Co-authored by Ricardo Postigo of Alterra in Lima, Peru and Philip T. von Mehren and Damien G. Scott of Venable LLP in New York, NY. This Overview does not constitute legal advice, and was prepared and updated as of February 8, 2016.
1. What are the Peruvian regulations that affect international private equity firms investing in Peru?
Peru does not impose any specifically targeted limitations on offshore private equity funds investing, directly or indirectly, in a Peruvian portfolio company. Nonetheless, offshore private equity funds need to comply with rules generally applicable to all investors purchasing companies or making an investment in Peru. Although foreign investors are entitled to the same rights as domestic investors, certain exceptions apply. The restrictions on foreign investment include the TV broadcasting and aviation industries, as well as limitations on foreign ownership of land or companies that own assets within 50 kilometers of Peru’s international borders.1
No authorization is required to make a foreign investment in Peru. Investors are guaranteed the right to freely transfer out of Peru, in freely convertible currency and without any authorization whatsoever, capital, dividends, profits, royalties and the royalties received in exchange for the use and transfer of technologies and elements of intellectual property. Foreign investors are entitled to the most favorable exchange rate to convert the Sol into a foreign currency.
Peru also permits foreign investors to enter into so-called “legal stability agreements,” which freeze the legal regime applicable to the investment to the regime in effect at the time of the investment. A Foreign investor can enter into a legal stability agreement or a tax stability agreement with ProInversión, the Peruvian government agency in charge of promoting foreign investment. Legal stability agreements including tax stability agreements give protection to both the investor and the relevant Peruvian company, such as a fund’s portfolio company. With respect to the investor, the agreement protects such investor from discriminatory treatment [by granting it national treatment] and the right to access (without paying taxes or penalties) foreign currency at the best prevailing exchange rate to repatriate capital out of Peru. With respect to the Peruvian company in which the foreign investor has an interest, these agreements guarantee the stabilization of the income tax regime, favorable labor rules and the right to export its products.
In order to benefit from favorable tax treatment afforded to offshore entities, international and local private equity funds often form companies in the British Virgin Islands that make investments directly in Peruvian companies. This results in the payment of a 5% tax on capital gains upon exiting the investment, rather than the 30% rate that would otherwise apply.
2. What are the Peruvian regulations that affect international private equity firms raising funds in Peru?
Generally, as for any domestic or foreign investor intending to raise capital in Peru, an offshore private equity firm needs to comply with Peruvian regulations regarding offerings when its fundraising efforts are addressed to the “public” in Peru. Pursuant to Peruvian law and regulation, any offering involving the use of mass media or more than one hundred (100) investors in Peru, is considered a public offering.2 The Superintendencia del Mercado de Valores (“SMV”) requires any issuer making a public offering to register the offering and receive authorization.3 As a general matter, a public offering or private offering in jurisdictions other than Peru through any means, including mass media accessible to investors in Peru, will not automatically require the issuer to register its shares with SMV.
International funds do not typically raise funds in Peru through a public offering. In order to avoid registration, international funds target only institutional Investors and do not use mass communication.4 Furthermore, marketing activities relating to the sale of interests (such as limited partner interests) in offshore private equity funds by means of an offer addressed to institutional investors in Peru are not subject to registration requirements. In addition, the sponsor of an offshore private equity fund may, without triggering registration requirements, contact prospective investors (aside from using mass communication), including presentations and personal visits (in Peru or abroad), respond to inquiries initiated by potential investors, or initiate contact with potential investors (regardless of whether the sponsor has a pre-existing relationship with such potential investors).
Interests in offshore private equity funds may be sold in Peru with or without an intermediary (such as a placement agent). Subject to the restrictions described in the preceding paragraphs, no limitations apply to (i) the numbers of offers and sales of the interests of offshore private equity funds in Peru, (ii) the form of entity used by the fund, or (iii) the method of solicitation or communications used by the fund with prospective investors in Peru.
3. What Peruvian regulation and rules affect international private equity firms seeking to raise capital from Peruvian pension funds and insurance companies specifically?
