Funds Update | November 2019

Written on 13 Nov 2019

Welcome to the latest edition of our Funds Update.

Recent years have brought renewed regulatory activity for the investment management sector, as the broad industry continues to increase in terms of the scale and sophistication of its offerings.

Alongside what is increasingly accepted as the “new normal” environment of low interest rates and the rapid growth of new technological solutions and opportunities for the sector, much of the regulatory activity has focused on evolving ideas of stewardship and sustainability.

Regulators are trying to keep abreast of broader developments, not least for limited partners that face rapid change in the private equity industry. Our update assesses how recent guidelines offer a framework for fundraising in this increasingly complex environment.

The Financial Conduct Authority’s “Dear CEO” missive in May to leading firms in the investment management arena was far from a clean bill of health; we look at how the ‘host’ AIFM model is a source of concern for the regulator.

The increased focus on environmentally sustainable finance took another step forward for the EU this summer, and we note how technical experts gathered together by the Commission have launched their report, conducted a consultation and are assessing the feedback.

If you would like to discuss any of the topics covered in this Update, please contact one of the experts listed below.

ILPA Principles 3.0 | Comprehensive but flexible

In recent years, the private equity industry, together with its strategies and products, has increased in size and complexity. Against this backdrop, the Institutional Limited Partners Association has released guidelines to help with best practice during fundraising.

The ILPA’s “Principles 3.0” update, which is the third in a series of guidelines, is designed to set out best practice on fund terms and documentation. The Principles will be a useful tool for industry practitioners, and form a central part in private fund negotiations over the next few years.

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‘Host’ AIFM models | The FCA’s review of principal firms

In May 2019, the FCA published its review of principal firms in the investment management sector, accompanied by a “Dear CEO” letter. The findings were far from a clean bill of health. The FCA identified significant weaknesses in the control and oversight of appointed representatives and identified host AIFM models involving ARs as a particular area of concern.

The warning from the FCA in the Dear CEO letter that it will conduct further work including visits to principal firms and expects to see that firms have acted on the findings of the review is a shot across the bow for authorised firms that take a light-touch approach to the supervision of their ARs.

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Sustainability | European Commission ‘taxonomy’ push

The European Commission, in its push to promote environmentally-sustainable finance across the EU, is assessing feedback from a recent consultation on a proposed classification system – or “taxonomy” – for sustainable economic activities.

The consultation was launched in July and headed by the Technical Expert Group on Sustainable Finance, a global forum of experts set up by the Commission. In June this year, the TEG published its report on taxonomy, following the Commission’s legislative proposal in May 2018 for an EU-wide classification system. The Commission’s proposal on an EU taxonomy, which has been discussed by the European Parliament and the Council, aims to develop a unified, EU-wide system.

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The future of defined contribution pensions

In September, the British Business Bank and management consultancy Oliver Wyman published a study analysing how defined contribution pension schemes may – and should – increase their allocation to venture capital and growth equity investments.

The study notes the increase in size of this pool of capital generally as a result of automatic enrolment, which was introduced in 2012, and concludes that an allocation to the asset class would be beneficial to these pension schemes when based on historic performance

While generally a positive move towards encouraging more pension fund investment in the sector, the report’s comments on the commercial and regulatory constraints on fees and carried interest that DC schemes can bear will be a significant issue for many venture and growth managers.

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