In 2017 Richard Perry got The Hedge Fund Journal’s “Outstanding Contribution” award for Hedge Funds – Law and Practice; a gong that Simmons & Simmons’ partner, Iain Cullen, has also received in previous years. Perry’s legal career began at Stephenson Harwood, where he qualified in 1990, after reading law at King’s College London. As a newly qualified assistant solicitor working with Andrew Sutch, his focus quickly transitioned from corporate transactional to investment fund work. By 1994 Perry had set his sights on the then emerging European hedge fund industry, and was lured to Simmons & Simmons by its strong reputation in the space. Perry rapidly made partner in 1999.
He was charged with a business plan that focused on the hedge fund industry. The plan worked like clockwork. The explosive growth of Simmons & Simmons’ financial services practice has gone hand in hand with the exponential trajectory of Europe’s hedge fund industry. Perry reflects how Iain Cullen, who has advised on the set up of such luminaries as Brevan Howard, BlueCrest, Lansdowne and Egerton “has been at the epicentre of the growth of Europe’s hedge fund industry”. Perry, too, has been advising some of his clients from the very start. His first client instructions as a new partner were received as a result of a pitching process to Henderson Global Investors on the launch of the hedge fund range which went on to become the current AlphaGen range, which he continues to advise eighteen years later. Other clients that Perry credits with propelling his career include Odey Asset Management, Marshall Wace and GSA Capital. Perry continues to advise new start-up managers on the launch of their businesses and funds and has seen an increase in recent years in systematic and quantitative strategies. Simmons & Simmons advises systematic managers on issues such as ensuring code developed by new staff does not infringe the ownership rights of former employers. In this area, Perry comments that “managers are more likely these days to assert their rights against departing staff with disputes often being resolved in out-of-court settlements”.
Indeed, Simmons & Simmons is sought after for the breadth and depth of its practice, which covers areas including fund formation work, regulatory advice, advising on prime broker and trading documents, tax, employment, corporate, litigation, investigations, intellectual property and data protection. This reflects the strategy of the firm where asset management and investment funds is one of four key sectors. “We are distinguished by specialist sector knowledge that helps us understand the context of our advice. Our offering is different from our main competitors; we cover all issues for our hedge fund clients, not just the areas a fund formation lawyer can cover,” says Perry. Simmons & Simmons’ financial services group took its current shape in 2000 and has seen brisk growth since then with currently 19 partners and a total team of more than a 100. Simmons & Simmons acts for an enviable proportion of the largest managers in The Hedge Fund Journal’s Europe 50 and US 50 rankings (and market coverage is even higher when the alliance with New York based Seward & Kissel is factored in). Perry has always enjoyed client-facing work and maintains regular dialogue with clients despite his management responsibilities. Perry is currently head of the financial services practice, a role that he has held for approaching 10 years over three stints.
Firm-wide, Simmons & Simmons has 240 partners across 21 offices in Europe, Asia and the Middle East. In addition, the firm opened in Bristol in 2012 to provide a lower overhead centre to service its international clients. 6 members of Perry’s team are now located there. In Europe, Simmons & Simmons now has offices in countries including France, Germany, Italy, Spain, the Netherlands, Luxembourg, and Belgium, as well as the UK. Perry argues that “our well-integrated network of European offices helps to give us an edge in monitoring the impact of regulations, such as AIFMD and MiFID2, on the asset management industry”. Though ESMA makes efforts to harmonise rules in some areas, many regulations leave considerable latitude for different interpretation and enforcement between countries. AIFMD private placement rules are a prime example where Simmons & Simmons sees “a wide range of practices adopted by the member states”. Perry elaborates “you cannot market through private placements in France, Italy or Spain whereas it is relatively straightforward to do so in the UK or the Netherlands. Other countries lie between those extremes, in that it may be possible to market but the registration process can be protracted”.
Seward & Kissel alliance
Perry has been one of the lead partners responsible for the alliance between Simmons & Simmons and US firm Seward & Kissel in relation to the asset management and investment funds sector. The alliance will soon have its fifth anniversary and Perry is delighted with its achievements to date. “We have won new clients and important mandates from US, European and Asian managers; we responded amazingly to key European regulatory developments for US managers and to key US developments for non-US managers and are developing seemless ways of working together including through the use of regular secondments between the firms.”
