The flow of money back and forth over the Atlantic into PE coffers appears to be slowing.
European fund sponsors, for one, are backing away from American investors due to fears about the Dodd-Frank financial reform law, said Cédric Teissier, the new general counsel at the Paris-based placement agent Triago. “We had a couple of GPs say to us, ‘I don’t want any U.S. investors now. I want to see how Dodd-Frank plays out.'”
Dodd-Frank’s “foreign private adviser exemption” limits non-U.S. sponsors to managing less than $25 million from fewer than 15 U.S. investors if they want to avoid registration with the U.S. Securities and Exchange Commission. Triago has estimated that registration could cost non-U.S. sponsors $300,000 to $400,000 a year in compliance expenses.
But there is an out for foreign sponsors that don’t have an office in the United States, called the “limited private fund exemption.” Such firms can raise unlimited funds here, provided they follow a few notification and recordkeeping requirements, Teissier said.
“Most foreign GPs are not very educated about U.S. regulations,” he said. “They looked at the quote-unquote ‘foreign’ exemption, realized they were probably not going to fall under it and got scared, not realizing there was this other exemption they could use.”
Teissier estimated that close to 40 percent of European sponsors have U.S. investors.
The same kind of regulatory deterrence is also taking hold in the opposite direction, he said. The Alternative Investment Fund Managers Directive, approved by the European Union parliament in November as its response to the financial crisis, will require U.S. fund managers to register and obtain a “passport” to raise money in the Continent, he said.
Although the restrictions of the AIFM are not as stringent as draft proposals had been, both it and Dodd-Frank are likely to discourage private equity sponsors from raising money across national borders, effectively limiting investors to investing domestically, Teissier said. “It’s ironic to see this momentum at a time when money is supposed to be flowing internationally without boundaries.”
The new regulations are likely to complicate life for Triago, which receives some 40 percent of its mandates each from the United States and from Europe, with 12 percent from the Middle East and 8 percent from Asia.
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