1. General remarks
Over the past two decades, the evolution of the legal requirements governing undertakings for collective investment in Portugal, in particular private equity funds (“Private equity funds”), has been characterized by intense legislative activity which is largely due to the need to transpose European directives (in particular Directive 2011/61/EU, theAIFMD”) and to articulate it with other European legislation as well as with the framework of the pre-existing Portuguese legal structure for these types of vehicles (which dates back to the 1980s).
This articulation proved difficult for the Portuguese legislator, who (as in many other areas of economic regulation) had to construct new concepts and practices 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 grow their business. However, several obstacles remain in place and the legal regime for the management of PE funds remains a complex network of national and European rules which remains inaccessible to all but legal practitioners and the Portuguese Securities Market Commission (“CMVM”) staff who are in daily contact with these issues.
For example, private equity fund managers above the AIFMD thresholds are subject to the provisions of the legal regime for private equity, social entrepreneurship and specialized investment, approved by Law no. 18/2015 (“Legal regime of private equity”) but also to certain (but not all…) provisions applicable to alternative investment funds of the General Framework for Undertakings for Collective Investment, approved by law no. 16/2015, of February 24 (“RGOC”) through a complex system of references (which raises many problems of interpretation) and also (although in this case such references do not exist) to the rules set out in Delegated Regulation no. 231/2013 of December 12, 2012.
This is one of the reasons why the Portuguese Securities Market Commission (“CMVM”) now intends to simplify and revise the existing legislation on the management of private equity funds. Thus, recently, the CMVM studied a diploma project for a New Asset Management Framework (“MFA”), which involves a complete overhaul of the private equity legal regime, as well as the RGOIC, merging these two statutes into one.
With this revision, the CMVM aims to create a unified legal framework for the asset management industry (including private equity) which aims to be simpler, more coherent, more credible, centered on an approach based on the risks and on ex-post supervision (instead of tedious and lengthy authorization processes) and, very importantly, by eliminating excessive regulation built on the pre-existing provisions of the directive (i.e. the “overregulation”).
2. Impact of the AMF in the private equity industry
The AMF regulates, in an integrated manner, the regime applicable to asset management, unifying the implementation of Directive 2009/65/EC of the European Parliament and of the Council of July 13, 2009 on the coordination of legislative, regulatory and administrative procedures concerning companies for collective investments 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 (theAIFMD”).
The main impacts of the AMF project on the management of private equity funds are as follows:
a) Authorized activities
The AMF establishes that managers of private equity funds (including managers of “small” private equity funds, i.e. below the AIFMD thresholds) will be able to manage all types of investment funds. alternative investments (vg credit funds, hedge funds and other “kitchen sinks”). alternative funds), with the exception of real estate funds, provided that at least one of these funds is a private equity fund.
In addition, large private equity fund managers (above the AIFMD thresholds) may also provide portfolio management and investment advisory services, while smaller private equity fund managers may invest for their own account without the need for special authorization from CMVM for these purposes.
b) Simplification of incorporation procedures
Managers of “small” private equity funds are not required to show, ex antethe organizational requirements necessary for the management of private equity funds (ex antesuitability requirements for directors and qualified shareholders remain in place, however). In addition, the authorization periods are reduced to 30 days. The minimum share capital of these entities is also reduced to €75,000.00.
AIFMD ‘over-regulation’ is removed from the process of incorporation of ‘large’ private equity fund managers and it is proposed that only organizational requirements resulting from European law apply. Approval of this proposal would represent a significant relaxation of the conditions for incorporation. The deadlines for granting authorization have also been reduced.
vs) Rules for replacing private equity fund managers
The AMF specifies that the replacement of the management entity of the private equity fund is not subject to the approval of the CMVM but only requires a ex post notice to the regulator. Since the private equity legal regime was silent on this subject, this clarification is now useful to increase legal certainty for investors and managers.
D) Abolition of the “venture capital investor” structure
Venture capitalists are special venture capital companies compulsorily incorporated as single-member companies with limited liability by quotas (sociedades unipessoais por quotas) under Article 14 of the current private equity legal regime. However, given the failure to launch this regulated structure and the fact that the interests underlying its formation are only the private interests of the sole quota holder and no other investors (this essentially goes to the contrary to the objective of a regulatory framework for asset management if only the interests of a single person are served), the CMVM considers that there is no material interest in maintaining this legal entity in the new MFA.
e) Holding period of private equity investments
There is a maximum holding period of 12 years for private equity investments. This represents a change from the previous legal regime which allowed private equity funds to have very long investment deadlines.
This solution seems to aim to steer investors with long-term investment horizons towards other types of investment structures, in particular the so-called European Long Term Infrastructure Funds (“ELTIFELTIFs are a “harmonised” European alternative investment vehicle (approved by Regulation (EU) 2015/760) which is designed to invest in very long-term illiquid projects (including infrastructure). Unlike private equity funds governed by the AMF, ELTIFs are generally not limited in time for their investments.
F) Minimum investment amount
The minimum PE fund subscription per investor of €50,000 is removed, giving retail investors more investment options.
g) Abolition of the investment ceiling in transferable securities admitted to trading
Another important change is the removal of the 50% cap on investment in transferable securities admitted to trading on a regulated market by private equity funds, which should be read in conjunction with the proposal that private equity funds private equity hold a minimum stake of 20% in each of the listed entities in which they invest.
The aim seems to be to encourage the formation of private equity buyout funds to privatize public companies (and not, conversely, to allow private equity funds to make minority investments in public companies). listed, which should be left to mutual funds or alternative investment funds in liquid securities).
h) Bond issue
It is now clarified that private equity funds can issue bonds to obtain financing from outside investors (an issue that has been debated legally before).
3. Final remarks
At a time when the raising of capital and the deployment of funds in private markets are still setting new records around the world, the time seems opportune to revise the legal regime of private equity in Portugal. Indeed, if approved with these characteristics, the AMF will introduce significant changes in the legal regime applicable to private equity funds and their respective managers.
We can anticipate that the new degree may mark a turning point in the Portuguese private wealth management market. Among other aspects, faster and less restrictive authorizations and more possibilities to target retail investors will certainly encourage the creation of new managers and increase the attractiveness of the Portuguese private equity industry.
As mentioned, however, AMF approval is still at a preliminary stage (currently CMVM is gathering comments and input from industry players and other stakeholders before the proposal reaches the Portuguese government to initiate a “formal” legislative procedure – should still be in the first half of 2022) and it will probably be subject to relevant amendments. It will be worth keeping an eye out for what these changes might entail.