It is impossible to be certain how the European market will look in six years’ time when the transitional provisions relating to national private placement regimes (NPPR) are due to come to an end. How managers respond to this challenge will define their strategy and competitiveness in the new era. Here we consider the marketing and other strategic choices which need to be made by managers, together with the way in which their decisions look set to shape the future of the industry.
Given that access to the EU market now comes with significant regulatory implications, firms are considering whether they are (or need to be) based in the EU and whether it is worthwhile for them to actively market in the EU. The benefits of accessing EU investors should be weighed against the additional regulatory requirements that need to be met. Non-EU managers wishing to access EU investors are required to identify their gateways to the EU.
The AIFMD1 defines marketing as a direct or indirect offering or placement at the initiative of the alternative investment fund manager (AIFM) or on its behalf of units or shares of an alternative investment fund (AIF) it manages to investors domiciled in the EU, or having a registered office in the EU.
Therefore any reverse solicitation or passive marketing whereby an investor initiates the transaction is not in scope of the AIFMD. Reverse solicitation may therefore appear an attractive solution for those managers challenged by compliance with the AIFMD or NPPRs. However, very careful attention will need to be given by managers to the differing rules and evidential requirements relating to reverse solicitation in each relevant EU jurisdiction. Managers should also take steps to limit the litigation risks, as well as the regulatory risks, associated with reverse solicitation, not least because a disgruntled investor might one day (rightly or wrongly) claim that active marketing took place.
EU marketing passport
With the implementation of the AIFMD in July 2013, the marketing passport is the only way for authorised EU AIFMs to market EU AIFs to professional investors in the EU, with NPPRs no longer available to them.
The marketing passport is also due to be made available to EU AIFMs marketing non-EU AIF, and to non-EU AIFMs marketing EU or non-EU AIFs in the EU in July 2015 (at the earliest). However this is subject to positive advice from the European Securities and Markets Authority (ESMA) and the adoption of enabling legislation by the European Commission.
National private placement regimes
Non-EU managers and EU managers with non-EU funds have the option of maintaining private placement for as long as permitted. In some cases moving funds, or even an entire operation, outside the EU to achieve this may be an option worth considering.
NPPRs, where they exist, will continue in parallel with the marketing passport regime until at least July 2018. Thus marketing under NPPRs to EU investors of non-EU AIF managed by EU AIFM, and EU and non-EU AIF managed by non-EU AIFM, is continuing to be permitted subject to compliance with certain provisions of the AIFMD2.
However, even this more or less limited compliance means that NPPRs under AIFMD can in no way be regarded as a continuance of the pre-AIFMD status quo. Moreover, the AIFMD gives discretion to individual EU member states to impose stricter regimes than those provided for in the AIFMD. Even where NPPRs were available pre-AIFMD, some jurisdictions are changing or abolishing their NPPRs and managers relying on these regimes need to keep the position in each relevant jurisdiction under ongoing review.
Moreover, NPPRs are due to prove only a temporary reprieve from AIFMD for managers marketing to EU investors, as in 2018 the European Commission may bring the NPPRs to an end (subject to ESMA’s opinion on the functioning of the marketing passport regime). This will mean only AIF managed by fully AIFMD-compliant AIFM may be marketed in the EU, irrespective of where those AIFs or AIFMs are located.
The impact of AIFMD will depend on what managers do to react to its requirements, bearing in mind the need to respond as efficiently and commercially as possible. Individual managers are taking different approaches to AIFMD, reflecting a diverse sector that encompasses everything from retail non-UCITS to offshore hedge funds, private equity funds and real estate funds. The (EU or non-EU) locations of managers, funds and investors are principal factors determining how the AIFMD rules apply to a given business and what strategic options are available.
While an AIF can have only one AIFM, some (typically larger) managers may have more than one entity which could potentially fulfil the AIFM role (while needing to bear in mind that any delegation of risk management and/or portfolio management requires great care in order that avoid the delegate, as opposed to the AIFM, being regarded by regulators as the ‘true’ AIFM).
