Private equity firms will desperately be hoping that a no-deal Brexit never materialises, but as time to ratify an agreement runs out GPs need to take steps to protect their interests irrespective of the outcome. Reals Deals gathered a panel of experts in a recent webinar to outline what GPs can do in the worst-case scenario. Here are some of the highlights.

1. Solutions are available

Alexandrine Armstrong-Cerfontaine, a partner at law firm Goodwin, said that irrespective of where a GP is in the fundraising cycle, there are solutions in place to see firms through all eventualities.

UK-based managers investing in Europe who have recently closed their funds, or who are likely to close before Brexit takes effect at the end of March, will be able to continue running their firms as they have always done.

Firms that will only close post-Brexit face a more complex scenario, but one that can be addressed in fund documentation.

Armstrong-Cerfontaine said these managers will be able to include clauses in fund documents that allow for an “automatic switch” to an EU fund structure if necessary in the event of a no-deal Brexit.

“A switch and investor consent are baked into documents, so in principle any manager should be able to continue fundraising,” she said. “A firm can use a third-party solution to facilitate this and managers will have spoken to providers about this in advance.”

John Daghlian, a partner, O’Melveny and Myers, said the growth of third-party providers since the implementation of the AIFM (Alternative Investment Fund Manager) directive “was very welcome”.

“It has been very useful to GPs who have built lifeboat planning into their documents,” he said.

2. Luxembourg is the answer

Daghlian said Luxembourg had emerged as the jurisdiction of choice for private equity firms looking for Brexit solutions.

“The Special Limited Partnership (SLP) structure in Luxembourg has been a real game changer. The structures used to be very clunky and there was no freedom contract, but with the SLP that has changed,” Daghlian said. “The flexibility is highly attractive. Managers can launch domestic UK funds with UK managed SLPs, but with the ability to flip to been Luxembourg managed if it all goes horribly wrong.”

Armstrong-Cerfontaine added: “The SLP looks and feels like an Anglo-Saxon structure and the VAT exemption saves a huge amount of money.”

3. Adjusting to life with a third-party AIFM

The third-party AIFM solution may offer a tidy solution to Brexit-related uncertainty, but arrangements can take some time getting used to for managers unfamiliar with using third-party providers.

Justin Partington, group funds solutions leader at SGG, said a third-party arrangement did change the dynamics for signing off investments.
Partington explained a third-party AIFM was not permitted to delegate all functions to GP. Typically, the GP directors in the structure would oversee the review, monitoring and exit of investments while the AIFM would take on a compliance role and monitor governance, risk and adherence to the limited partner agreement.

When there was no third-party AIFM in place, private equity firms that signed off deals in investment committee would simply go to the GP to finalise the transaction. With an AIFM in place, however, once the investment committee agreed a deal it first had to go to the AIFM for sign off before going to the GP.

Partington also pointed out that pressure from some EU member states to tighten up rules around what was delegated back to GP directors could add another layer of complexity in the future, although Armstrong-Cerfontaine expressed the hope that EU regulators would take a pragmatic approach.

4. Counting costs

The flexible fund structures available in Luxembourg come at a price according to Daghlian.

“The service providers in the Channel Islands are excellent and, forgive me, their service levels are also better than Luxembourg’s,” he said. “There is no doubt that costs are much greater. There is something to swallow.”

Christian Heinen, managing director of SGG Luxembourg, however, said that some of the gripes raised about Luxembourg were overplayed.

“Luxembourg is very business friendly and it has done the right things over the last couple of years, providing the vehicles business wants with the launch of the SLP and the Reserved Alternative Investment Fund (RAIF),” Heinen said. “The difficulty of working in Luxembourg is overemphasised. The regulator moves fast and I do believe that over time prices will level out as competition increases. Luxembourg is very well placed.”

Daghlian said that for large managers, who were also focused on building substance in fund jurisdictions for tax purposes, the higher costs in Luxembourg were less of an issue, but that for managers with funds of €500m or less the question of cost was “a sensitive point”.