legal & regulatory bulletin...venture capital fund managers across developing and developed...

At its May meeting in Washington, EMPEA’s Legal and Regulatory Council discussed the regulatory changes facing the private equity industry and the likely impact of those changes on the membership of EMPEA.

The Council concluded that some of the changes, such as the European Alternative Investment Fund Managers Directive (AIFMD), would impact the industry globally whilst others, occurring on the margins, still had potentially far-reaching implica-tions, such as the erosion of cross-border enforcement of arbitral decisions. Council Members believed that the changes would, in aggregate, impact the cost of managing and operating private equity firms in our markets. This issue of the Legal & Regulatory Bulletin addresses both those regulatory developments that we believe have a global reach as well as evolving fundraising and deal making conditions in markets where you, the EMPEA membership, are most active.

We start with an update on an important but perhaps poorly understood aspect of the AIFMD, namely the importance of cooperation between the European supervisory authority and its counterparts in other countries. SJ Berwin, an international law firm, apprises us of the status of current cross-border information sharing and enforcement arrangements, a pre-requisite to the eventual implementation of a passporting regime for marketing by non-EU managers or by EU managers’ marketing non-EU funds within the EU.

Moving south, ECP, a pan-African fund manager, provides guidance on how private equity dealmakers on that continent can contend with the complexity and diversity of local legal regimes and judicial environments. Colombian law firm Brigard y Urrutia then offers a perspective on that country’s prospects, not just as an emerging source of investor capital but also as an increasingly attractive investment destination.

Finally, in our annual Debevoise & Plimpton update on terms and conditions for emerg-ing market private equity funds, we see that the increasingly strong negotiating power that investors wield in a capital constrained world is yielding important changes in fund structures with potential long term ramifications for the conventional fund model.

We look forward to exploring the regulatory changes faced by and shaping our industry when EMPEA next convenes at its annual London events on 15th and 16th October 2013. Until then, we invite your comments and observations on the matters that are puzzling and concerning you. We’ll do our best to address some of those concerns in the next Bulletin.

In the meantime, enjoy your summers—we look forward to engaging with you again in the Autumn.

Sincerely, Mark Kenderdine-DaviesGeneral Counsel and Company Secretary, CDC Group plcChair, EMPEA Legal & Regulatory Council

A Publication of the Emerging Markets Private Equity Association

Issue No. 9 – Summer 2013

Legal & Regulatory Bulletin

Contents

ESMA Third Country Cooperation Arrangements under AIFMD .......................3

The Legal Challenges of Private Equity Deal Making in Africa ..................6

The Changing Landscape of Private Equity Fund Formation ...........................9

The Outlook for Private Equity in Colombia ...........12

EMPEA Fundraising Masterclass in Mumbai .....16

EMPEA Guidelines Update ..............................16

1077 30th Street NW, Suite 100 Washington DC 20007 USAPhone: +1.202.333.8171 Fax: +1.202.333.3162 Web: empea.org

About EMPEA

The Emerging Markets Private Equity Association (EMPEA) is an independent, global membership association whose mission is to catalyze the development of private equity and venture capital industries in emerging markets. EMPEA’s 320+ member firms share the belief that private equity can provide superior returns to investors, while creating significant value for companies, economies and communities in emerging economies. Our members include the leading institutional investors and private equity and venture capital fund managers across developing and developed markets. EMPEA leverages its unparalleled global industry network to deliver authoritative intelligence, promote best practices, and provide unique networking opportunities, giving our members a competitive edge for raising funds, making good investments and managing exits to achieve superior returns. EMPEA’s members represent nearly 60 countries and more than US$1 trillion in assets under management.

1077 30th Street NW • Suite 100 • Washington, DC 20007 USAPhone: +1.202.333.8171 • Fax: +1.202.333.3162 • Web: empea.org

EMPEA Team

Robert W. van ZwietenPresident & Chief Executive Officer

Jennifer ChoiVice President, Industry and External Affairs

Shannon StroudVice President, Programs and Business Development

Serge DesjardinsSenior Advisor

Phillip ReidFinancial Controller

Kyoko TeradaDirector, Membership

Holly FreedmanDirector, Marketing and Communications

Nadiya SatyamurthySenior Director, Consulting Services

Michael CaseyDirector, Consulting Services

To learn more about EMPEA or to request a membership application, please send an email to [email protected].

Maryam HaqueHead of Data and Analysis

Jeff SchlapinskiSenior Analyst, Research Department

Sam VerranSenior Analyst, Research Department

Molly BristerAnalyst, Research Department

Emily SandhausSenior Manager, Programs and Events

Carolyn KolbSenior Manager, Marketing and Communications

Aisha RichardsonExecutive Assistant to the President & CEO, Office Manager

EMPEA Legal & Regulatory CouncilMark Kenderdine-Davies (Chair) CDC Group plc

Benjamin Aller SJ Berwin

David Baylis Norton Rose

Carolyn Campbell Emerging Capital Partners

Folake Elias-Adebowale Udo Udoma & Belo-Osagie

Laura Friedrich Shearman & Sterling LLP

William Hay Baring Private Equity Asia

Kem Ihenacho Clifford Chance

Geoffrey Kittredge Debevoise & Plimpton LLP

Prakash Mehta Akin Gump Strauss Hauer & Feld LLP

Zia Mody AZB & Partners

John Morgan Pantheon

Peter O’Driscoll Orrick, Herrington & Sutcliffe LLP

Paul Owers Actis

Mara Topping White & Case LLP

Jordan Urstadt Capital Dynamics

Solomon Wifa O’Melveny & Myers

Disclaimer: This material should not be construed as professional legal advice and is intended solely as commentary on legal and regulatory developments affecting the private equity com-munity in emerging markets. The views expressed in this bulletin are those of the authors and not necessarily those of their firms. If you would like to republish this bulletin or link to it from your website, please contact Holly Freedman at [email protected].