In order for local pension funds to commit capital to a private equity fund, each of the fund itself, the general partner (Management Company) and/or the investment advisor, need to meet the requirements set forth in Article 9 of the Regulation for Pension Funds’ Foreign Investments (Reglamento para la Inversión de los Fondos de Pensiones en el Exterior) issued by Superintendent of Banking, Insurance and Pension Funds (“SBS”), the entity in charge of overseeing pension funds’ investments in private equity funds, among others.5 Offshore private equity funds must comply with Article 9’s requirements and register prior to seeking capital commitments from local pensions, and such commitments may not exceed 35% of the fund’s total capital. Additionally, Peruvian pension funds may not commit more than 50% of their capital outside of Peru. Local private equity funds raising capital from Peruvian pension funds generally need to be managed by a SAFI and have an investment advisor (or a team of individuals) with at least five years of experience in managing private equity assets accordingly.6
Prior to September 2014, offshore private equity funds were required to register with SBS. Subsequent to 2014, in order for a pension fund to formally commit capital to a private equity fund, the pension fund itself is required to (i) register the private equity fund with SBS and (ii) submit the registration materials for SBS’s sign-off. Upon submission of such materials, the SBS will review the submission and provide one of the following three forms of authorization:
- A. general authorization for the pension fund to invest in funds for a specific sub-asset class, meaning there is no need to register prior to any particular investment (provided it complies with rules specified in the regulation);
B. partial authorization (or a general authorization with a maximum investment limit), which can be up to 50% of the regulatory limit per sub-asset class; or
C. ad hoc authorization per fund, which allows investments up to 20% of the regulatory limit per sub-asset class (including prior investments).
This regulatory regime will only be in place through 2015. As of January 2016, new regulations are expected to come into effect whereby local pensions will have the right to commit capital to private equity funds without SBS’s prior confirmation, although the SBS will examine individual filings on an ad hoc basis.
Peruvian insurance companies may not commit capital to offshore private equity funds unless they receive an opinion from the SBS confirming that (i) such fund constitutes a permitted investment for Peruvian insurance companies and (ii) such fund is registered with the insurance companies’ investment division at the SBS. Peruvian insurance companies may commit capital to local private equity funds by complying with the guidelines set forth in Article 9.
Peruvian pension funds have lobbied SBS for various extensions of authorizations granted under the regime prior to the implementation of the 2014 reforms in order to continue investing in private equity while coming into compliance with the new regime. These extensions have generally been granted, allowing Peruvian pension funds until the end of the first quarter of 2016 to come into full compliance. Peruvian insurance companies have been lobbying to change the applicable regulations in order to allow them to make investments in private equity by utilizing their technical reserves. The first draft of this regulation has been approved.
5. What additional Peruvian regulations affect hte manaagement of PE funds in Peru?
There are no specific regulations for the formation of private equity funds in Peru, other than those described in question 3 above and those that regulate investment funds in general.
Local private equity funds are formed as a Fondo de Inversion (“FI”), which is a trust managed by a Sociedad Administradora de Fondos de Inversion (“SAFI”), which in turn is a corporation that acts as general partner and investment advisor to the FI. SAFIs are subject to SMV’s regulation and oversight. Although there may be cases in which a third party other than a SAFI could be retained as investment advisor to an FI, the SAFI must preserve the ability to act as general partner to the FI. Investors normally purchase interests or shares in the FI and have similar roles and rights to those of a limited partner in a typical limited partnership fund structure.
The FI structure is generally consistent with global market practice as it can mimic most of the basic provisions found in offshore private equity fund documentation (e.g. carried interest, investment policies, preferred return for LPs, indemnification for the GP and its members, etc.) If an FI is formed through a public offering, the offering and the FI will be subject to SMV’s oversight and provisions on public offerings and investment funds generally. As these regulations would prevent an FI from reflecting standard private equity provisions, most local private equity funds are formed through private offerings (which are not subject to SMV’s oversight and regulatory requirements) or under the Régimen Simplificado (a special regime that involves a public offering addressed exclusively to institutional investors or investors that do not require SMV’s protection).7
Under a private offering structure, although local private equity funds do not need to obtain any authorization from SMV, they will generally need to meet the regulatory requirements set forth in question 6 below in order to raise capital from local pension funds and insurance companies.
If a local private equity fund is formed under the Régimen Simplificado, then it will need to register with the SMV. Such registrations are automatic once the fund files its fund documentation with the SMV. However, funds structured under this regime generally need to comply with the requirements set forth in question 3 above and SAFIs are required to meet specific reporting obligations to SMV in connection with such funds (basically the same reporting obligations as for funds that raised capital by public offerings). Generally, the information contained in these reports is disclosed to the public. Most SAFIs structure PE funds as private funds provided that such SAFIs are already managing a fund under the Régimen Simplificado.
6. What Peruvian regulations affect local PE funds that seek to raise capital from Peruvian pension funds and insurance companies??
