kpmg private equity forum · may 2014: “spreading sunshine in private equity” andrew bowden,...

KPMG Private Equity ForumIn association with Preqin

30 November 2016

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Document Classification: KPMG Confidential

© 2016 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

AgendaIntroduction Nick Stevens KPMG

Preqin equity update Chris Elvin Preqin

Governance – Fee reporting and valuations Ben Honeywood KPMG

Changes to UK tax rules for PE executives Sinéad Leddy KPMG

Regulatory trends in the PE market place Oli Morris KPMG

Q&A

Governance –Fee reporting and valuationsBen HoneywoodKPMG Channel Islands Limited

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Fees

May 2014: “Spreading Sunshine in Private Equity” Andrew Bowden, SEC office of compliance General focus on ultimate client being “main street” whilst intermediary is a

professional investor LPAs weakly drafted around managing potential GP/LP conflicts (co-invest

or accelerated fees.) Lack of transparency of key fee arrangements such as carried interest and

allocations to different funds Increased focus on changing valuation methodology and cherry picking

comps or EBITDA adjustments

Q3 2015: Major fines by SEC on mega buy out houses KKR: $30m fine: overcharged abort costs to the fund Blackstone $39m fine: accelerated monitoring fees and not disclosing conflict of

interest Various other smaller fines or disciplinary procedures since and the spotlight

remains

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Fees – industry response

October 2015: Institutional Limited Partnership Association fee and expense template Explicitly structured to address the external criticism of transparency Recent study indicates widely adopted with >75% of GPs that

CALPERS invest into using it

November 2015: Invest Europe Professional Standards handbook Europe's holistic response to governance, transparency and

accountability including a code of conduct and investor reporting guidelines

Significant focus on the relationship between the GPs and LPs

November 2016 FCA: report on UK investment industry noted that fees were “not always clear” and have issued a consultation paper of whether PE should be have to comply with a fee template

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Fees – recommendations to GPs

Increase review of recording, allocation and disclosure of all fee arrangements, including GPS offsets

Increase review of expense clauses in LPA which are likely to increase in number and detail in order to provide more transparency

Where ‘interpretation’ of LPA clauses is required, document the clarified position and if complex, obtain a legal opinion

Err on the side of investors where clauses are ambiguous / vague

Ensure full monitoring and disclosure of notional carry

Increase reference to ILPA and Invest Europe templates to ensure that all arrangements are suitably disclosed

We have already seen certain managers / investors requiring explicit assurance reporting on fees allocations beyond the audit cycle.

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IPEV valuation guideline – 2016 update

Removed reference to IPEV investor Reporting Guidelines

Removed negative bias towards DCF method

Update on IASB Unit of Account progress

Specific requirements on “backtesting”

Minority interest / non-control investments

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Valuation – governance factors

A valuation is never ‘right’ unless sold on that day, but the reported valuation reflects the judgement of the valuer / house / board, hence a suitable control environment and level of documentation will drive the suitability of the value Policy and terms of reference

Preparation and review

Deal teams know the asset best

Finance teams have consistent approach and know IPEV

Internal challenge process / Valuation committee

Backtesting

Documentation

SEC interest and focus on cherry picking of multiples, EBITDA adjustments and changing valuation basis

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Valuation – current market factors PE valuation is the highest it has been since the GFC - are the existing

returns still achievable for 2015 / 2016 vintages? A number of high profile retail casualties as consumer trends change

(BHS, Austin Reed, Commit, Woolworths) Increases of high growth digital “Tech” funds / assets (KKR raised

c$700m & “the Whale”) Valuation basis other than traditional earnings basis A number of high profile recent transactions (Linkedin, SkyScanner,

Whatsapp)Brexit IPO exit routes are harder to achieve What level of discount should be applied to reflect current market

uncertainty? Weakening of the pound – direct impact on UK assets held in non

sterling funds, improved impact on exporters

Thank you

Ben HoneywoodDirector, AuditKPMG Channel Islands Limited+44 (0)1534 [email protected]

Changes to UK tax rules for PE executivesSinéad LeddyKPMG Channel Islands Limited

1. DIMF rules

2. Carry arrangements

3. Income-based carried interest

4. Changes to tax rules for non-doms

5. Concluding points

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DIMF rules ensure management fees charged to income tax

— Execs of the GP LP could allocate fees paid as a priority profit share by the fund LP to the GP LP

— What was ostensibly a fee for IM services was not taxed as a fee

— Commonly referred to as GP LP streaming. DIMF rules remove this planning

— Income tax 45% + NI 2%

— Applies to sums arising on or after 6 April 2015

— No grandfathering

— Carve-outs for carried interest and genuine co-investment arrangements

Fund Executives

Manager LLP

GP LP Carry LP

Fund LP

GP Co

Investors

Limited Partners

Limited Partners

Limited Partner

General Partner

General Partner

General Partner

Limited Partners

Management Agreement

Example 1

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Carry arrangements

Carry LP

— £1,000 distribution is made to investors - on an 80:20 split

— Investment team treated as receiving a distribution of £200, reduced by £20 (instead of 1p) representing their base cost

— Carry LP treated as if it had made 20% of the contribution to the fund

— In the past: investment team paid CGT at 28% on £180

— Now: CGT will be paid on £199.99

— Carry holders can no longer transfer investor’s base cost to themselves

InvestorsGP LP

Fund

Investment Team

Traditional 80:20 model

£0.01

£99.99

Example 2

https://www.google.com/url?q=http://www.clker.com/clipart-2333.html&sa=U&ei=KAueUpHvFYix0AWQxYCQDQ&ved=0CCUQ9QEwAw&usg=AFQjCNH4ScZRqBaWhxkqX80wEDacxufGnA








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How carried interest has been taxed since 8 July 2015

— Ensures individuals pay at least CGT rate 28%, on their full economic gain from carried interest

— Now carry holders can only deduct amounts actually paid on acquisition of a right to carried interest

— Remittance basis of tax now restricted for non-dom executives.

