Incorporating inducement arrangements
DSW Venture Capital LLP ( “the Firm”) is authorised and regulated by the Financial Conduct Authority (FCA). In accordance with Principal 8 (Conflicts of Interest) and as a matter of best practice when the Firm carries out regulated activities it is required to manager conflicts or interest fairly, both between itself and its customers and between a customer and another client. The Firm is classified as a small authorised UK AIFM and as such it is not subject to the full requirements relating to conflicts of interest under the AIFMD. However this policy is in place to ensure the Firm takes all reasonable steps to identify conflicts of interest that arise in the course of its managing activities so that these do not impact the client or ultimate fund investors in a detrimental manner to ensure they are fairly treated..
The Firm is committed to identifying, monitoring and managing all actual and potential conflicts of interest that can arise between clients and the Firm and between contacts in all areas of our business. Members of staff are expected to refer to a Partner in the event that a potential area of conflict is identified.
The purpose of this document is to provide appropriate information relating to the policies we have in place to identify and manage conflicts of interest. Much of the contents of this will be covered by other functions of the business but for best practice and regulatory purposes this document summarises the Firm’s Conflicts Policy incorporating also our arrangements regarding the management of inducements.
2. What is a Conflict of Interest?
A conflict of interest is a situation where the Firm, an employee or associate of the Firm owing a duty to a client may have a personal or professional interest that competes with this duty. A situation may be a conflict of interest even if no improper act or disadvantage to the client arises from it.
Conflicts of interest are defined in the context of FCA rules as any conflicts that may arise between:
- the Firm and a client; or
- a client and another client; or
- between fund investors.
The types of conflicts envisaged by the FCA may include situations where the Firm:
- stands to make a financial gain, or avoid a loss, at the expense of the client or a fund investor;
- has an interest in the outcome of a service provided to the client, or transaction carried out on their behalf, which is materially different from the interest of that client or fund investor;
- has financial or other incentive to favour the interests of another client or group of clients over that client or fund investor;
- carries on the same business as the client or fund investor; or
- is likely to receive from a person other than the client an inducement, whatever the form, relating to the service provided to the client other than standard fees or commission for that service.
The FCA has classified conflicts of interest as having high significance in terms of potential risk in the Private Equity sector and therefore due to the interactions made by the Firm and its employees it expects all staff and contacts to pay due regard to its Conflicts Policy.
Material conflicts arise in private equity fund management between the responsibilities the fund manager has to itself (including its owners and staff), the investors in the separate funds or share classes it manages and the companies owned by the funds. DSW Ventures acts in an advisory and management capacity and therefore the Firm must be mindful of all potential areas of conflict.
The Firm is aware that it may not only be in breach of a regulatory obligation by failing to monitor or address potential areas of conflict but that any negative publicity could have an adverse impact on its reputation within the industry.
The Firm is owned by the Members of the LLP.
4. The Client Relationship
In terms of client relationships the Firm has an Investment Management Agreement (“the Agreement”) in place with British Business Investments Limited relating to the DSW Ventures investment network (“the Client”), the investors of the investment network, and portfolio companies.
5. Identification, recording and management of conflicts of interest
The Firm takes reasonable steps, administratively and organizationally to help prevent conflicts arising relating to clients and prospective clients of the business. The Firm has in place procedures for the following:
- identification of conflicts of interest (in accordance with SYSC), these are covered in the annual review and Investment Committee meetings as well as ongoing monitoring relating to the client base and contacts;
- recording of conflicts of interest (in accordance with SYSC) as part of the compliance monitoring programme; and
- management of conflicts of interest (in accordance with SYSC).
The Firm conducts a regular review of conflicts of interest as part of its compliance monitoring program and maintains a Conflicts Register to record any conflicts that are identified. Based on the structure of the Firm the Partners are actively involved in the identification and reporting of conflicts and no one individual can exercise inappropriate influence over a particular aspect of the advisory or management process. A conflicts check is included in the investment sign off procedure to ensure that appropriate checks have been completed. Also the training, qualifications and experience of employees help mitigate some of the risks of conflicts from occurring.