Such managers may benefit from a choice of an AIFM domiciled outside the EU (mitigating the initial impact of the AIFMD) or inside the EU (subject to full AIFMD compliance from the outset). However, for many EU managers the AIFM will most likely be an existing EU MiFID investment manager.
For some managers, full AIFMD compliance from the outset in 2013 offers a first mover advantage which outweighs the higher compliance costs. At the other end of the spectrum, if managers have few or no EU funds or EU investors they are likely to remove themselves from AIFMD’s requirements.
Ultimately, there will be a trade-off for managers as to whether they want to remain in the EU or move offshore altogether, continue with private placement for as long as possible or operate fully under the EU passport to ensure access to EU investors.
The AIFMD enables EU managers to use a management company passport to set up and manage AIFs in other EU Member States. This can be carried out by establishing a branch in another EU member state or by providing cross-border services. The AIFMD management passport thus provides a strategic opportunity to consolidate operations throughout the EU along the lines of that available for UCITS management companies under UCITS IV3. Indeed, the AIFMD enables a UCITS management company to manage AIFs by permitting it to obtain dual authorisation under both the UCITS and AIFMD regimes.
Whether management company centralisation is worth considering in practice will depend largely on a manager’s organisational structure, activities and cross-border operations. Some AIFMs, often being smaller and more simply organised than traditional UCITS management companies, may simply not have the need to rationalise operations across jurisdictions. Also, and as with the UCITS IV management company passport, cross-border tax issues will need careful consideration.
AIFM and UCITS as alternative options
The AIFMD will enable, for the first time, a range of non-UCITS funds to be managed and marketed to professional investors on a cross-border basis. Some managers of UCITS, or at least those UCITS with hedge fund-like strategies, may therefore ask whether they should switch to AIFs, as potentially AIFMD will provide managers with greater flexibility than UCITS while allowing them to continue to enjoy passporting benefits. A switch may become more appealing if regulation of “complex” UCITS becomes more restrictive (as raised in the contexts of both the European Commission’s proposal to replace MiFID4 with a new regulation and directive and also in its July 2012 consultation, known as UCITS VI, proposing improvements to the UCITS regime).
However, marketing to retail investors is not covered by the AIFMD and will remain subject to individual EU member states’ regimes for non-UCITS retail funds (providing no prospect for a standardised non-UCITS retail product). The AIFMD marketing passport can only be used to market to professional investors, a smaller market than retail.
Ultimately, it is investors who will decide whether AIFMD gains status as a global brand along the lines of UCITS and, while the AIFMD provides potential for this, there is a long way for AIFs to go before comparable status in the eyes of investors is achieved. However, AIFMD compliance may potentially be a means to enhance investor confidence. With thousands of non-UCITS funds falling within scope, the potential force of AIFMD should not be underestimated.
Some (typically larger) EU managers are able to treat AIFMD as a business opportunity, allowing them to distribute their (EU and, from 2015 non-EU) non-UCITS funds and consolidate their businesses through the new EU marketing and management passports. They may consider re-domiciling funds onshore. Larger managers will be better placed to absorb these costs and are more likely to view operational realignment as a less daunting challenge. Scale will be a clear advantage when it comes to addressing the challenges and exploiting the opportunities of AIFMD.
Meanwhile, smaller managers have fewer internal resources to deal with the initial and ongoing compliance responsibilities. They may have a more limited desire and/or capacity to take advantage of EU passporting. This may result in fewer non-EU managers choosing to operate in Europe, placing remaining, larger, EU managers at a competitive advantage.
The marketing and other strategic choices which need to be made by managers will define their strategy and competitiveness in the new AIFMD era. Each manager will have to make their own determination based on their business and distribution strategy and the nature of their investor base.
- In summary, EU AIFMs managing non-EU AIFs will have to comply with the AIFMD, except for the full depositary provisions. Non-EU AIFM managing EU AIF or non-EU AIF will have to comply with the AIFMD transparency requirements; appropriate co-operation arrangements must be in place between the relevant EU and non-EU competent authorities; and the country of the non-EU AIFM or the non-EU AIF must not be listed as a Non-Cooperative Country or Territory by FATF.
- Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009.
- Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004.
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Stéphane Puel | Lucy Frew