Despite its transposition into French law last summer and the endeavours of the French Financial Markets Authority ("AMF") to provide guidance to stakeholders in the asset management sector, the impact of Directive 2011/61/EU on alternative investment fund managers (known as the "AIFM Directive") remains unclear.
It is particularly difficult to assess the impact it will have on investment vehicles that have not thus far been subject to the control of the financial regulator. This concerns the scope of the AIFM Directive, and represents one of the most significant changes introduced. The Directive will apply not only to regulated investment funds (such as, in France, SCPIs or OPCIs), the creation and operation of which are strictly governed by financial regulations, but more generally to all vehicles that, regardless of their legal form or the nature of the assets held (financial assets, real estate, receivables, etc.) satisfy the criteria for classification as "alternative investment funds" or "AIFs". It should moreover be noted that these criteria have been very broadly defined and interpreted.
The development of AIFs by object
AIFs include all vehicles (regulated and unregulated) that satisfy four basic, cumulative conditions: they must (i) be a collective investment undertaking, i.e. offer investors the prospect of a financial return, (ii) raise capital from (iii) a number of investors, with a view to (iv) investing it in accordance with a defined investment policy. All methods used to raise funds for the purposes of offering a financial investment may therefore be covered by this definition of an AIF. Initial estimates from the AMF suggest that thousands of structures that are at present unregulated may thus be defined as AIFs. "SCIs and other real estate companies", together with venture capital companies, head up the list of examples most frequently cited by the AMF as being included in this new category of AIFs.
French investment funds now include, on the one hand, strictly regulated funds for which the regime is defined by law, classified under the French Monetary and Financial Code as "AIFs by nature" and, on the other hand, "other AIFs" or "AIFs by object", i.e. vehicles that were until present unregulated and that satisfy the four above-mentioned criteria; these other AIFs are now subject to a set of standard rules.
The stakes involved in classification as an AIF are far from inconsequential. It goes without saying that the implementation of AIF status goes hand-in-hand with a certain number of obligations relating, in particular, to the requirement for the fund manager to hold an AMF licence (if it manages closed-end vehicles representing a total amount in excess of EUR 500 million), the appointment of a depositary responsible for holding the assets, the manager's remuneration, the methods used for valuation of the portfolio's assets, and reporting to the AMF and investors. There are, however, certain exceptions to these requirements (for holding companies and family offices) as well as reduced obligations for certain vehicles, according to the amount of assets managed, the leverage levels or the type of investors targeted (professional or non-professional). The AIFM Directive also brings certain welcome progress, for example in terms of the facilities offered for the raising of capital within the European Union via the introduction of a passport. The qualification criteria are thus clearly of great importance.
Initial clarifications from the AMF and the ESMA
The AMF has already published preliminary guidelines, which provide an indication of the regulator's approach. An economic approach is favoured, consisting in ascertaining whether the vehicle is a savings / investment vehicle or merely an instrument designed to facilitate the joint operation of one or several assets held collectively. In the first case, the vehicle may be classified as an AIF, whereas in the second, such definition will not apply. This approach appears convincing in theory, but can nonetheless prove rather complicated in practice, as the dividing line between operation and investment is often rather elusive, especially in the field of real estate.
The European Securities and Markets Authority ("ESMA") has also contributed significantly to the definition of AIFs, through the publication of "guidelines on key concepts", which will most likely be echoed in an official AMF position. These key concepts develop each of the criteria for definition of AIFs.
As regards the first criterion, i.e. the notion of a collective investment undertaking, the ESMA reaffirms that an investment fund does not have a general commercial or industrial purpose, instead existing to generate a pooled return by means of the pooling of capital raised. The notion of investment fund also implies that investors agree to entrust the investment of the capital to a third party, meaning that the investors themselves have no day-to-day discretion or control. The criteria regarding the existence of a number of investors and of a defined investment policy are also interpreted very broadly. A fund with a sole investor may thus still be classified as an AIF, provided that there is no legal provision that prevents new investors from joining the fund. In order for an investment policy to be considered relevant, it must, in principle, be set out in an official document and be binding on the manager.
A few examples in terms of real estate
If we apply the AMF's positions, a real estate joint venture in which two investors retain control over the real estate assets is not an AIF, as it does not comply with the definition of an investment fund, according to which the investors must not retain day-to-day discretion or control over the assets. However, the AMF has not provided any indication of what should be considered "day-to-day" operations in relation to real estate. Do such operations include decisions on investments and disposals, asset management, property management…?
Another illustration provided by the AMF is that of a real estate club deal in which several investors invest together in an SCI, entrusting the SCI's management to a third party and retaining no discretion or control over decisions regarding investments or disposals of the real estate assets. According to the AMF, such a vehicle constitutes an AIF.
Can it then be concluded that if, as is the case for the majority of real estate transactions, the investors work together with an operator (be it a developer, property trader or simply an asset manager) on a single, clearly defined transaction, then this cannot qualify as a transaction involving an AIF? At present, this assertion cannot be confirmed. The definition of an AIF by object is therefore a particularly high-stakes issue for the traditional real estate industry.
One year during which to analyse the situation
It will be difficult to prepare any standard framework for analysis and to implement a "tick-the-box" approach. Consideration of the AIF classification will have to be carried out on a case-by-case basis for each unregulated structure, taking into account its instruments of incorporation and commercial documentation. The consequences of such a qualification are significant: failure to comply with the regulations may result in disciplinary consequences, as well as civil and even criminal proceedings in certain circumstances.
We must strive to ensure that a clear position is progressively developed through discussions between the AMF and practitioners. Ideally, this position should be defined as soon as possible, in that AIFs and their managers only have until 22 July 2014 to comply with the obligations resulting from the AIFM Directive.