Industry Comment

Platform Problems for the AIMFD Express

Wednesday, February 08, 2012

With the 2013 deadline for transposition of the Directive into national law fast approaching, basic problems are coming back to the fore. Investors beware.

Whilst the advisory model seeks to manage the cross-contamination of legal risks in a private equity funds’ context through the use of both a separate general partner company (at fund level) and separately appointed investor directors (at portfolio company level), there is no recognition of this by the Directive itself which sits much more comfortably in a mutual funds’ context. The big difference of course, is that in a private equity context you are not dealing with liquid securities but rather real businesses and real liabilities.

Investors should consider very carefully, therefore, whether they wish to invest in cellular platforms that could be polluted by the risks of other funds managed by the same promoter and, of course, other funds controlled by the same banking-custodian. All the more so where cells lack international recognition.

By connecting otherwise remote partnerships with differing pools of assets and investors, the Directive, in short, risks the very systemic risks that it was supposed to avoid.

Aside from the very obvious structural shortcomings of the Directive, pooling of management arrangements across a series of private equity funds also carries with it significant practical disadvantages. Put simply, to the extent that one general partner company is appointed as a general partner of multiple cells, it would be impossible for the investors in one cell to change that general partner without the assistance/agreement of the investors in all other cells, which is just not practical. In signing up to the wrong product, investors it seems are also stripped of key industry protections.

Whilst platform products may work well for banks, captive funds and family offices, they are wholly inappropriate in an institutional private equity context and it seems that caveat emptor applies as far as ESMA or the Commission is concerned.