6. Management of Potential Areas of Conflict
The funds managed by the Firm are structured using effective contractual agreements to protect against potential conflicts of interest between the manager and the fund investors or between different interested parties. It is normal practice for these relationships to be governed by extensive contractual documentation, such as Limited Partnership Agreements which provide detailed mechanisms for fully disclosing and resolving potential conflicts. The Firm will typically include these details in a Private Placement Memoranda, or similar document (see Appendix 1 for sample disclosure text). It is widely recognised that private equity investors are not passive but proactively monitor these controls put in place.
In its role as manager, the Firm will carry out appropriate checks when recommendations are made to enter or exit an investment to ensure that any conflicts are reported to the General Partner or other interested parties in the correct manner.
Remuneration of the Firm and Staff
The Firm has appropriate procedures in place to ensure that it manages potential conflicts between the General Partner and Limited Partners in the fund vehicle, particularly in terms of fee structuring.
Potential conflicts may arise where the Firm receives fees from the client for the services it provides during a purchase or realisation of an asset. This may put the Firm, or its client, in a conflict situation between achieving the best price for the services for the Limited Partners and maximising the revenues for the Firm. The Firm will monitor this situation to ensure that Limited Partners are not disadvantaged and that costs and remuneration are acceptable to the client and are commensurate to the services provided.
In terms of remuneration the Firm will ensure that its staff remuneration policy does not encourage staff to take account of their own earnings from a potential transaction rather than the best interests of the client. All members of staff are aware of their obligations to act in the client’s best interest regardless of personal benefit. To reinforce this staff are remunerated on a salary rather than a commission basis. Annual reviews are carried out and a performance related bonus may be paid to staff as appropriate to their role at the end of the year. This is in line with standard industry practice. Bonuses within the Firm are not dependent on an individual transaction and distributions from the fund are only made once investor obligations have been met.
In the Private Equity sector networking and developing relationships with contacts is common practice. The Firm has procedures in place to mitigate any risk that any gifts or hospitality provided by a third party may not materially influence a recommendation provided to the client. The Firm has a gifts and benefits policy in place to manage this which requires individuals to provide notifications to the Compliance Officer
The rules on inducements are to be considered by the Firm as additional to those rules relating to conflicts of interest. All inducements are considered and not only those where a conflict or potential conflict arises. Indirect payments that are received by the Firm are only legitimate when the Firm ensures the incentives it receives do not result in investment advice or a management service which is biased and is not in the best interests of the client.
Under the FCA conduct of business obligations the Firm will not be considered to be acting honestly, fairly and professionally in accordance with the best interests of a client if, in relation to an investment or service it provides, it pays or is paid any fee or commission, or provides or is provided with any non-monetary benefit, in relation to its regulated activities unless it is:
- to or from a client or from a person on behalf of the client: or
- a proper fee* which
- enables and is necessary for the provision of the service to the client; and
- by its nature, cannot give rise to a conflict between the Firm and the client; or
- to or from a third party provided that it:
- does not impair compliance with the Firm’s duty to act in the best interest of its client; and
- is designed to enhance the quality of service; and
- the existence, nature and amount (or method of calculation) is clearly disclosed in a comprehensive, accurate and understandable manner to the Firm’s client before the service is provided.
* A proper fee could be custody costs, settlement and exchange fees, regulatory levies or legal fees.
Potential inducements which may be encountered by the Firm include deal fees, directors’ fees, underwriting fees, monitoring fees, secondment fees and finders’ fees. In considering each of these potential inducements we will consider a number of different factors, including but not limited to:
- whether the inducement results from our regulated activities;
- whether the inducement falls within one of the exemptions listed above;
- where those inducements categorised as ‘proper fees’ the Firm will consider the nature of the fee in relation the client’s best interest requirements and whether they are ‘necessary’ and ‘enable’ the provision of our services.
