Subject:File No. S7-30-96 January 31, 1997 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Stop 6-9 Washington, DC 20549 Re: File No. S7-30-96 Dear Mr. Katz: We are writing in connection with the aforementioned rule-making and, in particular, the definition of "Qualified Purchaser" under new Section 3(c)(7) of the Investment Company Act, as amended. Horsley Bridge Partners is a registered investment advisor which acts primarily as a general partner of partnerships formed to invest in private equity funds, typically venture capital and buyout funds. Our partnerships have relied on the Section 3(c)(1) exemption in the past, as have the underlying funds in which we invest. Our partnerships are expected to qualify under the new Section 3(c)(7) exemption as well. We expect that some of the private equity funds in which we invest will wish to qualify under the new Section 3(c)(7) exemption, which would mean our partnerships would need to qualify as a "Qualified Purchaser." Our existing partnerships have committed capital of over $1 billion and the investors in our funds are major corporate pension funds and endowment funds, all of which are Qualified Purchasers. Therefore, we are quite sure that we are the type of investor intended to be covered by the new Section 3(c)(7) exemption. This conclusion was reinforced by the repeated comment in your proposal that the new Section 3(c)(7) is intended for sophisticated investors. We have been investing in private equity partnerships since our formation in 1983, and many of our limited partner investors have been participants with us for many years. However, because periodically we form new limited partnerships with our firm as general partner, it appears that, under the proposed rules, at the beginning of each partnership, the partnership would not technically fall within the definition of Qualified Purchaser because we would not meet the asset test. While the binding capital commitments to our partnerships are always well in excess of the $25,000,000 threshold, those capital commitments are drawn only as needed. The investments we make in private equity partnerships also require capital commitments to be paid in on an as-needed basis. These deferred contribution arrangements are made as an alternative to holding cash or cash equivalents. Prior to the publication of the proposed rules, we wrote the attached letter addressing these issues. We believe the suggestions set forth therein remain appropriate, but, having seen the proposed rules, have additional suggestions for addressing our concerns. Proposed rule 2a51-1(b)(5) would include in the definition of investments cash and cash equivalents held for investment purposes. Binding commitments to make capital contributions in the future function as an alternative to holding cash and cash equivalents and are generally employed because they are viewed as more favorable to investors. Because they are functionally equivalents, we recommend that binding capital commitments be treated as cash and cash equivalents. This change better serves the interests of the ultimate investors while meeting the policy of including only large investors as Qualified Purchasers. An alternative suggested in our earlier letter was to clarify paragraph (iv) of the statutory definition. It requires that a person "own and invest on a discretionary basis" at least $25,000,000 in investments. As stated above, our firm invests on a discretionary basis over $1 billion of assets through various partnerships. However, it is not clear that our firm would be deemed to "own" those investments since it invests those as a general partner of a partnership in which it has only a minority interest or through investment advisory agreements. Furthermore, each individual partnership does not "own" the investments of the others and cannot be said to invest the assets of the other partnerships. The rules should clarify that "own" as used in this paragraph includes control as under the Section 13(d) definition of beneficial ownership and that assets owned and controlled by a person and their affiliates should be aggregated so that all controlled persons would be "Qualified Purchasers" if the aggregate aassets so owned and invested on a discretionary basis are at least $25,000,000. Our earlier letter also suggested that companies should be treated as Qualified Purchasers if all of the beneficial owners of securities of the entity are Qualified Purchasers. We continued to endorse this approach and note that under proposed rule 2a51-3 the look-through to beneficial owners of a company's securities would allow a company to be a Qualified Purchaser even if it was formed for the specific purpose of making the investment. Why should not this idea be extended to allow such a company to qualify as a Qualified Purchaser as it does in the "accredited investor" definition of Regulation D? Finally, if none of the suggestions above are adopted, it would at least be helpful to clarify that, for purposes of valuing investments, commitments made to companies would be valued at the full binding commitment, notwithstanding any deferred capital contribution obligation. This would enable our partnerships to more quickly reach the $25,000,000 threshold and would reflect the true significance of commitments of the magnitude we usually make. Thank you for your consideration. If we can provide any further information with respect to this matter, please call the undersigned at (415) 986-7733. Very truly yours, Alfred J. Giuffrida Enclosure *************************The following letter was the enclosure*************** November 27, 1996 Via Federal Express Mr. Barry P. Barbash Director, Investment Management Department Securities and Exchange Commission 450 Fifth Street, N.W. Stop 10-6 Washington, DC 20549 Re: National Securities Markets Improvement Act of 1996 - SEC Rulemaking Dear Mr. Barbash: We are writing in connection with new Section 3(c)(7) of the Investment Company Act of 1940, as amended, and in particular the definition of "Qualified Purchaser." Horsley Bridge Partners is a registered investment advisor which acts primarily as a general partner of partnerships formed to invest in private equity funds, typically venture capital and buyout funds. Our partnerships have relied on the Section 3(c)(1) exemption in the past, as have the underlying funds in which we invest. Our partnerships are expected to qualify as well under the new Section 3(c)(7) exemption as well. We expect that some of the private equity funds in which we invest will wish to qualify under the new Section 3(c)(7) exemption, which would mean our partnerships would need to qualify as a "Qualified Purchaser." Our existing partnerships have committed capital of over $1 billion and the investors in our funds are major corporate pension funds and endowment funds, all of which are Qualified Purchasers. Therefore, we are quite sure that we are the type of investor intended to be covered by the new Section 3(c)(7) exemption. However, whether we technically qualify at all times may depend on the calculation of investments for purposes of the definition of Qualified Purchaser. At the beginning of each of our partnerships, we will not have made commitments to private equity funds nor will we have value in those investments in excess of $25,000,000. We would also not hold assets of $25,000,000 at the beginning of a fund because we call our capital commitments on a just-in-time basis in order the maximize investment returns to our investors. Therefore, we urge that investments for purposes of the definition should include any partnership's or other entity's undrawn committed capital. That would be consistent with our view and the view of our clients that we have the full capital commitments under management. Alternatively, you could make it clear that paragraph (iv) of the definition includes all entities managed by a person that manages investments in excess of $25,000,000. Otherwise, the rule may temporarily exclude us and others like us in a manner inconsistent with the policy of the new exemption and place an additional burden on those in which we invest. We also note that the definition of Qualified Purchaser does not specifically include entities of which all the security owners are qualified purchasers as does the analogous definition of "accredited investor" under Regulation D. It is particularly surprising that a trust is provided favorable treatment under paragraph (iii) of the definition, but not partnerships and limited liability companies. It is not clear why there should be a distinction based on the form of entity. Therefore, we recommend that you include in the definition of Qualified Purchaser all entities, all of the security holders of which are Qualified Purchasers. Thank you for your consideration. It would be unfair if our clients were excluded from investments because of technicalities in the language of the amendment. If we can provide any further information with respect to this matter, please call the undersigned at (415) 986-7733. Sincerely, Alfred J. Giuffrida Managing Director cc: Craig Tyle, Investment Company Institute Julie Allecta, Heller, Ehrman, White & McAuliffe