EMPEA Legal & Regulatory Bulletin Summer 2013 3

ESMA Third Country Cooperation Arrangements under AIFMDBy Gregg Beechey, SJ Berwin

The European Securities and Markets Authority (“ESMA”) announced on 18 July 2013 that it has approved global supervisory cooperation arrangements between the secu-rities regulators of the European Union and their third country counterparts. The arrangements were negotiated by ESMA on behalf on the EU Member States, the additional three countries which make up the European Economic Area (Iceland, Liechtenstein and Norway) and Croatia, whose accession process completed on 1 July 2013 making it the EU’s 28th Member State.

What are these arrangements?Under the provisions of the Alternative Investment Fund Managers Directive (“AIFMD” or the “Directive”), the access of third country alternative investment fund managers (AIFMs) and alternative investment funds (AIFs) to European markets through national private placement regimes (or, from potentially 2015, through a pan-European passport regime) raises a number of challenges for EU regulators who want consistency in the regulatory protections afforded to professional investors based in the EU.

The AIFMD contains a broad framework for the regulation and supervision of such third country entities, including requirements for EU and third country regulators to enter into cooperation and exchange of information arrange-ments. The operational detail of these provisions was provided in the European Commission’s (the “Commission”) Level 2 Delegated Regulation No. 231/2013 (the “Level 2 Regulation”) which was issued in December 2013. The stipu-lated cooperation arrangements were required to be in place by the AIFMD’s implementation deadline of 22 July 2013.

Prior to the publication of the AIFMD in the Journal of the European Union in July 2011, the Commission sent a request to the Committee of European Securities Regulators (ESMA’s predecessor) requesting assistance in relation to the content of the Directive’s implementing measures, i.e., the Level 2 Regulation. In response, ESMA issued two con-sultations setting out its draft advice on these measures in summer 2011, the latter of which dealt with the various third country issues raised by the Directive including the required supervisory cooperation arrangements.

The advice contained in ESMA’s initial consultation on these issues did not distinguish between the potentially relatively light “systemic risk information only” provisions, which the

Directive makes clear could be appropriate as the minimum amount of information required before non-Directive pri-vate placement marketing could be permitted, and fuller information which could be appropriate if and when EU authorisation and passporting is available for third country AIFMs. Instead, ESMA applied the same standards to both and then added that any final decisions made on whether any additional safeguards will have to be place with respect to the third country passport would be made at a later stage. This issue was evidentially a point of contention for respondents to ESMA’s consultation paper as the report containing ESMA’s finalized advice (published in November 2011) addresses this matter, noting that while ESMA did consider whether to make such a distinction, it feels that systemic risk is sufficiently important to justify the exchange of the same level of information in both cases.

Following ESMA’s final advice, the Level 2 Regulation there-fore imposes the following requirements. The cooperation arrangements shall:

• be in writing; establish the specific framework for consultation, cooperation and exchange of information for supervisory and enforcement purposes between the EU and third country regulators;

• include a specific clause for the transfer of information received by an EU regulator from a third country regulator to other relevant entities, specifically other EU regulators, ESMA and the European Systemic Risk Board; and,

• establish all mechanisms, instruments and procedures required for:

° enabling EU regulators to have access to all information necessary for performance of their duties under the Directive;

° enabling on-site inspections to be carried out where required for the exercise of such duties; and,

° the third country regulator to assist EU regulators with the enforcement of EU legislation and national implementing legislation.

The language which imposes a duty on a third country regulator to assist EU regulators in taking enforcement action against a third country AIFM for breaches of “EU legislation” was a controversial aspect of ESMA’s initial consultation. The reference to the enforcement of EU legislation by EU

© 2013 Emerging Markets Private Equity Association4

regulators raises a number of legal and practical issues if it is intended to go beyond the provision of information of the kind envisaged by the International Organisation of Securities Commissions (“IOSCO”). Rather unhelpfully, the term was not actually defined in the consultation and so the scope of this power was initially very unclear with no guidance on how it would actually work in practice. Fortunately, ESMA took heed of the criticisms of respondents to its consultation paper who noted that the term was very broad and created uncertainty. Consequently, ESMA stated in its final report that it agreed with the respondents and had amended the advice to make clear that the breaches should be understood as relating to the AIFMD and its implementing measures.

Additionally, ESMA’s initial consultation was met by requests from respondents for further clarity on the responsibilities under the cooperation agreements of the EU regulatory authorities and their third country counterparts, specifically the precise remit of each regulator given the constraints of having to act within their respective national legislative frameworks. However, ESMA simply responded by stating that the allocation of responsibilities would be addressed during the negotiation of the cooperation arrangements and, as such, currently no further detail is available.

In addition to the cooperation arrangements required to address the marketing considerations outlined above, the AIFMD also requires such arrangements to be in place in order for an AIFM to assign its portfolio or risk management activities (as permitted under the Directive) to a delegate in a third country or in order to appoint a third country de-positary. There is some uncertainty as to why ESMA feels it is necessary to require a further written agreement between countries in this instance when both parties are already signatories to the IOSCO Multilateral Memorandum of Un-derstanding Concerning Consultation and Co-operation and the Exchange of Information of 2002 (“IOSCO MMoU”), al-though as noted above the scope of the arrangements under the Level 2 Regulation includes on-site visits and assistance in enforcement action which goes beyond the levels of co-operation envisaged by the IOSCO MMoU.

What form do these arrangements take?The supervisory cooperation agreements take the form of Memoranda of Understanding (“MoUs”) whose content is aligned with the IOSCO Principles on Cross-Border Supervi-sory Co-operation of 2010 and the terms and conditions of the IOSCO MMoU. The MOUs for the 38 individual agreements negotiated before the July 22nd deadline are available on ESMA’s website.

To ensure consistency of approach and avoid the proliferation of bilateral agreements, ESMA has consistently expressed a preference for a single agreement to be negotiated between

ESMA and the relevant third country regulators. The nego-tiations have progressed and concluded accordingly, however, it will now be up to the individual regulators in each EU Member State to decide precisely with which third countries they wish to enter into cooperation arrangements as it is the regulators themselves who will be responsible for the super-vision of the relevant AIFMs.

