealers, resentative of foreign funds should be an entity licensed by Finma to exercise
32 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015
fund managers and asset managers of investment funds, or regulated insur-
ance companies); second, if they sell their funds’ units to investors that have
approached the fund on their own initiative without prior solicitation of
the fund manager (reverse solicitation).
Swiss representatives and paying agents
The Cisa requires that, prior to marketing a private equity foreign fund in
Switzerland, the fund manager must appoint a Swiss representative and a
Swiss paying agent. In practice, it is difficult to determine whether market-
ing activities prior to the finalisation of the fund structure are already
deemed to be distribution of a fund, as the fund is not yet established. This
leads to a conundrum for private equity funds, which are often marketed
prior to launching the fund, on the basis of teaser documents and generally
before the PPM (private placement memorandum) is finalised.
The Swiss Funds & Asset Management Association (SFAMA) is of the
view that once the investment policy, the fee structure and the fund manager
have been determined, the tipping point will already have passed. According
to this interpretation, the sending of teaser documents or pathfinder PPMs
could already constitute fund distribution and would trigger the require-
ment to appoint a Swiss representative and a Swiss paying agent. On the
other hand, abstract discussions with potential future investors not related
to a specific product or specific funds’ units should not trigger this require-
ment and in this sense, market testing appears to be possible without having
to make any appointment.
The process for appointing a Swiss representative and paying agent starts
 SWITZERLAND

such activities. There are a handful of providers that offer the Swiss repre- land. However, Cisa does not require the place of jurisdiction to be in
sentative services, with prices usually ranging between SFr10,000 ($10,600) Switzerland and the fund manager is free to agree with Swiss investors on
to SFr15,900 per fund per year. The fund manager will then start on-board- any other place of jurisdiction.
ing procedures with the Swiss representative chosen and complete an on-
boarding questionnaire. Once the on-boarding process has been completed, Swiss representatives are also of the opinion that foreign fund managers
the private equity fund and the Swiss representative will negotiate the rep- need to comply with the Guidelines on Duties Regarding the Charging and
resentation agreement under which the Swiss representative is appointed. Use of Fees and Costs (Transparency Guidelines) issued by SFAMA. The
In addition, the private equity fund, the placement agent of the fund and Transparency Guidelines have been recognised by Finma as a minimum
the Swiss representative will negotiate the distribution agreement. standard. The Transparency Guidelines require funds to disclose all charges
and fees incurred directly or indirectly by the investors and their appropri-
The appointment of the Swiss paying agent usually comes next. The pri- ation in the PPM in general or as part of the Swiss mandatory wording. In
vate equity fund manager may choose between one of several banks which addition, SFAMA has in its Transparency Guidelines extended the applica-
usually already work with the Swiss representative of the fund chosen. The bility of these guidelines to foreign placement agents and foreign fund man-
fees of the Swiss paying agents range between SFr1,060 to SFr5,300 per agers. In our view, the Transparency Guidelines are more extensive than
fund per year. For the Swiss paying agent, a short on-boarding process must what is required by the law and as such, should not be viewed as mandatory
be completed, followed by negotiations on the paying agency agreement. by foreign placement agents and foreign fund managers. In practice, Swiss
representatives require a respective contractual undertaking in the distribu-
The process for appointment of both the Swiss representative and the tion agreement. In general, it is of course advisable to specify all applicable
Swiss paying agent usually takes around three weeks depending on the rep- charges and fees in one single document (the PPM) in order to avoid con-
resentative chosen and the fund manager’s appetite to negotiate the agree- tradictions and different interpretations based on different governing laws.
ments. If time is of the essence, it is possible to complete the appointments
in a shorter period. Requirements on foreign placement agents
A foreign placement agent may only place foreign private equity funds to
Under the law, if applied literally, the Swiss representative and the Swiss qualified investors in Switzerland if it is subject to appropriate supervision
paying agent must remain appointed for the whole marketing period. Once and admitted for fund distribution in its country of domicile. In addition,
this period is over and any distribution activities in relation to the private eq- the foreign placement agent must enter into a written distribution agree-
uity fund in Switzerland have definitely been stopped, the mandates of the ment with the Swiss representative of the fund manager. However, the re-
Swiss representative and paying agent will, despite the text of the law, remain quirements on appropriate supervision or admission for fund distribution
in force and may be terminated, for private equity funds (as a rule, closed- are not specified in detail. Any fund manager subject to the AIFMD (Alter-
end funds) only in the following cases. First, where no subscription of units native Investment Fund Managers Directive) would meet the requirements.
or interests in the private equity fund has been made by a qualified investor We are also of the view that any SEC (Securities and Exchange Commission)
domiciled in Switzerland; or, second, where early redemption is not possible registered investment adviser is deemed to be appropriately supervised, as
(which is normally the case for private equity funds) or only with a special fee the Cisa does not request an explicit authorisation to distribute funds from
or penalty applying, once the last qualified investor domiciled in Switzerland the foreign placement agent’s home regulator; however, this has not yet been
has transferred its interests or the private equity fund is liquidated. confirmed or specified by Finma.

