New Hungarian law makes easier to establish a private equity fund manager and private equity fund
December 2016 | SPECIAL REPORT: INVESTMENT FUNDS
Financier Worldwide Magazine
Simultaneously with the implementation of the EU Alternative Investment Funds Directive into Hungarian law, the Hungarian parliament also made various changes to national rules regulating the establishment and operations of private equity funds. As such, the act and some subsequent amendments have introduced a less stringent legal framework, designed to boost the private equity industry in Hungary.
Among the changes affecting private equity funds, various rules relieve the establishment of funds with assets less than the equivalent of €100m or, if the funds are not leverage financed and their term is at least five years, less than the equivalent of €500m. Thus, reduced requirements apply for the initial capital of the fund manager and for the documents which are to be submitted in the licensing procedure of the fund manager. The manager of a private equity fund does not need to have guaranteed capital and it does not have to involve a custodian when managing a fund. The restrictive rules on asset valuation do not apply to private equity fund managers. Also, contrary to the previous regime, the fund manager does not have to initiate a separate licensing procedure for the management rules of a fund since the rules of managing each fund now form just an attachment to the request to the regulator to register a new fund.
However, since only a few new private equity fund managers were established under the new rules and only a few new private equity funds were recently registered, the Hungarian regulator has limited experience when applying the new laws under the relevant licensing and registration procedures. The uncertainties of the regulatory procedures cause practical issues when a new participant wants to enter the Hungarian private equity market.
From the perspective of structuring the establishment process, it is always an issue whether the fund manager as a corporate entity can be established with a name indicating that it is a fund manager before it is duly licensed by the regulator. Company registration procedures may become protracted or suspended by judges over the lack of the required licence. However, the position of the regulator is clear – the corporate establishment procedure of the fund manager should be completed first, before requesting the licence from the regulator, so no licence is required to establish the fund manager as a corporate entity.
The applicable EU regulation and the Hungarian act on investment funds provides that fund managers must generally maintain a permanent compliance function, risk management function and liquidity management function within the organisation. Unfortunately, it is not clear from the applicable laws to what extent a private equity fund manager should set up a separate internal organisational unit or whether they should employ staff for performing these functions. The position of the Hungarian regulator appears to be very conservative in this respect since in the licensing procedure they require the submission of various internal rules concerning these functions which implies that the fund manager should separate the internal organisation and allocate some staff to these functions. Also, there is no clear guidance regarding whether any of these functions can be outsourced to third-party service providers.
Similarly, there are uncertainties when initiating the licensing process about the expected scope of the internal rules of the fund manager. Although the laws, in some respect, expressly exempt private equity fund managers from the obligation to file certain internal rules during the licensing procedure, the Hungarian regulator takes the position that it requires the submission of the entire set of internal rules which would otherwise be required from an ‘ordinary’ alternative investment fund manager. Therefore, for instance, the regulator requires a three year business plan and investment rules to be prepared. Also, it is questionable on what legal basis the regulator requires the filing of a remuneration policy, risk management rules and a compliance policy.
Concerning the issue of how the fund manager can demonstrate its compliance with the technical and personal requirements of the applicable act to the regulator, the existence of signed employment contracts and the signed lease agreement related to the fund manager’s office may be relevant.
With regard to communications with future investors, there is no explicit legal requirement that any information memorandum must be approved by the regulator before distribution. The fund management rules form part of the registration procedure of each fund, but if the regulator in such a registration process finds the required documents (including the fund management rules) deficient or in breach of a law, it will refuse to register the fund until the issues are resolved. This makes the registration procedure, in practice, a licensing procedure.
Experience shows that it is worth informally consulting with the regulator on these issues before officially launching the licensing procedure. However, given the conservative approach of the regulator, the chance to make a compromise or to achieve a concession are limited.
Erika Papp is a partner and Árpád Lantos is a senior consultant at CMS Budapest. Ms Papp can be contacted on +36 1 483 4813 or by email: email@example.com. Mr Lantos can be contacted on +36 1 483 4823 or by email: firstname.lastname@example.org.
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Erika Papp and Árpád Lantos