Which countries are included?Cooperation arrangements have been entered into with the following regulatory bodies: Alberta Securities Commission (Canada), Australian Securities and Investments Commission, Autorité des Marchés Financiers du Quebec (Canada), Bermuda Monetary Authority, British Columbia Securities Commission (Canada), British Virgin Islands Financial Services Commission, Capital Markets and Securities Authority of Tanzania, Capital Markets Authority of Kenya, Cayman Islands Monetary Au-thority, Comisión Nacional Bancaria y de Valores (Mexico), Comissão de Valores Mobiliários do Brasil, Commodity Futures

List of Countries/Authorities with

Memoranda of Understanding with ESMA

Albania (AFSA)

Australia (ASIC)

Bahamas (SC)

Bermuda (BMA)

Brazil (CVM)

BVI (FSC)

Canada (AMFQ)

Canada (ASC)

Canada (BCSC)

Canada (OSC)

Canada (OSFI)

Cayman Islands (CIMA)

Dubai (DFSA)

Guernsey (FSC)

Hong Kong (HKMA)

Hong Kong (SFC)

India (SEBI)

Isle of Man (FSC)

Israel (ISA)

Japan (JFSA)

Japan (MAFF)

Japan (METI)

Jersey (FSC)

Kenya (CMA)

Labuan (FSA)

Macedonia (SEC-FYROM)

Malaysia (SC)

Mauritius (FCSM)

Mexico (CNBV)

Montenegro (SEC)

Morocco (CDVM)

Pakistan (SEC)

Republic of Srpska (SC)

Singapore (MAS)

Switzerland (FINMA)

Tanzania (CMSA)

Thailand (SEC)

UAE (SCA)

US (CFTC)

US (OCC and FED)

US (SEC)

Note: as announced by ESMA on 18 July 2013.


Trading Commission (US), Conseil Déontologique des Valeurs Mobilières of Morocco, Dubai Financial Services Authority, Emirates Securities and Commodities Authority, Federal Reserve Board (US), Financial Services Commission of Mau-ritius, Financial Supervision Commission of the Isle of Man, Financial Supervisory Authority of Albania, Guernsey Finan-cial Services Commission, Hong Kong Monetary Authority, Hong Kong Securities and Futures Commission, Israel Securi-ties Authority, Japan Financial Services Agency, Jersey Finan-cial Services Commission, Labuan Financial Services Author-ity, Ministry of Agriculture, Forestry and Fisheries (Japan), Ministry of Economy, Trade and Industry (Japan), Monetary Authority of Singapore, Office of the Comptroller of the Currency (US), Office of the Superintendent of Financial In-stitutions (Canada), Ontario Securities Commission (Canada), Republic of Srpska Securities Commission, Securities and Exchange Board of India, Securities and Exchange Commis-sion (US), Securities and Exchange Commission of Montene-gro, Securities and Exchange Commission of Pakistan, Secu-rities and Exchange Commission Thailand, Securities Commission (Bahamas), Securities Commission (Malaysia) and Swiss Financial Market Supervisory Authority (FINMA).

Editor’s note: After the transposition deadline of 22 July 2013, non-EU managers in jurisdictions in which the financial services regulator has not signed a co-operation agreement with ESMA will not be permitted to market or manage alternative investment funds in the European Union.

What are the other private placement regime requirements?In addition to the requirement for supervisory cooperation agreements with third country regulators, non-EU AIFMs man-aging either EU or non-EU AIFs seeking to take advantage of the private placement regimes of EU Member States will nev-ertheless have to comply with certain obligations under the AIFMD. The level of compliance required is far less substantive than that required under the passporting regime for EU AIFMs.

About the Author

Gregg Beechey is a Partner with SJ Berwin specializing in financial markets.

Disclaimer: This material should not be construed as pro-fessional legal advice and is intended solely as commentary on legal and regulatory developments affecting the private equity community in emerging markets. The views expressed in this bulletin are those of the authors and not necessarily those of their firms. If you would like to republish this bulletin or link to it from your website, please contact Holly Freedman at [email protected].

Non-EU AIFMs are required to comply with the “transpar-ency requirements” of Articles 22, 23 and 24, i.e., the preparation of an annual report, the requirement to make certain disclosures to investors and the reporting obligations to the relevant EU regulatory authorities.

Additionally, in the event that a non-EU AIFM manages an AIF which acquires a substantial stake in an EU company, the portfolio company provisions will also apply. These require the non-EU AIFM to make a notification to the relevant regulatory authority, provide additional disclosure regarding the acquisition to its investors and comply with the Directive’s “asset stripping” provisions.

EU AIFMs marketing non-EU AIFs are also not required to comply with the Directive in its entirety, although their obligations are much more comprehensive than those of their non-EU coun-terparts. In practice this means that such entities must comply with the full AIFMD requirements with the exception of the provisions relating to the appointment of a depositary under Article 21 (since the relevant jurisdiction for the non-EU AIF may not recognise the depositary concept), although an inde-pendent party must still perform the duties of the depositary.

As mentioned above, it is expected that national private placement regimes will continue in most Member States until at least 2015 at which point a marketing passport is expected to be made available to non-EU AIFMs and EU AIFMs manag-ing non-EU AIFs. It is currently envisaged that the two regimes will then exist in parallel until 2018, providing a degree of choice about the level of compliance with the AIFMD.

“ The negotiations have progressed and concluded accordingly, however, it will now be up to the individual regulators in each EU Member State to decide precisely with which third countries they wish to enter into cooperation arrangements as it is the regulators themselves who will be responsible for the supervision of the relevant AIFMs.


The Legal Challenges of Private Equity Deal Making in AfricaBy Carolyn Campbell, Emerging Capital Partners

Private equity is a longstanding component of Africa’s eco-nomic landscape. However, strong growth, an expanding middle class, and a global trend that is seeing more investors seeking growth from a broader and more varied range of markets is driving an increased interest in the region. In 2007, Sub-Saharan Africa accounted for approximately 3% of total emerging market fundraising. By 2010, this had doubled to 6%. In 2013, 54% of LP respondents to an EMPEA survey said they were planning to begin or expand commitments in the region. With GDP growth rates well below 2% across most of the developed economies compared with annual growth of 5% or higher in many countries on the continent, Africa’s attractiveness as an investment destination is growing.

