At the end of July 2024, the Institutional Limited Partners Association (ILPA) issued guidance on the use of NAV financing in private equity funds. The guidance focuses on increasing dialogue and transparency levels between sponsors (GPs) and investors (LPs) about the use of NAV financing. The guidance makes six recommendations, including the following. 

• From now on, fund limited partnership agreements (LPAs) should expressly address the use of NAV financing.
• If an existing LPA is silent on NAV financing: 

1.  the GP should seek the consent of the LP advisory committee (LPAC) before undertaking a NAV financing; and 
2. LPs should proactively engage with the GP to see if the GP has previously interpreted the LPA as permitting NAV financing and, if so, whether it has included or excluded the NAV financing from the LPA restrictions on fund-level borrowings.

For a more detailed summary of the guidance and the six recommendations, plus a link to a note on the key tax and structuring considerations for a NAV financing, please see our article “NAV financing in private equity strategies: ILPA issues guidance”.

We noted in our previous Radar that the SEC had fined a private fund sponsor for recordkeeping failures, specifically with respect to its personnel using “off-channel communications” (i.e. private messaging, such as WhatsApp). 

The SEC recently announced action against a further 26 firms – a mix of broker-dealers and investment advisers – for similar failings. According to the SEC’s press release, its investigations “uncovered pervasive and longstanding use of unapproved communication methods, known as off-channel communications” and, as a result, records that those firms should have been retaining under US securities laws were not being maintained and preserved. 

This clearly remains a focus area for the SEC and one in which it is ready to take enforcement action. Private fund sponsors, especially those with US registered investment advisers in their group, should review their policies and procedures relating to US recordkeeping requirements and remind their personnel of the perils of using personal devices and private messaging for work-related discussions. 

The new UK Government ran a call for evidence over the summer, inviting views on its plans to reform the tax treatment of carried interest. The call for evidence closed on 30 August 2024. 

In this context, we published two papers: the first outlining the current UK regime and international comparators and examining the possible options for reform; the second explaining how the UK currently receives an out-sized share of total European carried receipts. You can access both papers here.

Within a week of the general election, the UK Government announced its intention to establish a National Wealth Fund (NWF). The Government’s plan is for two existing public finance institutions – the UK Infrastructure Bank and the British Business Bank (BBB) – to operate under the NWF umbrella, with a renewed focus on investments in decarbonisation technologies.

As we noted in a short post, the BBB has been a significant investor in private funds investing in or lending to UK SMEs (UK SME funds). It is not yet clear what impact, if any, the establishment of the NWF will have on BBB’s current or future allocations to UK SME funds, or indeed what mandate the NWF will have to invest via third-party managed funds, as opposed to providing direct investment. 

Full details on how the NWF will operate and its investment parameters are expected to be released ahead of the Government’s international investment summit (expected to be held this autumn). For a more detailed discussion of the NWF (including its objective, how it should invest, how it should be constituted and how it should be managed), see our paper on our dedicated Private Capital Solutions website.   

The FCA has conducted a review of how UK firms treat customers/investors who are politically exposed persons (PEPs). Private fund sponsors will be familiar, from their investor AML/KYC and onboarding processes, with the requirements to undertake enhanced due diligence on investors who are PEPs (or family members or associates of PEPs) or who are beneficially owned by PEPs (or their family members or associates). 

The FCA review reminds firms, including private fund sponsors, that when looking at UK PEPs (that is, PEPs entrusted with prominent public functions by the UK): 

• the starting point is that UK PEPs present a lower level of risk than non-UK PEPs; and
• unless there are other enhanced risk factors present, the extent of enhanced due diligence measures to be applied in relation to a UK PEP is less than that to be applied in relation to non-UK PEPs.

This position was hardwired into the UK AML regime in January 2024 by the Money Laundering and Terrorist Financing (Amendment) Regulations 2023.

The FCA expects all firms to ensure that “[their] current arrangements […] reflect the legislative position […] which makes clear that UK PEPs […] should be considered as presenting a lower level of risk if no enhanced risk factors are present”. 

Consequently, sponsors subject to the UK AML regime should review their AML/KYC and investor onboarding procedures in line with the FCA’s expectations; in particular, they should ensure that they do not adopt a “one-size-fits-all” approach when it comes to PEPs and that they distinguish between UK and non-UK PEPs. 