The revised Cisa and its new marketing rules came into effect on March The distributor must enter into a distribution agreement with the Swiss
1 2013, but provided for a transitional period of two years until February representative. The distribution agreement is usually a tripartite agreement
29 2015 for the appointment of a Swiss representative and Swiss paying between the private equity fund manager, the placement agent (distributor)
agent. As a result, private equity funds that were marketed in Switzerland and the Swiss representative. The fund manager acts as principal of the dis-
to qualified investors during this transitional period were exempt from hav- tributor and the distributor is approved by the Swiss representative for pur-
ing to appoint a Swiss representative and a Swiss paying agent. poses of distribution in Switzerland. We recommend that the Swiss
distribution agreement is aligned with the global distribution agreement in
On March 1 2015, this transitional period lapsed and all private equity place between the fund manager and the placement agent or any other dis-
funds must now fully comply with the new law. This means that private eq- tributor. In the event the private equity fund manager acts itself as distrib-
uity funds that have been marketed in Switzerland under these transitional utor for its own funds, the distribution agreement may be consolidated with
arrangements (but have been closed before March 1 2015) must appoint a the representative agreement to avoid contradicting provisions. The distri-
Swiss representative and Swiss paying agent if qualified investors domiciled bution agreement has to be governed by Swiss law.
in Switzerland have subscribed units or interests in the private equity fund.
If no subscription of units or interests in the private equity fund has been Duties of the Swiss representative
made by a qualified investor domiciled in Switzerland, no appointment has The Swiss representative represents the private equity fund with regard to
to be made. Likewise, any private equity fund that has been closed prior to Swiss investors and therefore serves as a point of contact for enquiries and
the revised Cisa coming into effect on March 1 2013, is exempt from com- claims by Swiss investors. In this sense, the Swiss representative must ensure
pliance with the new law. that qualified investors may obtain the fund documents they request. Given
that these documents are confidential, the Swiss representative should make
Requirements on fund documents them available to existing investors only or potential investors approved by
Once the appointment of a Swiss representative and paying agent has been the private equity fund manager.
made, the name and address of the Swiss representative and the Swiss paying
agent, the fund’s country of domicile and the applicable jurisdiction between Some Swiss representatives also require extensive involvement in fund
the private equity fund and its investors has to be included in all relevant fund distribution activity. Swiss law, however, only requests the Swiss representa-
documents, based on Swiss mandatory wording. For alternative investment tives to: (i) ensure that a written paying agent agreement is entered into; (ii)
funds, such as private equity funds, this term is generally understood to in- have any distributor for Switzerland sign a written distribution agreement
clude the PPM, the subscription agreement and the financial statements. compliant with the Swiss distribution rules (including the Provisions for
Distributors by SFAMA); (iii) ensure that the fund documents contain the
Many Swiss representatives still insist that the Swiss mandatory wording Swiss mandatory disclosures; and (iv) make the fund documents available
also mentions a reference to a place of jurisdiction at the registered seat of to Swiss investors upon request. Where violations of the law become known
the Swiss representative and so creates a forum for Swiss investors in Switzer- to the Swiss representative, it has also to take appropriate measures. In our

