On January 7, 2020, CEE Legal Matters reported that Tokushev & Partners had helped the Fund of Funds in Bulgaria make arrangements with two financial intermediaries to create several alternative investment funds for equity investments. We asked Lazar Petrov, Director of Financial Instruments and Operational Programmes of the Fund of Funds, to walk us through the set-up of the alternative funds.
CEELM: To start, tell us a bit about the FMFIB.
Lazar: The Fund of Funds is a state-owned company that is entrusted with mandates from several European Structural and Investment Funds (ESIF) Operational Programs in the country. Currently, our assets under management add up to approximately BGN 1.2 billion and our responsibilities cover the structuring, implementation, and monitoring of a wide portfolio of financial instruments.
We act as a typical Fund of Funds and select financial intermediaries for the implementation of our products. About 55% of our assets are allocated to infrastructure projects in the spheres of urban and regional development, tourism, mobility, and environmental protection, and social services, among others. The remaining 45% target sustainable investments in entrepreneurship, business support, and innovation.
Close to BGN 300 million consist of equity instruments. The equity segment of our portfolio is the most dynamic and challenging aspect of our work.
CEELM: Wha is the business case behind these alternative investment funds?
Lazar: The idea of AIFs is well-known and such structures have been operating for a long time now in countries such as, for example, the United States, Luxembourg, and the Netherlands. Basically, such investment vehicles provide a great opportunity for private companies in different stages of development, but with strong growth potential, to find an appropriate funding solution for their investment programs. The business from an investor’s perspective is high risk, but also high return.
There are positive trends in the Bulgarian market for such investments and we are going to back up six AIFs with diverse investment strategies ranging from acceleration to later stage investments.
One of our priorities regarding the legal structures behind the AIFs is to have both the fund managers and the funds registered in Bulgaria. We have spent substantial efforts in creating prerequisites for that to happen, also in terms of initiated changes in the regulatory framework. The local market has reached the stage where these AIFs can be registered here and contribute to the development of the already-thriving eco-system.
CEELM: What would you say was the most complex element to sort out from a legal standpoint in this set-up?
Lazar: The overall legal framework is clear, both on the EU and national levels. Yet, the implementation challenge is starting now and there is simply not a sufficient number of precedents and enough examples to use as case studies. The system lacks a level of flexibility and capacity of the respective authorities and other stakeholders involved in the process.
As an institutional investor and a public organization operating in the venture capital world, we need to find the optimal balance of being absolutely compliant with a very complex regulatory framework on the one hand and trying to act market-oriented on the other.
It took a great level of proficiency in order to analyze in detail the applicable legal structures in Bulgaria and more precisely the pros and cons of the different types of legal entities. This is what we felt was the most complex element from a legal standpoint.
CEELM: What aspects of the legal work did you keep in-house and what did you externalize?
Lazar: The Fund of Funds has a strong team of highly-qualified legal professionals with education, background, and hands-on experience in EU law, public procurement law, banking law, and other financial regulations. We mostly perform the types of work-related to these themes in-house. Of course, when necessary, with respect to these issues, we receive support from our colleagues in the Ministry of Finance (our de-facto sole-shareholder), the Tax authorities and so on.
We outsource legal work which is either highly specific and niche or non-reoccurring and which requires independent external review. The closing of an AIF can be described as a long and complex process, which we manage both by using our internal resources and external support. Such support is especially necessary in the final, very intensive stages of the closing process, to complement our expertise with professional legal advice on the viable options, best practices, identification and mitigation of legal risks, etc. Our management always seeks to obtain the highest level of assurance before the finalization of the closing process so to approve the start of the investment period of our AIFs.
CEELM: What were your main considerations in retaining Tokushev & Partners as your external advisor on this process?
Lazar: Our history with Tokushev & Partners as our external advisor has begun with an assignment related to one of our AIFs. We needed an independent and professional legal analysis that explores the available options under the local Commercial Act with respect to the structuring of the fund along with their advantages and disadvantages. We chose them for the professional track record, academic recognition, and established reputation, especially within the financial industry. Honestly speaking, we needed a high-profile legal advisor to match the sophistication and the quality of the advisors of our fund managers.
Being a public entity, we tender our legal services, and Tokushev & Partners participated in an open call and were able to provide the most economically advantageous offer based on the quality of their team and the competitive price.