What’s new for private equity following the end of CMVM’s public consultation

On 28 February 2022 the public consultation of the draft diploma of the New Asset Management Framework (“AMF”) was closed; the AMF aims to simplify the regulation of the Portuguese asset management industry, creating a single framework in order to foster competitiveness and market development.

The consultation on the AMF was one of CMVM’s most “popular”, with 583 contributions received from 22 different entities.

This article addresses the main takeaways of the public consultation for the private equity sector introduced by this new regime, expected to come into force by the end of 2022.

A. Main developments on Private Equity

1. Management of real estate AIFs by private equity fund managers

The AMF establishes that private equity fund managers (including “small” private equity fund managers, meaning those below the thresholds foreseen in the Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 (“AIFM Directive”)) will be able to manage all types of alternative investment funds (“AIFs”) – v.g. credit funds, hedge funds and other “kitchen sink” alternative funds – provided that at least one of such funds is a private equity fund.

Real estate funds are, however, excluded from the AIFs which can be managed by private equity fund managers, a restriction which was contested by many of the respondents to the public consultation.

CMVM has nevertheless opted to maintain this restriction, on the grounds that it is one of the distinctive features that justifies maintaining the “duality” of management companies under the AMF, meaning, the collective investment undertaking management companies, on the one hand, and private equity fund managers, on the other.

CMVM has further clarified in the public consultation report that, although AIFs managed by private equity fund managers may be exposed to real estate activity, private equity fund managers cannot directly hold real estate. 

2. “Small” private equity fund managers

AMF has defined a lighter regime for the so-called “small” private equity fund managers, which, inter alia, are not required to present, ex-ante, the necessary organizational requirements to manage private equity funds, are subject to a minimum share capital for of € 75,000.00 and, in what concerns those funds addressed exclusively to professional investors, are exempt from appointing a depositary in the funds they manage.

The lighter share capital requirements and regulatory regime (in particular the appointment of a depositary for each fund managed not being mandatory), has led “above threshold” management companies to fear that the new regime will introduce an unbalanced playing field, as small-scale companies, with less expensive structures, will be able to apply lower prices and be more competitive.

Notwithstanding the criticisms pointed out, CMVM states in the public consultation report that:

a) regarding the minimum share capital of € 75,000.00 for below threshold management companies, the amount is considered to be the minimum amount necessary for the commencement of a regulated activity which presupposes financial stability to operate in the market, while safeguarding the competitiveness of the market;

b) regarding the absence of a mandatory requirement to have a depositary in funds marketed exclusively to professional investors, it is referred that the differences are justified, not only on grounds of proportionality, but by the absence of a European regime imposing such a duty. 

Finally, CMVM notes that below threshold fund managers may still voluntarily appoint depositaries in funds addressed exclusively to professional investors. 

3. Holding period for private equity investments 

The AMF originally implemented a maximum holding period of 12 years for private equity investments. This represented a shift from the previous legal regime, which allowed for private equity funds to have very long investment timelines.

The limitation was therefore subject to criticism by several respondents, who considered the establishment of such a limitation to be a step back on making the Portuguese private equity market more competitive.

CMVM has reconsidered this matter and made it more flexible in the AMF. It is now established the need for fund regulations to disclose holding periods of private equity investments when they are equal to or greater than 12 years, while funds with a holding period below 12 years are acceptable. 

4. Minimum investment amount

The AMF has eliminated the minimum subscription to a private equity fund per investor of € 50,000.00. However, according to contributions received, some respondents disagreed with this amendment, given that it may result in unfair treatment between current funds and those that may be created in the future, and may also jeopardize the protection of participants.

CMVM defends the elimination of restrictions on access to these funds, indicating that the underlying intention is to promote the competitiveness and attractiveness of the national market, while also safeguarding the protection of investors, who will now have more alternatives and investment opportunities available to them, as is the case in other European markets. The minimum amount of subscription should therefore be established in accordance with the particularities of each fund.

5. Bonds issuance

AMF has clarified that private equity funds can issue bonds to procure financing from outside investors (which was legally debated before). Since it was requested to clarify the type of bonds in question, CMVM has now confirmed that there are no limitations as to the type of bonds to be issued, which should be assessed on a case-by-case basis, in accordance with the applicable legal requirements. 

B. Final remarks

The repercussions that the AMF will have to the private equity sector have been the subject of intense discussion under the respective public consultation, which shows the increasing sophistication of the sector in relation to the regulatory environment in which it operates. This interaction also signals that CMVM is aware of the sector’s concerns and has taken a constructive approach to assess which changes should be considered.

All in all, following the public consultation it still looks like the AMF will provide more flexibility for private equity fund managers (notably those under the AIFMD thresholds) to pursue other “private market” strategies and tap additional sources of investment (and investors). The ball is now on the court of the Portuguese Government and it will be worth to be on the lookout to see whether any further relevant changes to the AMF will be implemented.