As well as Africa-focused fundraising, the total capital invested via private equity transactions in Africa has also con-tinued to rise over recent years. According to EMPEA’s 2012 industry statistics, total private equity investment in Sub-Saharan Africa grew by US$531 million between year-end 2010 and year-end 2012. In 2012, private equity investment in Sub-Saharan Africa reached approximately US$1.16 bil-lion, with a record number of GPs looking to capitalize on the possibility of high returns offered by the continent’s well documented growth prospects. So, with this increase of both investor appetite and capital flows towards the continent, it bears mentioning that firms looking to invest in Africa face a set of unique challenges in identifying and completing deals. One such challenge, which I will explore in this article, is the regulatory issues faced by international investors when completing and/or enforcing deals in Africa.

While Africa offers over 54 bodies of local law, most of these legal systems are strongly based on New York, English or French law. New York and English law provide the most flexible legal background for structuring private equity transactions, as those two bodies of law have been used in cross-border transactions around the world for over a century and have evolved considerably to accommodate the more highly complex transaction structures of recent decades. In terms of sheer volume of transactions histori-cally, the New York and English legal systems are at the forefront. Consequently, an abundance of New York and English-trained judges, arbitrators, barristers and lawyers can be easily found around the globe. Due to the lengthy history and sheer volume of transactions, the members of these two legal fields have more experience to draw from and more creative structuring to offer than their counter-parts in any other system.

New York law, in particular, allows for extreme flexibility in contracting with very few limitations on the parties’ freedom to contract. As jurisprudence has advanced, requirements of minimum contact have been relaxed allowing contract-ing parties broader freedom to choose New York law to govern their contracts. French law has a more limited his-tory in terms of volume of transactions and geographical scope, and while it nonetheless benefits from a longstand-ing tradition as a legal standard for private transactions, has certain limitations that restrict the parties’ freedom to structure certain desirable contractual remedies, such as the right to put shares back to a company. Similarly, UK law, by comparison to New York law, has attributes that can restrict a contracting party’s ability to execute on certain contract remedies that must be carefully navigated if that body of law is selected to govern a contract where the pri-vate equity investor’s exit rights are paramount.

It is often the case that the founders or sponsors of a local company in Africa will initially attempt to insist on local law as the governing law for the investment documenta-tion, on the basis that the transaction is being implemented locally. And indeed often local law is itself based on one of the main legal standards as described above. This could happen in Zambia for example, where the legal system is modeled closely on English law. However, in practice, using local law is extremely limiting and unfavorable to a foreign investor. In the event of a dispute, the parties would need to locate suitable legal experts specialized in the local law as it applies to complex private equity transactions. This is not only limiting but potentially impossible if the universe of such experts is too small. It may also expose the foreign investor to an intrinsic bias that might result from all the experts having a local perspective.

“ It is often the case that the founders or sponsors of a local company in Africa will initially attempt to insist on local law as the governing law for the investment documentation, on the basis that the transaction is being implemented locally.


When it comes to selecting a dispute forum, for the time being New York or London are to be preferred, with New York presently offering the greatest advantages to inves-tors. As well as the ready availability of experts, New York courts and arbitration panels are extremely expeditious. Most importantly, they are frequently prepared to extin-guish or “stay” a local proceeding. As between the courts and arbitration panel, generally speaking, an arbitration panel in New York applying New York law is preferable to the court, and the federal court in New York (assuming fed-eral jurisdiction can be established) being preferable to the New York state court.

An additional advantage of selecting New York and London as arbitration venues relates to an alarming trend of local shareholders attempting to thwart the agreed contrac-tual remedies and circumvent the agreed choice of law by launching local proceedings on sometimes tenuous grounds such as the “abusive nature of the contract” and general invalidity of contract. This is true even where local sponsors have had the benefit of being advised by sophisti-cated international legal counsel in the course of document drafting and negotiation. In such cases a foreign investor can find itself battling on two or even three fronts depend-ing upon how many local proceedings are attempted. It is of utmost importance that the arbitration forum selected for dispute resolution have precedent experience in allow-ing the arbitration panel to stay these other proceedings and compelling the parties to respect their contractually agreed bargain. If a less proven dispute resolution forum is selected, a foreign investor may find itself thwarted simply because the cost and time elements involved in the multi-jurisdictional proceedings are too prohibitive. New York panels routinely issue these types of “pro-active” stays, and until recently London equally did so.

Equally important is a dispute forum’s willingness to not agree to stay a private equity investor’s right to enforce its negotiated contract breach remedies based on spe-cious local sponsor claims. This in part will be determined by the forum’s threshold standard applied for granting such a “defensive” stay. The preferable forum will apply a higher threshold and will demonstrate a greater intolerance for local sponsor claims that would attempt to circum-vent the investor’s benefit of the bargain negotiated in an arm’s length transaction. An example of forum shopping for a favorable court can be seen in IPCO (Nigeria) Limited (IPCO) v. Nigerian National Petroleum Corporation (NNPC). In 2004, IPCO received a US$152 million award from a domestic Nigerian arbitral tribunal. NNPC, the local com-pany, appealed the award to the Nigerian High Court in hopes of having the award overturned; meanwhile IPCO—a subsidiary of a Hong Kong registered company—sought enforcement of the award in the British High Court. After

numerous delays in the Nigerian court, in 2008 the British court ruled that the payment of the arbitration award could not continue to be delayed do the local court’s continual delays. The British court ordered that US$50 million of the award be paid immediately.

With all this is mind, foreign investors should favor New York law and venue as the preferred arrangement, with UK law a close second. Although French law and arbitration enjoys a deeply embedded tradition of being a legal stan-dard for PE transactions, it has not proven in recent time to be consistent in backing the rights of foreign investors. It has been noted that French panels are more reluctant to issue the types of stays described above, and they are also often more willing to open the proceedings to notions of fairness which may well result in a contractual bargain appearing particularly onerous in retrospect.