Perry is well aware that, although the average life of a hedge fund may be short, new managers and funds are established every year which go on to be long term successful businesses. In this dynamic and innovative industry, new launches are vital and the climate for start-ups has changed beyond recognition over Perry’s career. “The level of assets needed to have a viable and sustainable business has increased from as low as $10 million in the 1990s to as much as $200 million now to run an operation in which investors will want to invest,” he reflects. This is because “the private banks and high net worth individuals that once dominated the industry have been replaced by pension funds and other institutions, whose expectations in terms of infrastructure are light years ahead of what was previously needed”.
Therefore, Perry is not surprised to see fewer launches, because portfolio managers pragmatically recognise that going solo is only one of many options: “leading portfolio managers could stay where they are; move to another well-established firm on improved terms; or join a multi-strategy operation to remove the hassle of running a business”. Nonetheless, some want to start their own business and Perry asserts “it is really important for the health of the hedge fund industry that there continue to be new businesses created and invested in by leading institutional allocators”. To demonstrate its commitment to the sector, Simmons & Simmons has created an online tool to help aspirant hedge fund managers. “LaunchPlus” collects materials to inform new managers of key issues in the launch process. Perry, and Simmons & Simmons’ partners Dev Saksena and Lucian Firth, are the key contacts. The first version of LaunchPlus was for managers setting up in Europe, the second is “US to UK” for US managers seeking to open up and raise assets in the UK, and the third one, unveiled in May 2017, is targeted at those looking to set up shop in Hong Kong. The fourth LaunchPlus product, LaunchPlus Singapore, for managers wanting to locate in Singapore, is also now live. LaunchPlus is available without a subscription fee for clients of the firm, and Perry thinks that “being able to answer standard questions and provide useful background information without charging fees is a significant factor in winning new launch instructions in the current environment”. LaunchPlus is accessed via an open source application, elexica, which goes from strength to strength. “The volume of content in elexica grows remorselessly, as do the number of hits we get,” Perry is delighted to report. “We are always looking for innovative ways to provide new services and to improve the efficiency of the services we already provide. This group was behind the creation of the navigator range of products, KIID production and UCITS registration products, MiFID2 Manager and most recently Netting + Collateral Reviewer which helps managers carry out the independent legal review of netting and collateral arrangements required under EMIR,” explains Perry.
Evolving investment vehicle types and terms
What high level guidance might Perry give to newer and smaller hedge fund managers today? To maximise the chances of attaining a critical mass of assets quickly, managers need to start with the product in which day 1 investors will be most comfortable to invest. But over time, they will need to be open minded to the idea of offering access to their strategy through different vehicles. “Ideally, a new manager client would like a single comingled fund for all investors, but the reality of building assets is that they might start with a Cayman vehicle before setting up managed accounts, a UCITS fund, a ‘40 Act fund for the US market, a long only version for US endowments and foundations or any combination of the above, to reach out to the widest variety of investor types,” Perry points out.
The need to diversify product ranges partly arises from fee pressures. “In the current environment, average management fees have been coming down for all active managers as they work hard to justify their remuneration; hedge fund fees are at the higher end of the range for active managers and managers are having to demonstrate their added value,” notes Perry, who sees fee breaks as a typical incentive being offered in founder share classes for early investors into new funds. Perry is also witness to more discussion around performance fees. While he rarely hears requests for hurdle rates, some investors are seeking a tiered structure that charges a higher percentage fee above a particular performance threshold. Perry also sees some managers agreeing to a variety of different deals on management and performance fees that tend to involve trade-offs between accepting lower management fees in return for higher performance fees. He thinks managers will countenance this because the blended level of fee income, under probable scenarios, will end up broadly similar to having a single fee structure.