The Firm is deemed to satisfy the disclosure obligation where the essential arrangements relating to the fee, commission or non-monetary benefit are summarised for the client and if the client requests further details the Firm honours that request.
Market Abuse – Personal Account Dealing / Insider Dealing Rules
As part of the FCA’s supervisory responsibilities it views Insider Dealing and Market Abuse as of high significance and a potential area of risk and conflict in the private equity sector.
The significant flow of price sensitive information in relation to private equity transactions creates potential for market abuse. This flow can be particularly complex depending upon the number of parties involved. In general terms ‘public to private’ transactions represent a particular area of risk where price sensitive information is potentially available to a large group of participants in a transaction. The risk arising is that members of staff, party to privileged information concerning firms with which we deal, may trade on information that is not in the public domain. The Firm is mindful that failures in this area could present not only significant reputational damage but also to a failure of one of the FCA’s statutory objectives. The Firm does not generally act for firms in this area and therefore it does not consider this to be a significant area of conflict but procedures will be kept under review.
The Firm operates a program of dealing rules relating to prohibited dealings requiring permission to deal as well as guidance on reporting requirements. These procedures also provide guidance to members of staff on how to handle sensitive information. The procedures are reviewed on a regular basis.
Conflicts between clients
The Firm will ensure that any advice, management or any other activity does not conflict with interests of our client. The Firm will ensure that the rationale behind the decision and any related activity is clearly documented. This is considered to be relatively low area of risk for the Firm as advice it provides is reviewed by an Investment Committee before a decision is taken. As part of the review process the Firm completes a conflicts check and the outcome is documented in the deal summary sheet. This will highlight any particular concerns including, but not limited to confirmation that no member of the Investment Advisory committee has a personal /family interest in a recommendation and that valuations provided have been cross checked as accurate.
The Firm has formal Whistleblowing guidance which encourages all employees to communicate with the Partners in an open manner if they have any particular concerns regarding its public interest responsibilities. The Firm would not wish to prevent any employee from approaching a member of the Team when he /she feel the Firm is failing in its responsibilities.
External Business or Individual Relationships
It is the Firm’s policy that no employee may serve in any capacity for any other firm, government body or regulatory organization without prior approval from the Compliance Officer. Notifications regarding external business interests are made by staff as part of the quarterly compliance returns. The Compliance Officer keeps a record of all external relationships.
A potential conflict exists with respect to investment opportunities presented to DSW Ventures in which Dow Schofield Watts (DSW) has, or may have in the future, an economic incentive or interest. The method by which such conflicts are resolved and managed will be set out in the relevant placing memorandum.
7. Disclosure of Conflicts of Interest and Inducements
Where a conflict does arise the full nature of the conflict will be disclosed to our client prior to undertaking the activity, together with the proposed measures for handling it. If it appears for any reason that the conflict cannot be reasonably managed so as not to prejudice the best interests of the client, this will also be disclosed. The Compliance Officer will take responsibility for disclosing and documenting any potential conflicts of interest.
Inducement disclosures will be set out to clients in concise, unambiguous language (‘clear, fair and not misleading’) which clearly identifies the existence, nature and amount of a fee, commission or benefit in essential terms in the first instance with the offer of more comprehensive details in monetary figures at the client’s request.
8. Amendments to the policy
If any amendments are made to the policy, which may materially affect the way in which the Firm would handle a conflict of interest on behalf of our client, the client shall be notified in writing of the nature of the changes. The client will also be provided, on request, with an up-to-date copy of the conflicts of interest policy statement.
This policy will be kept under review by the Board and the Compliance Officer to ensure it continues to meet the client’s best interests.
9. Record Keeping
The Firm will maintain both a Conflicts Register and an Inducements Register. These records will be held and updated by the Compliance Officer as part of the compliance monitoring programme.