One solution, if an investor has no option but to agree to a jurisdiction other than New York, is that they should add a clear provision to the effect that the arbitrators are required to make the award, and any other decisions or rulings, strictly according to the governing law and not ex aequo et bono or as amiable compositeur, and shall not decide the dispute by reference to any other doctrine or practice that would permit them to avoid the contract in question or the governing law thereof.

It should be noted, however, that in some circumstances local law must be deferred to. These include listing on a local stock exchange, operating according to a concession agreement or matters of corporate governance where local legal entities are involved. In such circumstances, local law will be the reference legal body. However, the freely-negotiated contracts underpinning the other aspects of the investment

“ When it comes to selecting a dispute forum, for the time being New York or London are to be preferred, with New York presently offering the greatest advantages to investors. As well as the ready availability of experts, New York courts and arbitration panels are extremely expeditious. Most importantly, they are frequently prepared to extinguish or “stay” a local proceeding.


may still look to laws beyond local law. Moreover, very often once the listing is achieved and the investor’s shares are freely tradable, the shareholders agreement falls away, which would have been negotiated in advance of the listing. Local law is often required to be used for an agreed-form subscription agreement, but that does not prevent the parties from agreeing to additional terms outside such local law-governed subscription agreements that are governed by New York or English law and that augment the rights of the investor.

In summary, we can see that with reported return multiples of 2.5 times on investment, the potential for attractive returns for PE investors in Sub-Saharan Africa is high. Unsurprisingly, these return multiples are capturing the attention of a growing number of international investors keen to capitalize on the continent’s impressive growth trajectory. In committing to opportunities in Africa, however, PE firms must be prepared to act with levels of flexibility, tenacity and resourcefulness that other markets might not demand. This includes attention to detail, the ability to think laterally and readiness to respond quickly to obstacles, regulatory and otherwise, which may not be familiar challenges when operating and investing in the developed markets. In order to do this effectively, the PE manager must have a strong understanding of international standards of best practice as well as a deep knowledge of and penetration within the local market.

About the AuthorCarolyn Campbell is a Partner and General Counsel at Emerging Capital Partners, a pan-African private equity investor head-quartered in Washington DC. The views expressed are her own.

Disclaimer: This material should not be construed as pro-fessional legal advice and is intended solely as commentary on legal and regulatory developments affecting the private equity community in emerging markets. The views expressed in this bulletin are those of the authors and not necessarily those of their firms. If you would like to republish this bulletin or link to it from your website, please contact Holly Freedman at [email protected].

“ Local law is often required to be used for an agreed-form subscription agreement, but that does not prevent the parties from agreeing to additional terms outside such local law-governed subscription agreements that are governed by New York or English law and that augment the rights of the investor.


The Changing Landscape of Private Equity Fund FormationThe pillars of the conventional fund model in emerging markets remain largely unchanged, however the wave of regulation globally and continuing evolution in LP-GP dynamics are yielding some important shifts in fund terms and structures with implications for governance and opera-tions at the fund level. On 25 June 2013, EMPEA co-hosted a Professional Development Webcast with Debevoise & Plimpton on The Changing Landscape of Private Equity Fund Formation. The summary below highlights some of the trends in fund terms, structures and regulatory devel-opments discussed by Debevoise Partners Marwan Al-Turki, Jennifer Burleigh and Peter Furci.

Trends in Fund Structures On the whole, fund structures for the emerging markets continue to be primarily limited partnerships domiciled through offshore tax-efficient jurisdictions, such as the Cayman Islands, Mauritius and Cyprus. According to Debevoise Partner Peter Furci, limited partnerships remain the preferred model because “they lend themselves to the basic economics and governance arrangements that are typical to private equity funds,” including limiting the liabil-ity of the investors in the fund for any losses over and above their capital commitments, as well as affording flexibility in the economic terms of a given deal, unlike the fixed capital structure of a corporation.

Managers investing and operating funds across multiple coun-tries typically do so via sub-advisers in individual countries, or via a holding company located in a bilateral treaty jurisdic-tion. In determining the optimally tax-efficient structure for a fund, managers take into account investors’ tax liabilities within their home jurisdictions including those required to operate through feeder funds. In the case of funds of funds, negotiations present particular challenges as a single LP may require a manager to accommodate a wide array of tax structuring needs. Fund structures must also account for the liabilities for individuals sharing in the economics of the fund, i.e., the treatment of carried interest income for investment professionals based on where they’re located.

One of the most important tax considerations for both local teams and funds pooling domestic and international capital is permanent establishment treatment. For single country funds where the teams are physically based in the same places where they invest, the onshore team’s discretionary authority is often limited with final investment decisions relegated to an Investment Committee based offshore, e.g., an India-based team will have an Investment Committee

that meets in Mauritius to approve or reject proposed investments. In such cases, it is advised that the deal team is a subset of a larger group offshore, for instance in the US or London. For single country funds where the team is entirely local, it’s generally harder to solve for the avoid-ance of permanent establishment tax treatment through use of an offshore affiliated entity serving in an Investment Committee capacity.

For single country funds that are investing capital on behalf of both international and domestic limited part-ners, and where local investors are subject to limitations on “roundtripping” via a third country jurisdiction, two par-allel vehicles—onshore and offshore—are typically used. However, Furci cautions that if the two respective invest-ment committees are agreeing to and investing in the same deals, it could call into question the robustness of the off-shore investment committee for the purposes of avoiding treatment as a permanent establishment onshore.

Perhaps the single greatest change underway to the con-ventional fund structure is the rising use of co-investment and parallel funds. One key difference between the two structures is that a co-investment vehicle can invest at reduced fees and carry terms in any particular deal, and may have more flexibility in terms of exit timing, while a parallel fund invests and exits at the same time and in every deal, rather than cherrypicking, and shares in all investment and indemnification expenses.

Key Regulatory Developments Fund Marketing RulesIn most cases, regardless of where the investors are based or the jurisdiction in use, the same considerations apply —managers marketing funds to investors across multiple jurisdictions to accommodate for the tax profiles of various investors should be aware of what actions will constitute a public offering in some countries or trigger registration requirements in others.

“One of the most important tax considerations for both local teams and funds pooling domestic and international capital is permanent establishment treatment.