Longer lock-ups can to a degree justify reducing fees, and Simmons & Simmons sees longer duration vehicles in both open-ended and sometimes closed-ended funds. Two or three-year rolling lock-ups can apply to open-ended funds, and Simmons & Simmons has built up a private funds practice in recent years, containing four partners who structure closed-end funds, usually as partnership style vehicles. Some Simmons & Simmons clients have moved into illiquid asset classes such as direct lending, distressed debt, real estate and speciality finance. Though a handful of Simmons & Simmons’ clients do have exchange listed vehicles, Perry generally sees less interest in listing funds, where he finds little enthusiasm from either investors or hedge fund managers. The additional disclosure requirements associated with exchange-listed funds are perhaps nowadays less of a differentiator, as levels of transparency are rising across the board anyway. “Insurance companies’ reporting requirements under Solvency II rules are only one example, but over the years there has been far greater acceptance of the need to provide more information on the fund portfolio and the manager’s business. Greater openness can lead to significant allocations,” Perry explains.
Perry expects that UK firms selling UCITS product to European investors might have the most work to do in readying for Brexit. “We fully expect UK managers can continue to act as portfolio managers of UCITS, but UK authorisations may no longer secure access to the distribution passport”. Perry also expects managed accounts and European domiciled AIFS could run into similar issues. Whether current EU passports can continue to be relied on remains to be seen. Of course for some managers Europe is not an important source of capital, and Perry thinks “managers raising assets mainly from markets such as the US, UK, Switzerland and other non-EU countries may see limited impact from Brexit”. Perry belongs to Simmons & Simmons’ Brexit group, and the firm is doing much work to prepare managers for various scenarios; Simmons has contributed some articles on the subject to The Hedge Fund Journal.
Perry is also concerned that any post Brexit restrictions on immigration could cause problems for some firms. “Access to people is a primary issue” he stresses. THFJ recently interviewed a Chenavari, the leading credit manager and client of Simmons, and over two thirds of their staff are from EU countries other than the UK, as indeed are some of Simmons’ London staff.
The wider hedge fund industry and regulation
Perry makes a contribution to the wider hedge fund industry partly through voluntary commitments and speaking engagements. He spent three years on AIMA’s research committee, which “broadened my understanding of the industry as the committee went beyond the legal and regulatory developments that I am more familiar with, to include topics such as the analysis of hedge fund returns on a risk-adjusted basis and the effects on the markets of developments such as transaction taxes,” he recalls. Simmons & Simmons’ London office recently hosted AIMA’s private placements seminar, where Perry talked about marketing in the US which he views as “the most important part as 70% plus of hedge fund industry assets come from the US”. At another AIMA event, in Paris, Perry chaired the AIMA Global Policy and Regulatory conference, which discussed what pension funds are seeking from hedge funds. Further afield, Perry spoke on hedge fund regulation post-Trump and post-Brexit, at a Maples and Calder event in the Cayman Islands in February 2017.
Perry considers that “the introduction of AIFMD was not a triumph of legislative process and that investor protection and market stability was not significantly improved as a result”. Still, now that AIFMD is bedded down Perry views it as another set of rules to comply with like any other and thinks getting to grips with MiFID II ahead of the January 2018 deadline could be a greater challenge over the next year or so. (Simmons & Simmons naturally has an online guide, called “Simmons & Simmons MiFID2 Manager” which is available on a subscription basis.)
Perry views AIFMD as having been to a large extent politically motivated and reckons “the marketing passport was the single upside of the directive”. He does expect more managers will set up AIFMs but, even here, his optimism is qualified. Perry shares the widespread industry disappointment at persistent delays in extending the passport to third countries and does not expect much traction on this objective within the next two years, once again for political reasons. The corollary of these setbacks is, of course, that the national private placement regimes will have to remain open, and Perry’s experience is that “hedge fund asset raising in the EU is mainly limited to those countries which have an operable private placement regime”.
Perry, born and raised in Edinburgh, is a lifelong fan of “currently fashionable” Hibernian football club and, having hung up his own football boots, now coaches runners as a hobby. He also plays bass in Simmons & Simmons’ rock band MLC, a line-up that includes fellow partner and regulatory guru Darren Fox. Perry is however not optimistic about the chances of putting on any gigs before early 2018 while the team manage the twin challenges of MiFID2 implementation and strategic Brexit advice.
Perry cannily anticipated the growth of Europe’s hedge fund industry when choosing to specialise in the sector. He remains upbeat on the industry and feels strongly that its best years are still ahead of it. Though Perry expects the next five years will continue to favour well established managers with the strong business infrastructure needed to meet institutional investors’ needs, he deeply believes in the importance of a vibrant start-up manager market as the lifeblood of the industry.