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Private equity funds and the AIFM Directive

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By Dr Stephanie Micallef (pictured), Ganado & Associates, Advocates – Malta has become an attractive jurisdiction for funds, due in part, to the flexible regime for professional investor funds (“PIFs”). Under this regime, private equity funds are structured as PIFs.

Currently the Malta Financial Authority (the “MFSA”), through supplementary rules, regulates only one aspect of private equity funds; drawdowns on investors’ committed funds. Requests on committed funds must be effected on a pro-rata basis amongst all relevant investors in the fund and further calls can only be made by the fund once all outstanding commitments from existing investors have been requested. The fund is also obliged to retain copies of written agreements concluded with investors committing to invest in the fund, at its registered office.

Local regulation also provides for the issuing of units at a discount to investors who have committed to subscribe for units, by written agreement. The discount must apply exclusively to any outstanding commitment arising under the agreement and must be provided for in the constitutive document of the fund. The nature of such discount must be disclosed in the fund’s offering documentation. The regulations also impose a cap on the value of the units to be issued at a discount and if such discount is in excess of that permitted by the regulations, the investor is bound to pay the fund the difference plus interest.

Although the PIF regime is flexible enough to cater for private equity funds, the rules specific to such funds are currently limited. The MFSA has therefore recognised the need to consider additional regulation to facilitate the establishment of local private equity funds and in this regard will shortly introduce bespoke rules for these types of funds. The introduction of the rules will also serve as a means to align the current rules with the AIFM Directive.

The AIFM Directive includes disclosure rules which require a private equity fund manager to notify involved parties when the fund it is managing acquires a major holding or control of a non-listed company or an issuer. The Directive also obliges the fund to produce an enhanced annual report of the portfolio company or of the fund itself. The annual report must include a fair review of the development of the portfolio company’s business, its future plans for development and must highlight any significant events which have occurred since the end of the last financial year. Although these measures will increase transparency, the disclosure of sensitive information might disadvantage private equity bidders. To control this effect, the Directive includes confidentiality provisions, however it leaves it up to each Member State to implement its own rules to address confidentiality issues.

In order to protect companies from short-term investments and prevent asset stripping, the AIFM Directive has also sought to regulate buy-outs of companies. The Directive prohibits a fund which has acquired control in a company, from facilitating, supporting, instructing or voting in favour of any distribution, capital reduction, share redemption and/or acquisitions of own shares for a period of twenty-four months following the acquisition of control.

These requirements, together with the requirement for each fund to appoint a depository, have been criticised as increasing costs for private equity funds as well as impacting the drawdown process and closing procedures. A change in operating practice will inevitably be necessary. The introduction of new rules on private equity structures to the Maltese regulatory framework may address these issues and provide further clarity and solutions to private equity fund managers.

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