February 8, 2024
In a series of interviews to gain better insights into private markets, we sat down with Mark Shaw, who is a Partner at multinational law firm, Pinsent Masons.
Mark specialises in the structuring and distribution of regulated and unregulated funds and has extensive experience across the liquidity spectrum. Located in London, he also develops close relationships between UK clients and Luxembourg.
Almost all of it – while we are fairly asset class agnostic, the overwhelming majority of our work is in the private asset space. As a team we are jurisdictionally agnostic, but given my background, I focus on the Luxembourg side of things, so generally setting up structures that include at least one Luxembourg partnership at some stage and then whatever other entities that may be required around that, depending on complexity, investor needs, tax and the manager.
While a degree of standardisation is desirable, such as around terminology, and it's also helpful for a familiar look and feel of a document, I think it probably ends there.
Anything beyond that is likely to neglect the nuances of different strategies or limit scope for negotiation between the parties on risk allocation. We also have significant jurisdictional differences on either side of the Atlantic
One might argue that lawyers are conflicted, since we are in the business of negotiating and drafting these things, but the reality is that they are a critical document and one that is far too important to simply take off the shelf. While that may be a starting point, managers and LPs alike should be focused on ensuring their interests are negotiated to a consensus.
While the new SEC rules for private fund managers are more prescriptive, they are not overly dissimilar to what we have in the UK and EU under the Alternative Investment Fund Managers Directive (AIFMD).
Under both regimes, there is a general provision that investors are not able to be given preferential treatment unless it is duly disclosed. The are specifics around this in each case. Both also have positions on not materially disadvantaging other investors, with AIFMD having an overriding obligation to treat investors fairly and the SEC rules being more prescriptive.
Similarly, there are also ongoing reporting requirements across the regimes with the SEC requiring annual reporting to investors and AIFMD including preferential treatment disclosure as part of the annual reporting cycle to relevant regulators and investors.
It’s also worth noting that a non-US manager may fall under the US rules if they have a complex that includes a Delaware feeder or parallel fund, so it's feasible that a complex could fall under both regimes.
The FCA published its rules for its Sustainability Disclosure Requirements (SDR) at the end of last year. Its scope and impact depend on your activities and intentions, but if you have a UK regulated entity or UK fund then you are likely to be caught. Like the EU’s SFDR, it has a staggered implementation, with many of the rules coming into force at the end of July 2024. Although unlike SFDR, it does not currently apply to EU funds being distributed in the UK.
On the EU side of things, there is an acceptance that SFDR is not fit for purpose (something I’ve said from the start), so we will have the output of the current consultation regarding its future. In particular is the question of what to do with Articles 8 and 9 and whether to try to shoehorn a labelling regime into the existing rules or whether to start afresh.
We’ll also see the final rules for “AIFMD II” (which is a slightly misleading title as it also impacts UCITS). The final rules will be published this year, which people will get very excited about, but as it is a Directive we will have a two-year implementation period into the laws of member states, so less of a rush.
ELTIF 2.0 went live at the start of this year with a lot of fanfare. Amongst its changes are the loosening of investment rules, the lowering of the barriers to entry (minimum tickets for retail no longer being €10,000) and new rules on exit liquidity.
While policymakers want to allow retail investors access to private assets, and many managers may also be tempted by a new potential capital pool, I would urge caution. Opening up to retail investors may open a manager up to a whole host of new regulatory challenges and legal risks. Added to which, numerous small ticket investors create new operational challenges, although they will not be negotiating terms.
Finally, a more general point is that the regime itself needs to become successful to get to a point of critical mass – currently the market is dominated by private bank networks distributing their own products – so we need to get to a point of third-party distribution of wider ranges of funds. But there is a potential issue with ELTIF 2.0s where some of them are allowed to offer exit liquidity. The rules around this require portfolios to be invested in minimum levels of UCITS eligible securities. This is a concern for managers who are not offering exit liquidity because it risks causing confusion across the market more generally and harming the update of the product.