Effective July 22nd, Europe became a different story. Whereas until now private placement regimes allowed rela-tively unregulated access to institutional investors there, the Alternative Investment Fund Managers Directive will introduce an entirely new layer of regulation for managers marketing funds in Europe. Existing EU-based fund man-agers must apply for authorization under the Directive by mid-2014, but the regime for non-EU managers and funds is not yet clearly defined, and some countries may opt to extend existing private placement regimes, phasing them out by 2019.

Anti-Bribery RulesStepped up enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) and stricter provisions introduced to the UK Bribery Act have far-reaching implications for private equity investors. U.S. rules prohibit the making or prom-ise of payments to any foreign official, broadly defined, in order to influence an official decision to act or not act, or otherwise secure some kind of improper advantage. Notably, U.S. rules include an expansive definition of “U.S. conduct,” going so far as to include any email or phone call coming into the U.S. In addition, monies flowing through U.S. banks can also fall subject to this act.

The U.K. Bribery Act is slightly more expansive than the FCPA, with one key difference being that it extends beyond merely public officials; it also includes bribery by any “asso-ciated persons” affiliated with any company “carrying on business” in the U.K., regardless of where the bribe is paid. Additionally, the Act includes a strict liability corporate offence, meaning that a corporation will be held liable for the acts of its officers and employees. The only permissible defense for a corporation so charged is the demonstration that sufficient anti-bribery protocols are in place and that those policies have been adequately communicated and enforced. Notes Debevoise Partner Jennifer Burleigh, “It’s crucial to have both the training and the documentation—in addition to having a program in place, you must have a paper trail that demonstrates the program is being com-plied with.”

To ensure they don’t run afoul of these rules, private equity firms are advised during the fundraising process to screen prospective investors carefully for affiliations with gov-ernment entities. In cases where imperfect visibility into a market requires consultants to aid with deal sourcing, private equity firms should evaluate carefully how the con-sultant is being compensated and the uses for those funds. Use of third parties can be problematic generally, particu-larly under the U.K. law, as a sponsor can be tagged with the misdeeds of any agent used.

The standard for liability under the FCPA is knowledge, though "knowledge" is broadly interpreted to include con-scious avoidance or deliberate ignorance of the actions being taken. Burleigh notes that the key is to “know local practices within each jurisdiction, including permitting, and to also be familiar with any and all government touches for the industries in which you invest.” She additionally recom-mends that private equity firms conduct risk-based due diligence on all counterparties, with particular attention to any governmental ownership, and that the representations and warranties language in any counterparty negotiation include the ability to review policies and compliance records to ensure no corruption violations are taking place.

Due to the interplay between the two regimes and the broad jurisdictional reach, chances are quite good that any corrupt act will be picked up by at least one of the two sets of rules.

Terms and ConditionsBased on a sampling of 123 funds from the Debevoise IMG Database, spanning emerging and developed PE markets, many aspects of the conventional fund model are largely unchanged. A 10-plus-two year term and a five-year investment period remain the norm, although there has been some movement towards the outer limits. Management fees, by and large, remain close to 2% for the majority of funds, although it is more common, and more palatable to investors, to see a higher management fee for an emerging market fund, due to smaller fund sizes and the increased level of due diligence required. Other key terms, such as key person clauses and no fault termi-nation have become nearly universal if rarely exercised.

“It’s crucial to have both the training and the documentation —in addition to having a program in place, you must have a paper trail that demonstrates the program is being complied with.

“...a co-investment vehicle can invest at reduced fees and carry terms in any particular deal, and may have more flexibility in terms of exit timing, while a parallel fund invests and exits at the same time and in every deal, rather than cherrypicking, and shares in all investment and indemnification expenses.


Distribution continues to take two forms: the European or “all capital back” waterfall wherein all capital is paid back before any carried inter-est is paid, and the US deal-by-deal model, with emerging market funds more often falling in the “all capi-tal back” waterfall camp. Whereas there’s been little movement in basic terms, in line with the diversification in structures there are an increasing number of alternative arrangements being offered, such as lower fees or blended fee rates, and occasionally lower carried interest rates for par-ticipation in first closing (sometimes called “early bird discounts”) or for making larger commitments.

A replay of EMPEA’s Professional Development Webcast co-hosted with Debevoise & Plimpton on The Changing Landscape of Private Equity Fund Formation, featuring insights from Partners Marwan Al-Turki, Jennifer Burleigh and Peter Furci, can be accessed through the EMPEA website at www.empea.org/events-education/webcasts/.

Featured Contributors

Terms: Distributions Distribution waterfall

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Disclaimer: This material should not be construed as professional legal advice and is intended solely as commentary on legal and regulatory developments affecting the private equity community in emerging markets. The views expressed in this bulletin are those of the authors and not necessarily those of their firms. If you would like to republish this bulletin or link to it from your website, please contact Holly Freedman at [email protected].

Marwan Al-Turki is a Partner in Debevoise & Plimpton's London office. Jennifer Burleigh is a Partner in Debevoise & Plimpton's New York office.

Peter Furci is a Partner in Debevoise & Plimpton's New York office.

Source: Debevoise IMG Database.

Source: Debevoise IMG Database.


Overview of the Colombian Regulatory LandscapeDuring the last decade, stable economic growth, high-impact political and economic reforms together with impressive improvements in security and investor protec-tions have drawn the spotlight to Colombia. Gross domestic product has grown an average of 4.7% annually over the past 10 years1 and foreign direct investment increased 10.9% in 2012, exceeding an all-time record of US$15 billion.

