Private equity and the development of this activity in Monaco is a popular topic. How can we define this activity?
Gilbert Delacour: As is often the case, there are almost as many definitions as “definers”: Private equity involves acquiring a minority or majority holding in the capital of unlisted companies, at various stages of their development (start-up, growth phase, transfer or recovery), with the goal of medium to long-term returns. This involves the investor personally supporting the company in which they are investing, as opposed to passive or speculative investment.
The length of the holding period can vary. It reflects the company’s full development cycle, which can be between three and eight years. Other than involvement alongside the company’s manager, the other hallmarks of private equity are the investor exit and financial strategies. Without necessarily dismissing immediate returns, investors expect medium to long-term returns from their investment, i.e. when a capital gain is earned on resale, rather than immediately through dividends; the “exit” strategy (total or partial resale, selecting a buyer, IPO, etc.) is therefore closely intertwined with the financial strategy, with both considered jointly from the investor holding negotiation phase.
Magali Vercesi: When it comes to private equity, large sums are generally invested - the “benchmark” for investment funds often amounts to several hundred thousand euros - and it’s a relatively long-term commitment. This creates a significant risk for the investor. With regards to activities covered by Law 1,338, regulation is in place to protect investors from too much risk, or risk which they are unable to properly assess, due to a lack of training or experience. Investment funds are also required to provide potential investors with precise and detailed information regarding any risks. These risks are described in the documentation issued by Monegasque funds, which must be approved by the Commission de Contrôle des Activités Financières (CCAF) [Monaco Commission for the Control of Financial Activities].
What is the regulatory framework for private equity in Monaco?
GD: The matter of the regulatory framework boils down to knowing the “private equity” players in Monaco and how their activity is controlled.
Private equity investment can be carried out by a single person, either an individual or legal entity. It is typically an “industrial” investment, which is not specifically regulated if it does not relate to a “group” of investors in any form, and it does not relate to a listed company.
However the matter of regulation arises if this investment is proposed by a financial intermediary. This is the case for management companies, when they act as advisers or through a management mandate, or investment funds, which result from an agreement between one or several investors and a management company which will invest the assets entrusted to it by these investors in accordance with a predefined strategy. These intermediaries are therefore professionals, assuring investors that certain mandatory rules are followed. Their creation and operation are subject to specific regulation, and their activity is controlled by the Commission de Contrôle des Activités Financières.
MV: Approval by the Commission de Contrôle des Activités Financières is required by law no. 1,338 dated 7 September 2007, particularly for securities portfolio management activities on behalf of third parties, investment advice and investment fund management, whether Monegasque or foreign.
The objective is to offer a protective framework for investors, even if they are classified as “well-informed” or “professional” investors.
Law no. 1,339 and Sovereign Ordinance no. 1,285 dated 10 September 2007 relating to application of law no. 1,339 dated 7 September 2007 more specifically regulate mutual funds and investment funds.
In practice, how can this private equity activity currently be managed in Monaco?
MV: In Monaco, certain banks and management companies are equipped to allow their clients to invest in private equity. Specifically by allowing them to acquire shares in foreign investment funds, which are often funds of funds. Finally, currently there are no Monegasque venture capital funds. Whilst Monegasque regulation allows Monegasque investment funds to be created, this is still not the case for venture capital funds.
GD: In this context, mixed solutions could still be proposed, for example by creating a Monegasque “feeder” investment fund which supplies a so-called “master” private equity fund, located in a third-party location.
MV: Of course, this is provided that the location of this “master” fund is a location with which Monaco has an ongoing relationship, particularly with regards to regulators, in order to protect the investor.
CCAF Commission de Contrôle des Activités Financières
4, rue des Iris
Tél. (+377) 98 98 41 01
Gordon S. Blair Law Offices
7, rue du Gabian
Tél. (+377) 93 25 85 25