April 13, 2015
Interviewed by: David Snow
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How to Avoid Regulatory Complications

Three fundraising experts from Abbott Capital Management, MVision and BC Partners discuss the complications non-U.S. GPs can encounter with regulatory issues in the U.S. They also discuss different laws from state to state and municipality to municipality, how to hire proper counsel, and why non-U.S. GPs should know their market.

Three fundraising experts from Abbott Capital Management, MVision and BC Partners discuss the complications non-U.S. GPs can encounter with regulatory issues in the U.S. They also discuss different laws from state to state and municipality to municipality, how to hire proper counsel, and why non-U.S. GPs should know their market.

How to Avoid Regulatory Complications
Fundraising in the U.S.

David Snow, Privcap: Today, we’re joined by Mona Marquardt of Abbott Capital Management, Mounir Guen of MVision, and Richard Kunzer of BC Partners. Everybody, welcome to Privcap. Thanks for being here.

Unison: Thank you.

Snow: We’re talking about fundraising in the U.S., which is a country with rules and regulations surrounding every form of financial product and, increasingly, private equity. Especially for a non-U.S. GP that’s about to fundraise in the U.S., many of them (Moose, I’d love to get your view on this) perhaps are not as prepared as they should be for (1) the amount of regulatory and tax work that they’re going to need to do and (2) the investor demands they might face. Is that ever the case—that GPs show up in the U.S. to polish off what should be the biggest leg of their fundraising trip and they’re maybe not as prepared as they should be?

Mounir Guen, MVision Private Equity Advisers: The very first thing, and the one that’s most interesting— especially the more remote and sometimes countries or general partners you have imagined should have been aware of this—is around the Regulation D. They need to be extremely careful what they say in the public domain concerning their performance and their fundraise. In some cases, they believe they can talk back in their home countries to the press openly. But they can’t, because if you’re soliciting U.S. investors, they might have offices abroad, [as] in the case of some fund-to-funds and other types of investors. But they have to abide by the highest bar, so that’s the first thing they realize.

The second thing they realize is that, in their marketing materials, if they have a focus towards the U.S., there are content rules. The regulators are very clear on what you need to be showing and how you need to be showing it. So you cannot just show gross numbers. You have to have gross and net numbers in your marketing materials. Again, this is something they need to then spend time on with legal counsel [for] all marketing materials being brought to the U.S. for the solicitation of U.S. accredited investors. Not only do they have to define the investors, they have to make sure the materials match the correct regulatory aspects of the investors.

Then, within that context, by the regulator’s standard and by the investor’s standards, there are certain disclosures and reporting that’s important. Again, certain public pensions have opened public disclosures where they videotape the committees. In other cases, they will publicly print investment memos.

Richard Kunzer, BC Partners: With the looking at the rules and regulations, one of the other things [about] using a placement agent such as yourselves that is very beneficial for GPs—or given our size, we have a team that fundraises internally—is making sure also every U.S. state and municipality has certain rules and regulations.

Guen: That’s correct.

Kunzer: Therefore, you need to have a lawyer or counsel go out and review on a regular basis those rules and regulations as to [whether] you are a lobbyist in that state. Do you need to register? For example, in this great city of New York, you need to be registered as a lobbyist or your placement agent needs to be registered as a lobbyist. There are very specific rules and regulations.

Snow: Mona, there are regulations and then there’s the sophistication and the demands of the LP base here in the U.S. What are some aspects of interacting with U.S. LPs that maybe some non-U.S. GPs might be interested to hear about?

Mona Marquardt, Abbott Capital Management: Yeah. I think you’re right and I think it’s actually increased. We’ve seen a ramp-up in what I would call “process discipline” across investors particularly in the U.S. That is due to increasing experience and sophistication among the individuals. It’s also due to their advisors, to the consultants wanting to and seeking to add more value, and adding resources to their own private equity research and consulting discipline. And therefore, being able to manage a much more detailed process and detailed review.

Kunzer: I think it’s very important also for GPs that are new or coming to the U.S. for the first time to understand there are certain requirements that insurance companies have. There is certain reporting that needs to be done. Obviously, K-1s on the tax side and all of these bits and pieces. But a lot of investors are very different because they have specific state-level—a regulator for insurance companies or bank-holding companies or whatever it might be. It’s very important to know well in advance that you have the infrastructure in place or you’ve outsourced it to people that can do it for you. And you’ve got the legal counsel and the people that understand the system.

Snow: I have a question for the three of you. Both of your organizations fundraise internationally and, if you could compare, we know that Europe is increasingly complex as a fundraising destination in part because of AIFMD. But where is more complicated? Where is there more complexity if you could compare Europe versus the U.S.? What’s the easier market?

Kunzer: Every region has its own complexities and it’s very hard—it depends on who you’re targeting, where you’re targeting and that’s something you take into account when you’re putting together your plan of “Where are we going to a reach or who are we going to see? Is the cost benefit analysis correct in that it’s worth spending time in Country X, given that we’re going to have to spend Y to even get there in the first place?” Whereas coming to the U.S.—it is a big market. We’ve talked about that and there’s a lot of opportunity. Hopefully, that’s very well worthwhile being registered, doing the lobbyist stuff, etc.

Guen: The one telling term is in the establishment costs that general partners are now having to put down. Historically, it was about $1 million to be able to bring a fund to market—it was $500 plus. It was pretty even. It might have been a tiny bit more. Today, it’s at least three times if not four times that and scaling.

Snow: Is that largely because of the rigors of fundraising?

Guen: No, it’s largely because—to the point that was made by Richard—it’s become a very complex situation.

Marquardt: To add to Richard’s point and to tie yours in, Moose, as well, I think the market that is most complicated for a GP is the market the GP doesn’t know. It really depends on what your home base is and what your experience is. If you don’t know the U.S. market, it seems very complicated because it does have such a diverse investor base and it is such a large physical region. And there are very specific regulatory requirements. That being said, the helpful thing about the U.S. is that it is a fairly stable environment to market into. We don’t have different shifting AIFMD requirements. We don’t have governments choosing to open or close IPO windows that can affect the salability of a particular strategy a GP is offering.

I think you can learn any market. You can master any market. You do need the right advisors, as we’ve talked about. You need the right lawyers and accountants. But it’s all about really prioritizing, which is where we started in the first place.

Guen: One thing that’s important to us is to be able to understand the global dynamics. And to be able to understand how capital flows, how it processes, how it thinks and what’s vital to it. And then to help guide our GP clients through those types of unchartered or chartered waters and to navigate the process to an ability to deliver for them in a realistic timeframe, to a realistic result.

On the other side of the equation, it’s very important that the investors are really well understood and their processes are respected. And that we work to try to make life easier for them by anticipating some of their issues and questions, understanding their programs, what works and what doesn’t work and being able to help their programs achieve their targets through the introduction to the right strategies.

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