Further to the implementation of the AIFM Directive1 in France,2 new cross-border management and distribution possibilities are now available for investment products in the form of alternative investment funds (AIFs).
Increased Access to a Key Market
The French market is a major place to raise funds, as France boasts one of the highest savings rates in the EU.3 Indeed, with more than €3 trillion of assets under management and over 12,000 investment funds (including 9,000 AIF), France is one of the key jurisdictions in the asset management area.4
French investors favor local products, compared to EU funds and offshore structures. Major attributes that generate French investors’ interest are trust in products subject to a familiar regulation regime, as well as the fact that these products are eligible investments for institutional investors, such as pension funds (e.g., PERCO, PERP), life insurance companies and comparable regulated entities.
The AIFMD provides both a management and a marketing passport. Through the management passport, EU alternative investment fund managers (AIFMs) now have the opportunity to directly manage French funds, as well as greater access to the French savings market. Such cross-border organizations offer additional advantages, including economies of scale, decreased costs and efficient management for international structures.
The successful implementation in France of the UCITS passports5 – both the marketing passport as well as the relatively recent management passport introduced by the UCITS IV6 Directive – demonstrate that cross-border organizations are very popular, and comparable success may be anticipated in the alternative investment world.
In addition, as part of the implementation of the AIFMD, the AMF, the French financial regulator, has reframed and significantly simplified the range of French funds available. Among other structures, a new vehicle is now available – namely, the Professional Specialized Fund (PSF) – which may be marketed via passport to EU investors. The PSF is an attractive vehicle, with many features comparable to the Luxembourg SIF or Irish QIF. Key features of the PSF include:
There is no minimum or maximum investment ratio;
The fund is open to professional investors, as well as investors with a minimum subscription of €100,000;
There are no investment strategy constraints;
The fund may invest in any type of instrument;
There is no need to obtain approval from the AMF (only a declaration is required);
The entity may be structured in contractual or corporate form (FCP or SICAV, respectively); and
The entity is tax-neutral (tax-transparent if in contractual form, and tax-exempt if in corporate form).
For a more detailed description of the simplification of the French management company regime and the range of French funds that can be offered to investors following the transposition of the AIFMD into French law, please refer to DechertOnPoint, The Regulation of Managers and Funds in France Following the Implementation of the AIFM Directive.
New Routes for Management
Previously, the only way to manage a French AIF was to establish a French management company or act via a delegation from a French manager. The AIFMD management passport offers two additional routes, whereby EU AIFMs may directly manage French AIFs:
Utilizing the “freedom to provide services” passport (FPS); and
Setting up a French branch under the “freedom of establishment.”
The delegation from a French manager to an EU or non-EU manager remains as an alternative to consider, but such delegation must comply with AIFMD requirements.7
The feedback we have received from the AMF regarding UCITS IV implementation is that most of the EU managers managing French funds passport their activities via the FPS passport,8 which leads us to anticipate the same attractiveness in the AIFMD world. The main advantages of the FPS passport are that: it provides direct access to the French market with only a straightforward notification process;9 there is no need for a manager to establish a physical presence in France; and such FPS passport is easy to manage.
Practically speaking, this means that:
An EU AIFMD-compliant manager that passports its activities into France via the FPS will directly manage a French AIF;
The home state regulator of the AIFM will remain the competent authority; and
The French rules applicable to the AIFM are limited to imposing (i) a duty to act in an honest, loyal and professional way when performing investment services and in the interests of clients; (ii) appropriate measures to prevent conflicts of interests affecting clients; and (iii) an obligation to comply with French-specific provisions applicable to French AIFs, which include rules related to marketing in France.
Having a French branch requires compliance with the local regulations related to having presence in France, such as rules of good conduct (for example, pertaining to conflicts of interest, best execution, and client classification, information and suitability) and French corporate, employment and regulatory requirements (including reporting duties). However, the notification process is easy to manage and there is no need to obtain a French license.10 Advantages of establishing a local branch include: creating visibility in the French market; having experts in place to assess local investment opportunities; and potentially dispensing with the need to hire intermediaries such as distributors.
Also, given that a French AIF is required to have a custodian located in France (either a French custodian or an EU custodian with a French branch), as well as its central administration in France, a French presence could partially handle this issue (for instance, performance by the French branch of accounting tasks).
Direct Distribution Barriers Yet to be Resolved
At the EU level, there is on-going debate regarding the passporting of receipt and transmission of orders (RTO) and investment advisory services within the framework of the AIFMD. The current position of the European Commission11 is that the AIFMD management passport should not cover RTO and investment advisory activities. Practically speaking, this means that an EU manager managing a French AIF via the AIFMD passport could not directly market such AIF in France.
In France, the AMF believes, as a practical matter, that it is unlikely active fund marketing activities may be carried out without providing investment advice and/or RTO. Therefore, the AMF supports an AIFMD passport that enables the passporting of RTO and investment advice. This would result in the possibility of directly marketing to French investors without the necessity of utilizing local distributors.
It is anticipated that clarification at the EU level will be forthcoming. Adoption of the French approach on an EU-wide basis is recommended, in order to provide a full fledged and efficient passport to AIFMs.