Improvement in Colombia’s economic indicators is creating a more favorable climate for foreign investments, which also draws on a strong institutional legacy: the country has never defaulted on its foreign debt, it has suffered only one reces-sion in nearly a century (1999) and has an unusually long democratic tradition compared to its peers in the region with only one military government since 1880, from 1953 to 1957. In recent years, President Juan Manuel Santos has opened a formal “peace process” with the Revolutionary Armed Forces of Colombia (FARC) and has enacted strong policies against organized crime and corruption following Alvaro Uribe’s double presidency that brought confidence back to international investors. Peace with FARC would gently benefit Colombia’s economy, as it would engender even greater confidence in the country and stability in its international relationships. All these attributes have been highlighted by The Economist Intelligence Unit, which listed Colombia among the promising “CIVETS” countries poised for fast economic growth on par with the BRIC countries.2

Colombia is prepared to seize this opportunity, with trans-parent and reliable rules regarding investment protection. The country participates in 6 Investment Protection Treaties (IPTs) and 5 double taxation treaties with important eco-nomic partners.3 Besides commercial agreements with major Latin American markets and Canada, Colombia’s Free Trade Agreement (FTA) with the US has been in place since May 2012 and an FTA with the EU entered into force in July 2013. The World Bank’s 2013 Doing Business Report ranked Colombia 45th out of 185 countries overall but 6th in terms of investor protections, scoring 86.3 out of 100 points in that category, reflecting for example Colombia’s heavy restrictions against expropriation and requirements for fair compensation to private investors.4

Recent reforms have reinforced the sentiment that Colombia is on the right track: in 2011 Congress enacted the Anticorruption Statute (Estatuto Anticorrupción) stipulating very strong pro-hibitions against corruption in the public and private sectors. Reforms are also anticipated to Colombia’s social security and pension schemes as is an overhaul of the judiciary system, aimed at providing greater transparency and efficiency.

Infrastructure investment is another area that has been the target of reform. Congress enacted in 2012 the first law for Public-Private Partnerships (Asociaciones Público Privadas), articulating clearer rules for private sector participation in infrastructure projects, which is crucially important in light of the estimated US$44 billion needed for connectivity and logistics integration.

Private Equity Regulatory OutlookFrom a legal perspective, Colombia’s private equity regu-lations are well developed and are contributing to the development of a robust domestic industry. The fondos de capital privado regime has been in place since 2007 when domestic pension funds were allowed to invest in private equity and pooled fund structures. In 2013 Colombia signifi-cantly enhanced its standing in the annual LAVCA Scorecard which rates the attractiveness of Latin American countries for private equity, rising from 42 to 61 points (out of 100) and ranking as the fourth strongest environment in Latin America for the development of private equity.5 In addition, the Ministry of Finance recently issued a reform of Decree 2555 (2010) to reduce operational concerns and facilitate custody and investment management services for pooled funds and private equity funds. This reform is expected to elevate the domestic industry’s sophistication to international standards.

The structure of local private equity funds is consistent with global market practice, having a similar general-limited part-ner structure, and with an additional administration figure in charge of a local supervised financial entity (mainly for back office purposes). General partners do not have to be registered companies but must demonstrate at least five years of experience in managing private equity investments. Regarding their incorporation process, private equity funds are not subject to the prior approval of the local regula-tor and required only to file certain documents with the Colombian Superintendent of Finance.

The Outlook for Private Equity in Colombia By Luis Gabriel Morcillo and Lyana De Luca, Brigard & Urrutia Abogados

1. Source: IMF.2. Source: http://www.investincolombia.com.co/newsletter/622-the-colombian-economy-between-the-strong-and-the-powerful-the-economist.html. CIVETS = Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa.3. Colombia has entered into IPTs with China, India, United Kingdom, Belgium, The Republic of Korea and Japan and double taxation treaties with Canada, Spain, Chile, Switzerland, and is part of the Comunidad Andina de Naciones CAN. 4. Source: http://english.doingbusiness.org/data/distance-to-frontier. 5. The Latin America Venture Capital Association (LAVCA) Scorecard on the Private Equity and Venture Capital Environment in Latin America and the Caribbean, available at www.lavca.org.


Sampling of Private Equity Funds Investing in ColombiaPE Firm Fund Focus

Teka Capital Teka Capital I Growth

Ashmore Management Company Colombia Ashmore Colombian Infrastructure Fund I FCP Infrastructure

Latin America Enterprise Fund Managers (LAEF)

Colombian Investment in Hydrocarbons Fund III (PROJECT INVESTMENTS)

Growth

ACON Investments, LLC ACON Latin America Opportunities Fund Growth

CoreCo CoreCo Central America I Growth

Altra Investments Altra Private Equity Fund II Buyout

Axon Partners Group Amerigo Ventures Colombia Venture Capital

Altra Investments Altra Private Equity Fund II Buyout

Brilla Group Bricapital Colombia Private Equity Fund Growth/Real Estate

MAS SEAF Equity Partners Fondo MAS Colombia Latam Buyout

Terranum Capital Terranum Capital Colombia Fund Growth/Real Estate

Source: Emerging Markets Private Equity Association. Data as of 30 June 2013. Published 29 July 2013.

Sampling of Private Equity Investments in Colombia, 2012- 2013PE Firm Investor Company Sector

Sociedad Gestora Valorar Futuro Mejisulfatos Agribusiness

Sociedad Gestora Valorar Futuro Laboratorios Higietex Industrials & Manufacturing

Teka Capital Inverdesa (Bodytech) Consumer

Nexus Group Empaques Flexa Industrials & Manufacturing

IFC Asset Management Company (AMC) PetroNova Oil & Gas

Southern Cross Group Sociedad Portuaria Regional de Barranquilla (SPRB)

Ports, Waterways, Shipping

Ashmore Management Company Colombia Promitel (Promigas Telecomunicaciones)

Telecom & Internet Infrastructure

Kandeo Acercasa Banking & Financial Services

Advent International Alianza Fiduciaria Banking & Financial Services

CIPEF and ACON Vetra Oil & Gas

Meso america OMA & Toscafe Food & Beverage

Source: Emerging Markets Private Equity Association. Data as of 30 June 2013. Published 29 July 2013.

PE FundraisingLocal private equity funds raise capital primarily from insti-tutional investors (pension funds and insurance companies) but the number of private investors, family offices and other financial institutions are steadily increasing. In most cases, fund raising among local institutional investors is conducted directly by Colombian and foreign general part-ners, although use of placement agents is rising. Among domestic institutional investors, an estimated US$3 billion

is available to be deployed to both local and international private equity funds, with less than US$1.2 billion allocated to date. Colombian pension fund assets are increasing by an average of 25% annually, and total AUM is estimated to be US$60 billion as of June 2013.

