/ Direct Investment in Private Equity- Pension Fund Regulations Published for Comment

On June 22, 2017 the Chilean pension regulator (Superintendencia de Pensiones – SP) has published for comment the draft regulations to implement the amendment made by Law 20,956 to the pension fund statute (DL 3,500) that would allow direct investment of Chilean pension funds in foreign private equity funds and make co-investments (click here to see our earlier newsletter discussing this statutory amendment).

Among other matters, the proposed rules provides that the foreign general partners (GPs) not only be registered abroad with a securities regulator of a country with a minimum sovereign rating of A+, but also be approved by a Chilean quasi-governmental rating agency created by DL 3,500 called the Comisión Clasificadora de Riesgo (CCR). This may be a challenge for GPs with multiple affiliates.

CCR approval of GPs will also be required if a pension fund is investing through a Chilean feeder fund. This is an unnecessary burden for GPs given the extensive due diligence that they are already subject to by Chilean pension fund managers (AFPs).

GPs will in addition be required to have a minimum experience of 10 years in managing this asset class. However, the proposed rule does not specify how such experience is counted and, therefore, it is unclear whether group experience may be taken into account.

In addition, GPs will have to file with the SP quarterly reports on fees using the Institutional Limited Partners Association (ILPA) standard and will also have to report valuations on a quarterly basis together with the methodology used for such valuations.

AFPs will need to have their interests as limited partners (LPs) custodied by the same types of custodians that they use for other asset classes. A legal opinion will also be required to opine on the title (“validity, existence and integrity”) that the pension funds have to their investments as LPs.

The proposed rule contains an aggregate limit for all investments (including commitments) in foreign private equity and foreign private debt which varies from 7% to 2% depending on the pension fund type, whether directly or through Chilean feeder funds. This is somewhat disappointing given the statute does allow an overall limit for investments in alternative assets (which also include investments in Chilean infrastructure concessionaires) of up to 15% of pension fund assets. Further disappointment arises from the proposed 2% limit in relation to investments (including co-investments) managed by the same GP.

The deadline to provide comments to the draft regulations expires on July 21, 2017.

Felipe Cousiño, partner

Nicole Cartier, senior associate