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 33

 SWITZERLAND

view, the Swiss representative has no further mandatory duties and in par- fees. All transactions and transfers can also be, and are therefore most of the
ticular, it is not required to attend any investment presentation or be in- time, processed by the foreign bank or the custodian of the private equity
volved in any communication between the private equity fund manager and fund manager directly. In practice, Swiss paying agents are only rarely used
the Swiss investors. for investments and disinvestments of private equity funds, since such funds
are most of the time closed-end funds and their units cannot be redeemed.
The Cisa requires that the Swiss representative represents the private eq- Most paying agents do not even request that the private equity fund man-
uity fund before the Swiss regulator Finma and that such power of repre- agers open an account with them.
sentation should not be restricted. In our view, despite unrestricted power
of representation, the Swiss representative’s contractual obligations demand One can therefore question the need to name a Swiss paying agent if a
that it first consults with and obtains instructions from the private equity foreign fund is only distributed to qualified investors and is a closed-end
fund manager before making any legally relevant statements on the private fund without redemption rights. In our view, the appointment of a Swiss
equity fund’s behalf. In addition, the fund must have the unrestricted right paying agent does not result in a practical protection or easement for Swiss
to choose to be represented by an independent attorney in any proceedings investors. Nevertheless, for the time being, such duty is mentioned in the
with Swiss authorities if it feels that its rights and interests cannot be suffi- law and will therefore be respected.
ciently preserved by the Swiss representative.
Representatives smooth the way
Duties of the Swiss paying agent The new regulatory framework created by Swiss lawmakers keeps the Swiss
Only banks under the Swiss banking act and supervised by the Swiss regu- qualified investors’ market accessible to private equity funds. This is achieved
lator Finma may act as Swiss paying agent. Swiss investors may request the through the use of a Swiss representative who is tasked by Finma to oversee
issuance and redemption of the fund interests at the office of the paying and enforce the Swiss marketing rules towards foreign fund providers. Com-
agent. Therefore, the Swiss paying agent would theoretically have to execute pared to Switzerland’s EU neighbours, the new framework is pragmatic, easy
all transactions involving Swiss investors. However, for the latter, using the to put in place, and avoids regulatory reporting or the need to establish a
Swiss paying agent is only an additional option, requiring extra transaction local presence.

Luc Defferrard About the author

Partner, Walder Wyss Luc Defferrard, partner with Walder Wyss since 2001, has been active
Zurich, Switzerland in the finance and legal industry for many years. He mainly advises
T: +41 58 658 55 47 clients in domestic and cross-border financing and M&A transactions,
E: luc.defferrard@walderwyss.com as well as in real estate and capital markets. Defferrard particularly
W: www.walderwyss.com focuses on private equity (leveraged buy-outs) advising a variety of
private equity funds, managers or target companies in the structuring
and implementation of their projects.
Born in 1965, Defferrard was educated at the Geneva University and
was registered as attorney-at-law with the Geneva Bar Registry in 1990.
Prior to joining Walder Wyss, he worked for seven years with UBS in
Geneva, Zurich and New York as client manager and project manager
in corporate and structured finance where he developed the bank’s
syndicated loans offer to clients in the French part of Switzerland.
Defferrard lectures regularly at universities in private equity and venture
capital legal matters.
Defferrard speaks French, German and English and is head of Groupe
Francophone of Walder Wyss. He is registered with the Zurich Bar
Registry and admitted to practice in all Switzerland.

David Hadad About the author

Associate, Walder Wyss David Hadad is an associate in the banking and finance team at Walder
Wyss, having joined in 2010. Hadad advises clients on the increasingly
Zurich, Switzerland
complex regulatory requirements in the financial sector. He represents
T: +41 58 658 52 04
asset managers, fund managers and distributors in regulatory matters
E: david.hadad@walderwyss.com
before Swiss regulatory authorities.
W: www.walderwyss.com
Hadad focuses on private equity and venture capital, advising investors
and target companies during every step of the investment process,
including providing assistance in developing investment vehicles,
placing shares and selling equity stakes to other investors or industrial
investors.
Before joining Walder Wyss, he worked as a project manager for Credit
Suisse from 2001 to 2008. In 2011, Hadad was seconded to UBS
Investment Bank in Zurich, where he advised the bank on derivative
trading and other financial instruments.
David Hadad’s professional languages are German and English and
Hebrew. He is registered with the Zurich Bar Registry and admitted to
practice in all Switzerland.

