1. General Remarks
In the last two decades, the evolution of the legal requirements governing collective investment undertakings in Portugal, notably private equity funds (“PE Funds”), has been characterised by an intense legislative activity that is largely due to the need to transpose European Directives (notably Directive 2011/61/EU, the “AIFMD”) and to articulate it with otherEuropean legislation as well as with theframework of the pre-existing Portuguese legal edifice for these types of vehicles (which dates back to the 1980s).
This articulation has proven to be challenging to the Portuguese legislator, which (as in many other areas of economic regulation) had to build new concepts and practiceswhich arose from an exogenous source (European law)and at the same time find solutions that would provide a competitive playing field for private equity managers to develop their activities. Several roadblocks, however, remain in place, and the legal regime for PE Fund management remains an intricate web of national and European rules which remains inaccessible to all but the legal practitioners and Portuguese Securities Market Commission (“CMVM”) staff who contact with these matters on a daily basis.
For instance, PE Fund managers above the AIFMD thresholds are subject to the provisions of the Private Equity, Social Entrepreneurship andSpecialized Investment Legal Regime, approved by Law no. 18/2015 (“Private Equity Legal Regime”) but also to some (but not all…) provisions applicable to alternative investment funds of the General Framework of Collective Investment Undertakings, approved by Law no. 16/2015, of 24 February (“RGOIC”) through a complex system of cross-references (which gives rise to many interpretativeissues) and also (albeit, in that case, no such cross-references exist) to the rules set forth in Delegated Regulation no. 231/2013 of 12 December 2012.
This has been one of the reasons why the Portuguese Securities Market Commission (“CMVM”) now intends to simplify and review the existing legislation on PE Fund management. Recently, thus, CMVM placed under reviewa draft diploma of a New Asset Management Framework (“AMF”),which entails a full revision of the Private Equity Legal Regime, as well as of the RGOIC, merging these two statutes into one.
With this revision, CMVM aims to create a unified legal framework for theasset management (including private equity) industry which intends to be simpler, more coherent, more credible, focused on a risk-based approach and on ex-post supervision (in lieu of burdensome and lengthy authorization processes) and, very importantly, eliminating excessive regulation built on top of pre-existing Directive provisions(i.e. “gold-plating”).
2. Impact of the AMF in the PE industry
The AMF regulates, in an integrated manner, the regime applicable to asset management, unifying the implementation ofDirective 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (the “UCITS Directive”) and Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (the “AIFMD”).
The major impacts of the proposed AMF on PE Fund management are the following:
a) Allowed activities
The AMF establishes thatprivate equity fund managers (including “small”private equity fund managers, meaning those below the thresholds of the AIFMD) will be able to manage all types of alternative investment funds (v.g. credit funds, hedge funds and other“kitchen sink” alternative funds), with the exception of real estate funds, provided that at least one of such funds is a private equity fund.
Furthermore, large (above the AIFMD thresholds) private equity fund managers may also renderportfolio management and investment consultancy services, whilst small private equity fund managers may invest on their own account without the need for a special authorisation by CMVM for such purposes.
b) Simplification of incorporation procedures
“Small” private equity fund managersare not required to show, ex-ante, the necessary organizational requirements to manage private equity funds (ex-anteadequacy requirements for directors and qualified shareholders remain in place, however). Also, deadlines for authorization to be granted are reduced to 30 days.Minimum share capital for these entities has also been reduced to € 75,000.00.
AIFMD “gold plating” is being stricken-out of the incorporation process of “large” private equity fund managersand it is proposed that only those organizational requirements which result from European law be applicable. Approval of this proposal would represent a significant easing of requirements for incorporation. Deadlines to grant authorization have also been reduced.
c) Rules for replacement of private equity fund managers
The AMF stipulates thatreplacement of the management entity of the private equity fund is not subject to the authorization from CMVM but requires only an ex-post notice to the regulator. Given that the Private Equity Legal Regime was silent on this matter, this clarification is now useful to increase legal certainty to investors and managers alike.
d) Elimination of the“venture capital investor” structure
Venture capital investors arespecial venture capitalcompanies compulsorily incorporated as single-member limited liability companies by quotas (sociedades unipessoais por quotas) under article 14 of the currentPrivate Equity Legal Regime. However, given the failure to launch for this regulated structure and together with the fact that the interests underlying its incorporation are merely the private interests of the sole quotaholder and of no other investor (it essentially defeats the purpose of a regulatory framework for asset management if only the interests of one person are being served), CMVM considers that there is no material interest in maintaining this legal entity in the new AMF.
e) Holding period for private equity investments
It is implemented a maximum holding period of 12 years for private equity investments. This represents a shift from the previous legal regime which allowed for PE Funds to have very long investment timelines.
This solution appears to intend to steer investors with long investment time horizonsinto other types of investment structures, notably theso-called European Long Term Infrastructure Funds (“ELTIFs”).ELTIFs are an European“harmonized” alternative investment vehicle (approved by Regulation (EU) 2015/760)which are designed to invest in very long term illiquid projects (notably infrastructure). Unlike in private equity funds under the AMF, ELTIFs generally have no time limitations for their investments.
f) Minimum investment amount
The minimum subscription to a PE Fund per investor of € 50,000 is eliminated, consequently offering to non-professional investors more investment options.
g) Removal of cap for investment in securities admitted to trading
Another important change is the removal of the 50% cap for investment in securities admitted to trading on a regulated market by private equity funds, which must be read in conjunction with the proposal for private equity funds to have a minimum shareholding of 20% of each of the listed entities in which they invest.
The objective appears to be toencouragethe incorporation of buyout private equity fundsto take public companies private (and not, conversely, allowing private equity funds to make minority investments in listed companies, which should be left to mutual funds or alternative investment funds in liquid securities).
h) Bonds issuance
It is now clarified that private equity funds can issue bonds to procure financing from outside investors (an issue which was legally debated before).
3. Final Remarks
At a time when capital raising and fund deployment at private markets are still setting new records worldwide, the timing appears opportune to overhaul the private equity legal regime in Portugal. Indeed, if approved with these features, the AMF will introduce significant changes in the applicable legal regime of private equity funds and their respective managers.
We can anticipate that the new diploma can set a turning point in the Portuguese market for private asset management. Among other aspects, speedier and less burdensome authorizations and more possibilities to target retail investors will definitely incentivize the creation of new managers and increase the attractiveness of thePortuguese private equity industry.
As we mentioned,nevertheless, the approval of the AMF is still on a preliminary stage (right now CMVM is collecting comments and contributions from industry players and other stakeholders before the proposal making its way to the Portuguese Government to initiate “formal” legislative proceedings – expected to be still during the first semester of 2022) and it will probably be thesubject to relevant amendments. It will be worthwhile to be on the look out for what those amendments may entail.