— Amounts paid need to be apportioned between UK and non-UK services (where duties are performed). Gains arise according to the location of where IM services performed, and not where assets based

— Legislation amended in October 2015 to make clear the rules apply to connected persons (e.g. companies / trusts / spouse)

— No grandfathering

— Offshore “blockers” no longer effective: except for non-doms

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Income-based carried interest

— From 6 April 2016, carried interest may also be taxed at income tax rates, depending on a fund’s investment strategy

— Holding period 36 months: income tax 47%— Holding period 40 months: CGT 28%

— Rules look at average investment holding period

— Calculation by reference to investments in relation to which the carry is calculated: can be complex

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Changes to tax rules for non-doms in the UK

— From 6 April 2017, non-UK domiciled individuals resident in the UK in 15 out of the last 20 years will be subject to UK tax on worldwide income

— Remittance basis no longer available

— Fundamental changes to the way non-domshave been taxed in the past

— HMRC guidance awaited on the detail

— Mixed fund cleansing “window” to 5 April 2018 to restructure bank accounts to bring funds into the UK

— PE execs considering the location of the performance of their duties

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Concluding points – all of these changes combined…

3 successive years of tax changes

The rules work together to cover the main types of reward a PE executive can receive from a fund

If performance-linked fees are not charged to income tax, the carried interest rules will apply CGT on the full amount of the economic gain to the executives

Management fees charged to income tax under the DIMF rules

Genuine co-investment continues as normal under CGT rules

UK-based executives will review current structures and consider their options

Thank you

Sinéad LeddySenior Manager, TaxKPMG Channel Islands Limited+44 (0)1481 [email protected]

Regulatory trends in the PE market placeOli MorrisKPMG Channel Islands Limited

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AIFMD

Third Country Approval – Equivalence (19 July 2016)— No significant obstacles impeding the application of the AIFMD passport to

Canada, Guernsey, Japan, Jersey and Switzerland;

— In relation to AIFs, no significant obstacles impeding the application of the AIFMD passport to AIFs in Hong Kong and Singapore. However, ESMA notes that both Hong Kong and Singapore operate regimes that facilitate the access of UCITS from only certain EU Member States to retail investors in their territories.

— No significant obstacles to the application of the AIFMD passport to Australia, provided the ASIC extends to all EU Member States the ‘class order relief’, currently available only to some EU Member States

— No significant obstacles to the application of the AIFMD passport to the United States (US). However, market access conditions for US funds marketing in to Europe may be less onerous than requirements for EU funds marketing in to the US. ESMA suggests, that the EU institutions consider options to mitigate this risk;

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AIFMD (cont.)— For Bermuda and the Cayman Islands, ESMA cannot give definitive Advice on

investor protection and effectiveness of enforcement since both countries are in the process of implementing new regulatory regimes and the assessment will need to take into account the final rules in place. For the Isle of Man ESMA finds that the absence of an AIFMD-like regime makes it difficult to assess if investor protection criteria are met

Third Country Passport?— In theory the EU Commission had 3 months from 19 July 2016 to issue

implementing measures

— Per discussion the documentation will be available by year end

— TAX - The EU is undertaking a review of its external taxation strategy, which will result in a revised scorecard for the assessment of third country tax regimes and the production of a new “tax haven” list scheduled for 2017 – Passporting is now stapled to meeting the scorecard criteria

— Brexit…

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AIFMD (cont.)

Other AIFMD issues— Not a great uptake from Non EU Managers for a Passport while NPPR continues

to work e.g. US

— BaFiN have confirmed they will close NPPR when a passport is issued.

— AIFMD Substance is still an issue – Substance continues to be a key issues for managers & boards also raised in BEPs

— European Investment Fund (EIF) commitment to Non EU Funds is becoming an issue.

— Disclosure: Remuneration, Annual Report & Annex IV

— No official Regulatory response re disclose of fees – but regulators watching with interest (ILPA Reporting template etc.)

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Other developments

GDPR— Provide citizens an increased level of control over their data— Improve protection of personal data, through the role of “processors and

custodians” of data— Increase regulatory oversight and supervision.— Severe penalties for non-compliance, including a fine up to €20m, or up to 4% of

the total worldwide annual turnover of the preceding financial year, whichever is higher.

Wider Political Reform— Trump administration yet to publish any meaningful Economic policies, — Netherlands mid March 2017— French Presidential elections in April & May 2017— German elections August – October 2017— Indian Presidential elections in 2017— Unknown impact on regulatory change & economic outlook

Thank you

Oli MorrisDirector, AdvisoryKPMG Channel Islands Limited+44 (0)1534 [email protected]

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Q&A

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Contacts

Nick StevensPartnerAudit, Jersey +44 (0)1534 [email protected]

Oli MorrisDirectorAdvisory, Jersey +44 (0)1534 [email protected]

Ben HoneywoodDirectorAudit, Jersey+44 (0)1534 [email protected]

Sinéad LeddySenior ManagerTax, Guernsey+44 (0)1481 [email protected]

mailto:[email protected]






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kpmg private equity forum · may 2014: “spreading sunshine in private equity” andrew bowden,...

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