34 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015

 UNITED STATES

Staying a step ahead

Protecting clients’ data requires internal policies that shift with the regulatory landscape.
Jordan Murray and David O’Neil of Debevoise & Plimpton discuss best practices to stay
ahead of cybercrime

W
ith each passing day, the tools that cyber criminals use become A data breach of any confidential information is likely to give rise to sig-
more sophisticated and the damage they inflict more severe. The nificant economic loss. According to a recent study by the Ponemon Insti-
regulatory landscape surrounding cybersecurity also continues tute, in 2013 the average data breach cost organisations $5.4 million, or
to grow more complicated as US states, the federal government as well as $188 per record compromised. Just one year later, the average cost per com-
governments around the globe issue new, and sometimes conflicting, rules promised record rose by seven percent to $201.
designed to protect individual privacy and the integrity of network infra-
structure. Advisers that took a strong security posture, however, saw a saving of
$14.14 per record, and implementation of an incident response plan trans-
Investment advisers, including private fund managers, must pay close at- lated into savings of $12.77 per record. The appointment of a chief infor-
tention to cybersecurity and data privacy. Responsible stewardship requires mation security officer saved $6.59 per record.
fund managers to proactively address cybersecurity threats, by assessing vul-
nerabilities and adopting best practices, anticipating and developing plans Investment advisers may also become an attractive target for regulators,
to respond to a cyberattack, and taking steps to prevent the economic loss which are looking for opportunities to seize turf in the bureaucratic scrum,
and reputational harm that too often follow attacks. Increased attention to and hammer the message that cybersecurity must be front-of-mind. The US
cybersecurity will allay the concerns of investors, many of whom demand Investment Advisers Act of 1940 and Investment Company Act of 1940
protection of their own confidential information. It can also help avoid un- each require private investment firms to implement written policies and
wanted regulatory attention, and is a prudent step with respect to a fund’s procedures to ensure compliance with federal securities laws. The Depart-
portfolio companies. ment of Justice has suggested that state of the art cybersecurity should be a
top priority of companies, and an April 2015 investment manager guidance
Unfortunately, investment advisers are an attractive target for malicious update issued by the Securities and Exchange Commission (SEC) indicates
cyber actors because they possess a trove of confidential information. This that failure to mitigate certain cyber threats could be construed as violations
includes: material non-public information relating to a private fund’s port- of the SEC’s identity theft red flag rules.
folio companies and acquisition targets; potentially sensitive information
about investors; personal information of executives, including information There are, however, steps that investment advisers can take to mitigate
about their personal securities trading and employees; portfolio company these risks. In general, a private equity adviser should implement a three-
customer lists and trade secrets, and; information regarding general business pronged approach to deal with the threat of cyberattacks: (i) assess its inter-
strategies. nal systems; (ii) remediate any weak controls; and, (iii) implement new
governance protocols. Advisers may wish to monitor their portfolio com-
panies to ensure they are similarly proactive and prepared.

IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015 35

 UNITED STATES

Assess internal systems Remediate weak controls

Private equity advisers should assess their internal systems by mapping and After conducting a thorough assessment of information technology systems,
taking an inventory of digital assets, a process that involves asking what policies and procedures, an adviser should proceed to closing vulnerable ac-
assets the adviser has, identifying where such assets are kept, and determin- cess points and bolstering systems that may have been compromised. The
ing whether they are really needed. The adviser should also evaluate its in- SEC has stressed the importance of controlling access to systems and data
ternal practices to protect data across platforms (for example mobile through active management of authentication methods and use of firewalls,
applications versus desktop workstations). data encryption techniques, and software that monitors systems for unau-
thorised activity. Advisers should consider granting tiered access to critical
Best practices include periodic internal audits, and conducting penetra- information and restricting the use of removable storage devices.
tion tests and other assessments of potential infrastructure vulnerabilities.
Assessing internal systems should involve performance of a benchmark Implement governance protocols
analysis against external standards, such as the framework for improving Advisers must implement effective governance policies and procedures to
critical infrastructure cybersecurity promulgated by the Department of minimise cyber threats, including incident response plans and teams to an-
Commerce’s National Institute of Standards and Technology (NIST Frame- ticipate and manage the fallout from any potential cyberattack. A typical
work) and the critical security controls developed by the SANS Institute incident response plan lays out appropriate procedures to be followed after
(SANS Controls). The NIST Framework offers, among other things, a set an incident. It also incorporates processes to ensure that boards of directors
of tiers against which an organisation can evaluate its internal controls and and senior management receive regular briefings on cybersecurity issues.
preparedness to thwart potential attacks. The SANS Controls focus on prod- Advisers should consider charging a committee with oversight of cyberse-
ucts, processes and services that historically have been effective at mitigating curity risk management. Finally, and perhaps most importantly, advisers
cyber threats. Threats may include insiders, for example disgruntled em- should regularly train employees on how to assess and respond to cyber
ployees, and outsiders such as hackers and other cyber criminals who may threats, so as to create a framework for identifying potential breaches early,
obtain access to systems through third parties or loose security protocols. thus thwarting or containing the consequences of such threats as nimbly as
possible.
In addition to considering in-house cybersecurity risks, an adviser must
consider the information it makes available to third party vendors. An as- Although private equity advisers may not be able to anticipate or prevent
sessment of an adviser’s systems should include the monitoring of vendors’ every form of cyberattack, they should undertake the efforts to mitigate such
security credentials and their access to the adviser’s systems. Vendor contracts threats and to be prepared if such an attack should occur. Failure to take
should specify or require the vendor to implement cybersecurity protocols, that responsibility seriously could result in substantial financial loss and rep-
adopt a written information security plan and provide audit results or re- utational harm to both the adviser and its investors.
ports to the adviser on request. In certain cases, contracts may grant the ad-
viser audit rights and appropriately indemnify it from losses stemming from
a vendor’s breach of its cybersecurity commitments.

Jordan Murray About the author

Partner, Debevoise & Plimpton Jordan Murray is a New York based partner with Debevoise &
Plimpton. He is a member of the firm’s private equity funds and
New York, US
investment management groups.
T: +1 212 909 6924
E: jcmurray@debevoise.com Murray focusses on advising sponsors of, and institutional investors in
W: www.debevoise.com open- and closed-ended private investment funds, co-investment
vehicles and separately managed accounts, covering numerous sectors
and strategies including buyout, real estate, debt, distressed and credit
opportunities. He acts for both private investment firm owners and
institutional buyers in connection with investments in private
investment firms, and has restructured private investment firms in
preparation for potential liquidity events for the firms’ owners.
He received his JD, cum laude, from the Fordham University School of
Law in 1999.

David O’Neil About the author

Partner, Debevoise & Plimpton David O’Neil is a partner in the Washington DC office of Debevoise &
Plimpton. O’Neil, a member of the firm’s white collar and regulatory
Washington DC, US
defence group, focusses on white collar criminal defence, internal
T: +1 202 383 8040
investigations, privacy and cybersecurity, congressional investigations,
E: daoneil@debevoise.com
and anti-money laundering/sanctions enforcement defence.
W: www.debevoise.com
Prior to joining the firm, O’Neil served for eight years in the
Department of Justice (DoJ). In 2014, the President and Attorney
General designated him to lead the criminal division, where he was
responsible for supervising over 600 attorneys investigating and
prosecuting the full range of federal crimes, including corporate
malfeasance, cybercrime, fraud offences and money laundering.
O’Neil earned his JD, magna cum laude, from Harvard Law School in
2000.

36 IFLR REPORT | PRIVATE EQUITY AND VENTURE CAPITAL 2015