Tax treatment of FIs generally does not make it possible for retail investors and institutional investors other than pension funds and insurance companies (among other investors that are not subject to income tax) to invest in private equity funds. As FIs are pass-through entities, the investors in FIs are subject, pursuant to Peruvian tax rules, to an income tax regime that imposes on each investor the obligation to pay income taxes every year calculated on the unrealized value of such investor’s interests in the FI. An amendment to such regime allowing an investor in an FI to delay its tax obligation until an FI totally or partially realizes its investments would increase investment into FIs. Peruvian authorities are not, unfortunately, considering such an amendment.
Given SMV’s general oversight of FIs and SMV’s function to regulate public capital markets in Peru, FIs formed under Régimen Simplificado are treated, in terms of what types of information about the FIs becomes public, as if the FI had raised capital through a public offering. This abnormality results in: (i) SMV imposing reporting obligations on SAFIs more in line with what makes sense for a publicly traded entity and (ii) SMV disclosing information about FIs that is not relevant to the public (e.g. capital calls, advisory board meetings, approval of financial statements, etc.). As the investors under Régimen Simplificado are sophisticated investors that do not require SMV’s protection, the current regulatory regime is overly protective of these sophisticated investors and is not in line with how many other jurisdictions regulate private equity funds. Although SMV’s oversight of SAFIs is necessary to ensure good practices, the regulatory focus should shift to more productive areas such as risk management and conflicts of interest matters, without creating unnecessary burdens on FIs and their investors by disclosing information that is not relevant to all participants in the market.
1See article 71 of the 1993 Political Constitution of Peru, articles 24 of Peruvian TV and Broadcasting Law and article 79 of Peruvian Civil Aeronautics Law.
2The SMV presumes any offering to more than 100 investors in Peru is a public offering. An issuer can overcome this rebuttable presumption if the issuer can demonstrate that the investors who were approached by the issuer do not require the protection of the SMV as a result of such investors being qualified as Institutional Investors. Please refer to section d) of Article 6 of SMV’s Public Offering Regulation (Reglamento de Oferta Pública Primaria y de Venta de Valores Mobiliarios) and footnote 4 herein.
3See generally Article 4 of SMV’s Public Offering Regulation.
4Pursuant to Appendix 1 of the Regulation of the Institutional Investors’ Market (Reglamento del Mercado de Inversionistas Institucionales), the following types of entities are defined as Institutional Investors: non-governmental Peruvian pension funds (Administradoras Privadas de Fondos de Pensiones); the Governmental Peruvian pension fund (Oficina de Normalización Previsional – ONP); mutual funds; investment funds; insurance companies; the Social Security Office (ESSALUD); securitization service corporations; Qualified Institutional Buyers as defined under Rule 144A of the U.S. Securities Act of 1933; institutions subject to the supervision of the Superintendent of Banking, Insurance and Pension Funds (“SBS”); entities, such as banks, financial companies, investment banks, trust corporations, etc. as set forth in Article 16 of the Peruvian Banking and Insurance Act.; private or public corporations that typically invest in securities (non-Governmental private corporations must have a securities portfolio of at least US$333,000); individuals whose net worth exceeds approximately US$775,000 and who hold securities with a value of at least US$ 333,000.
5Article 9 contains guidelines for both local and international funds raising capital from Peruvian pension funds. Certain guidelines apply to both local and international funds, such as rules relating to valuation policies, restrictions on in-kind distributions, restrictions on derivative transactions, restrictions on the sponsor launching similar funds, requirements for claw-back, key person and indemnity provisions in governing documents, compensation rules, restrictions on investments in publicly traded instruments, rules requiring the alignment of interests among committed capital and the fund and its investment advisor, independent advisory boards and investment and divestment periods. Additional restrictions exist with respect to investments in international private equity funds, such as the requirement for regulation of the investment advisor, an investment advisory agreement compatible with international standards, minimum experience requirements, minimum assets under management, minimum capital commitments of the fund’s most recent closing, other rules relating to the fund’s legal documentation and accounting practices and certain disclosure filing requirements.
6Article 3 of SBS Title VI on Investment Regulations issued by the SBS, as amended (Título VI del Compendio de Normas de Superintendencia Reglamentarias del Sistema Privado de Administración de Fondos de Pensiones referido a Inversiones).
7See, generally, section b) of Article 29, Article 31 and Articles 121 through 128 of SMV’s FIs and SAFI Regulation (“Reglamento de Fondos de Inversión y sus Sociedades Administradoras”).