/ Investment in Private Equity by Pension Funds3 November, 2017
Pension fund Investment (Direct and Indirect) in Private Equity and Private Debt- New regulations in force as of November 1, 2017. CCR approval required for all GPs.
As of November 1 the regulations issued by the Chilean pension regulator (Superintendencia de Pensiones – SP) 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 newsletters discussing the draft regulations and this statutory amendment) have come into force. They also regulate indirect investment via Chilean feeder funds.
The new rules provide that the foreign general partners (GPs) not only be registered abroad with a securities regulator of a country with a minimum sovereign rating of AA issued by at least two rating agencies (or alternatively one BBB rating, provided said country is on the list of Approved Jurisdictions published by the Chilean securities regulator- SVS), but also be approved by a Chilean quasi-governmental rating agency created by DL 3,500 called the Comisión Clasificadora de Riesgo (CCR). This is an improvement in relation to the originally proposed rule which mandated two sovereign ratings of at least A+. However, according to the implementing regulations for the CCR application for approval published on October 31st 2017, the CCR will also have to approve the GP’s regulator, meaning that the CCR must be satisfied with the regulatory system to which the GP is subject in terms of its system of regulation, supervision and sanctions.
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). This means that CCR approval of all GPs must be sought so that new commitments by pension funds in Chilean feeder funds may be signed after November 1, 2017.
GPs will in addition be required to have a minimum experience of 10 years in managing this asset class. The final text of the rule now clarifies that group experience may be taken into account by making reference to the holding company of the GP.
Furthermore, the CCR rules the GP must at all times have at least US$ 5,000,000,000 in assets under management (AUMS) in the relevant asset class (private equity, private debt, infrastructure or real estate). Investments in hedge fund strategies or commodities strategies cannot count towards meeting said minimum AUM requirement.
In addition, in the case of direct investment, GPs will have to contractually commit to file with the SP quarterly reports on fees using the Institutional Limited Partners Association (ILPA) standard (the final text of the rule allows the SP to authorize other standards) and will also have to commit to report valuations on a quarterly basis together with the methodology used for such valuations.
AFPs will need to have their direct interests as limited partners (LPs) custodied by the same types of custodians that they use for other asset classes. A legal opinion from an independent law firm hired by the AFP will also be required to opine on the instrument “according to international business practices”. The original proposal was that the legal opinion specifically refer to title (“validity, existence and integrity”) that the pension funds have to their investments as LPs.
The rule contains an aggregate limit for all investments (including commitments) in foreign private equity which varies from 7% to 2% depending on the pension fund type, whether directly or through Chilean feeder funds. Notwithstanding that this is an improvement from the original draft rule which also included foreign private debt in this aggregate limit, this is still somewhat disappointing given the statute does allow an overall limit for investments in alternative assets (which also include investments in private debt and in Chilean infrastructure concessionaires) of up to 15% of pension fund assets.
Furthermore, there is a 2% limit in relation to investments (including co-investments) managed by the same GP.
The AFPs must now start working on developing their own investment policies and risk management policies in relation to private equity as mandated by the new rules in order to be authorized by the SP to invest in this asset class.