Alternative asset managers are becoming increasingly important players in the global financial services industry. Their rise in prominence has led to greater global scrutiny of the alternative asset management industry and a concerted push by securities regulators to raise the standards that asset managers are held to. This push has been so successful that alternative asset management – traditionally an industry with minimal regulatory oversight – is now one of the most regulated industries in the world.
These developments have considerably changed the regulatory environment for Indian general partners (GPs) who are looking to market their India-focused funds to global investors. The defining feature of this new environment is the differing nature of global regulation, with some jurisdictions targeting the manager, some targeting the fund, and others targeting both the fund and the manager.
From a fund-raising perspective, the most important jurisdiction for an Indian GP remains the US, with newer classes of investors such as endowments and pension funds joining the traditional investor bases such as high net worth individuals and India-focused funds. The defining characteristic of US regulation of alternative investments is its focus on the investment manager.
The nature of US regulation is determined by the total assets under the management of each investment manager. Contrary to popular belief, registration with the Securities and Exchange Commission (SEC) is not a prerequisite for all offerings of interests in pooling vehicles in the US. A manager with less than 15 clients and US$25 million in assets under management from US onshore offices can offer such interests to investors resident in the US without any restrictions.
A manager with more than US$25 million but less than US$150 million in assets under management from US onshore offices can market interests in pooling vehicles by filing an exempt reporting adviser notification with the SEC under the US Investment Advisers Act. This is a relatively simple process for Indian GPs assisted by US counsel.
In cases where the assets under management exceed US$150 million, the registration requirements are relatively more stringent and impose major compliance obligations on the manager. Further, all offerings have to comply with the US Investment Company Act, which restricts the number and quality of investors that a pooling vehicle can have from the US.
The European Union is another key jurisdiction, with India witnessing renewed interest from EU-based limited partners including pension funds and governmental agencies. The EU is going through a paradigm shift in the regulatory landscape for alternative asset management with the “grace period” that most countries had provided for implementation of the Alternative Investment Fund Managers Directive (AIFMD) having expired in July 2014.
The AIFMD seeks to regulate managers, including non-EU-domiciled managers marketing non-EU-domiciled pooling vehicles in the EU. The most challenging feature of the AIFMD landscape is the non-availability of an EU-wide passport for non-EU alternative investment fund managers to market pooling vehicles across the EU. Therefore, managers need to comply with private placement regimes of individual member states leading to increased costs and complexity.
Individual regimes vary in degree of regulation. The UK, Luxembourg and the Netherlands are among the less regulated jurisdictions; Germany and France rank among the more restrictive; and countries such as Croatia, Greece and Latvia have no private placement regime at all. The AIFMD mandates certain minimum requirements for national private placement regimes.
Japan has assumed importance for Indian GPs from a fund-raising perspective recently, in view of the rapidly growing bilateral ties between India and Japan. Japan’s pledge to increase investment in India as well as the heightened consensus among Japanese pension funds and other asset managers to look at overseas investments presents Indian GPs with an excellent opportunity to raise capital.
Japan regulates the manager and has a comparatively stringent regulatory regime. The exemption for a manager from registering as a financial adviser is available only to the GP of a limited partnership (LP), so the pooling vehicle can only be structured as an LP. This may necessitate the setting up of a feeder as an LP for the exclusive use of Japanese investors, the commercial feasibility of which may have to be examined. Further, the GP must file a notification with the Kanto Local Finance Bureau with certain specified information.
International investor interest in India has considerably increased on account of the brighter economic outlook following the election of the Narendra Modi-led government in May and the tentative economic reforms that have been launched since then. This presents an excellent opportunity for Indian GPs to raise funds from international investors.
It is important that GPs keep themselves abreast of the changing regulatory requirements for the marketing of pooling vehicles in various jurisdictions as the increased investor interest in India may compensate for the legal and regulatory costs involved.
Vivek Mimani is a senior associate and Rohit Jayaraman is an associate at Khaitan & Co. Views are personal.
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