Regarding international pooled funds (generally UCITS, SICAVS, private equity, hedge funds and mutual funds), offshore general partners are able to market and distribute their interests to local mandatory pension funds, voluntary


COUNTRY 2008 2009 2010 2011 2012 1H 2013 TOTAL INVESTED (US$m)

Brazil 3,020 989 4,604 2,461 4,384 689 16,146

Chile 929 40 298 3 248 290 1,809

Peru 1,400 7 2 0 N/A 0 1,409

Colombia 123 10 612 376 115 N/A 1,236

Carribbean 950 42 53 0 0 50 1,095

Mexico 455 67 150 128 69 118 987

Argentina 85 151 525 89 65 6 920

LatAm Regional Inv. 0 0 405 4 0 409

Central America (Ex-Mexico) 0 11 1 174 73 65 323

Other South America* 0 1 0 11 5 0 16

Latin America 6,962 1,318 6,648 3,245 4,959 1,218 24,350

“Despite being a recently young industry, Colombian managers have already produced a number of interesting success stories, earning the respect of local and international players alike.

* Includes Ecuador, Guyana, Paraguya, Uruguay, Venezuela Source: Emerging Markets Private Equity Association. Data as of 30 June 2013. Published 29 July 2013.

pension funds, severance funds and insurance companies. However for these entities to invest in offshore PE vehicles, the law provides for specific requirements: the fund’s man-ager must be located in an investment grade jurisdiction, the general partner or its representatives must have at least five years of experience in managing private equity assets and either the general partner or the administrator of the fund shall credit at least US$ 1 billion in assets under man-agement, among others.

International managers are increasingly establishing a local presence for both capital raising and investment purposes, many of which have incorporated both on and offshore vehicles operating via co-investment structures.

For Colombian pension funds the alignment of interests is crucial. All fund documents are expected to adhere to global standards of practice regarding specific provisions around transparency in the administration of the fund s portfolio, particularly in relation to advisory committees, capital calls, investment reports, AML and KYC requirements, indemni-ties and limitation of responsibilities.

Despite being a recently young industry, Colombian manag-ers have already produced a number of interesting success stories, earning the respect of local and international players alike. Locally managed fund ALTRA II recently raised more than US$330 million for investments in the region and other players as Laefm, Tribeca, MAS SEAF, Terranum and Teka have drawn the interest of local and international institu-tional investors as well.

In general, Colombian regulations do not require the international investment vehicle or the general partner to be registered with the Superintendent of Finance, but distributors and investment managers must comply with certain marketing and promotion restrictions in undertaking such activities.

Competitive taxation regimeWith respect to tax regulations, the local private equity indus-try benefits from some competitive advantages that serve to attract foreign investment. Carried interest income is treated as capital gain and not ordinary income and is generally sub-ject to a tax rate of 10%. In addition, the fund itself is not subject to income tax (“Transparency Principle”) and there-fore distributions to the investors are taxed as direct gains of the investors depending on whether they are Colombian or offshore residents and particularly depending on the taxes being paid by each of the underlying assets of the fund.

Latin America PE Investment (US$m) by Country, 2008–1H2013


* Includes Ecuador, Guyana, Paraguya, Uruguay, Venezuela Source: Emerging Markets Private Equity Association. Data as of 30 June 2013. Published 29 July 2013.

About the Authors

Luis Gabriel Morcillo is a Director at Brigard & Urrutia Abogados in Colombia.

Lyana De Luca is an Associate at Brigard & Urrutia Abogados in Colombia.

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OutlookColombia’s private equity industry is expanding and becoming more sophisticated thanks to notable strides in investor protection and regulations consistent with international standards. Sophisticated local investors managing sizeable and growing pools of capital are familiar with international guidelines and ready to invest both onshore and offshore,

demonstrated by the volume of international managers flocking to Colombia in search of new pools of capital. But Colombia offers more than just new fundraising prospects for overseas managers. With its professional and regulated industry, sophisticated and well trained individuals and depth of opportunities yet to be discovered, Colombia presents an attractive investment option for domestic and international investors alike.


In June 2013, EMPEA took the EMPEA Fundraising Masterclass program to Mumbai. Presented with AZB & Partners, BerchWood Partners and Debevoise & Plimpton LLP, and in collaboration with the Indian Venture Capital Association and the University of Chicago Booth School of Business, the Masterclass travelled to India to arm local fund managers with proven fundraising tools and best practices. Discussions covered practical advice such as how to best position a fund in front of LPs and how to engage with LPs new to oppor-tunities in India. Participants and panelists delved into how

to frame for LPs certain challenging macro elements of the Indian market and questions about track record. Faculty also addressed the range of market terms, LP/GP pressure points and fund structuring strategies. This Masterclass also featured our inaugural "Perfect Pitch" session, in which attendees presented a two minute “elevator pitch” on their fund to a panel of expert judges who provided feedback. For more information about EMPEA’s Masterclass Series, please visit http://www.empea.org/events-education/training/em-pe-fundraising-masterclass/.

EMPEA’s Fundraising Masterclass in Mumbai

Guidelines Presentation at OPICSeveral members of EMPEA’s Legal & Regulatory Council met on May 13th with representatives from OPIC’s in-house legal group and Investment Funds and Risk Insurance departments to present the EMPEA Guidelines. Discussants included Jordan Urstadt, Capital Dynamics; Solomon Wifa, O’Melveny & Myers; Mara Topping, White & Case; Laura Friedrich, Shearman & Sterling; and Carolyn Campbell, Emerging Capital Partners.

The conversation focused on the relevance of the Guidelines to OPIC’s operations as a lender, as opposed to a tradi-tional fund investor, as well as their applicability to OPIC’s investment program. Panelists stressed that the Guidelines were meant to be universal recommendations that would allow private investment to thrive in any market, not just the emerging markets, noting in particular the importance

of being able to convince particularly minority investors that their interests will be protected, that their capital will be invested in a commercially viable way that allows for maximizing returns, and that their capital will ultimately be returned because the terms of a deal will be enforceable.

EMPEA Legal & Regulatory Guidelines Update

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