The CSSF announced in July 2024 that it had fined a Luxembourg authorised alternative investment fund manager (AIFM) for non-compliance with several obligations imposed by AIFMD. 

Of note, the CSSF found that, amongst other failings, the AIFM: 

• did not conduct its own diligence and instead “relied entirely on its investment advisor for the due diligence of the transactions”; 
• “did not perform a formalised conflict of interest review […] for each transaction”;
• “did not conduct formalised ex-ante investment restrictions checks on the investment transactions”; and
• “did not comply with the requirements regarding the monitoring of delegates […] the AIFM was not able to demonstrate that the delegate is qualified and capable of undertaking the functions in question, that it was selected with all due care and that the AIFM is in a position to monitor effectively at any time the delegated activity”. 

This case serves as a reminder to private fund sponsors to ensure their fund structures are appropriately designed and operated. Sponsors have become accustomed, particularly since Brexit, to their advisory and/or delegation arrangements being subjected to heightened regulatory scrutiny (even more so where those arrangements span both UK and EEA jurisdictions); this CSSF action emphasises that sponsors with EEA AIFMs must ensure they continue to perform their functions robustly and with substance.

A report by Mario Draghi (“The future of European competitiveness”), undertaken at the request of the European Commission, was published on 9 September 2024. 

Amongst other recommendations, and specifically in the context of private capital, the report calls for ESMA (the European Securities and Markets Authority) to “transition from a body that coordinates national regulators into the single common regulator for all EU securities markets”. 

The report anticipates that “[t]urning national security market regulators into subsidiaries of a single, EU-wide one will face fierce resistance, not only by the national bureaucracies that will feel directly displaced, but also by […] market participants who draw sizeable rents from the status-quo fragmentation”.

The report goes on to envisage that a newly-supreme ESMA would assume responsibility (from national regulators such as the CSSF in Luxembourg and the CBI in Ireland) for the regulation of mutual funds. 

Alternative investment funds – the category into which private funds fall – are not referred to in the report.  However, given:

• the recent trend by the EU to seek to harmonise the regulation of mutual and private funds; and 
• increasing drives by private fund sponsors to “retailise” the private capital offerings, 

private fund sponsors may in the future find their EU operations and interactions increasingly subject to centralised supervision by ESMA, rather than at national level by, for instance, the CSSF.  

The Australian Securities and Investments Commission (ASIC) has extended the “sufficient equivalence” and “limited connection” reliefs by a further 12 months. 

These reliefs are commonly relied upon by private fund sponsors to market their funds to Australian investors. As a result of this extension, sponsors who currently rely on these reliefs to market their funds in Australia can continue to do so until 31 March 2026. 

The Jersey Financial Services Commission (JFSC) in July published an updated version of the Jersey Private Fund Guide (Guide). 

By way of reminder, the Jersey Private Fund provides sponsors with a cost effective, fast-track (48-hour) regulatory approval process for funds that have no more than 50 investors (who must meet certain eligibility criteria). 

The updated Guide has been well received; the changes made are designed to make the Jersey Private Fund regime more user-friendly for sponsors, for instance: 

• excluding both carried interest vehicles and team co-investment vehicles from the 50-investor limit (the previous version of the guide only excluded carried interest vehicles);
• confirming that investor eligibility criteria must be satisfied on admission (and can continue to be relied upon notwithstanding a status change after admission); and 

widening the definition of eligible investors to include all “financially sophisticated” employees of investment businesses or other service providers (previously, the category was “senior” employees). 

We noted in a previous Radar that the Cayman Islands Beneficial Ownership Transparency Act (the Act) had been passed but not yet implemented. The Act is now in force.   

As a reminder, under the new regime brought in by the Act, the exemptions for funds registered under the Mutual Funds Act or the Private Funds Act have been abolished. Sponsors with Cayman Islands funds registered under either of these Acts must therefore now review their position under the new regime and determine whether they will need to establish and maintain a beneficial ownership register or whether they can make use of an “alternative route to compliance”. 

The “alternative route to compliance” (i.e., notification of certain required particulars rather than maintaining a beneficial ownership register) involves nominating a contact person to hold up-to-date information on the beneficial owners that can be provided to the relevant Cayman Islands authorities within 24 hours of any request. The contact person must be a Cayman Islands fund administrator or other entity licensed by CIMA.