Distribution of Private Funds in Europe after AIFMD
By Gus Black and Rachel Fenwick
With the AIFMD now effective, the attention of U.S. investment advisers, who had in large part relied on transitional provisions that have since expired, has turned to capital raising in Europe under the new regime. The key impact of the AIFMD for U.S. advisers is the prohibition on the active marketing of alternative investment funds (AIFs) to investors in the European Economic Area (EEA), without some form of registration and ongoing compliance requirements.
An AIF is defined broadly to include most kinds of pooled investment vehicles — other than UCITS funds — that raise capital from investors. Subject to very limited exemptions, this will catch most private funds (including hedge, private equity and real estate funds), but it will also catch a wide range of other types of funds, including U.S.-registered mutual funds.
The quid pro quo for this new regulation is the so called marketing “passport”, whereby a fund can be registered once and then be freely marketed throughout the EEA. It has been well rehearsed that U.S. managers cannot directly benefit from this passport, at least not initially. But, in fact, any U.S. manager that wishes to avail of the passport can do so right away – as long as it is prepared to establish an EEA fund and EEA alternative investment fund manager (AIFM). Outsourcing providers can deliver the required AIFM infrastructure on a relatively “turnkey” basis.
That said, many U.S. managers would prefer not to commit to such a step just yet. This leaves two options.
The first option involves accepting European investors only on a passive – or “reverse solicitation” – basis. A genuine reverse solicitation sale falls entirely outside the new AIFMD regime. In general terms, in order to qualify, the relevant offer or placement must be at the investor’s initiative rather than that of the adviser or any agent of the adviser – reverse solicitation is not about the adviser actively finding investors, it is about allowing investors to access the adviser.
Firms that adhere to this fundamental principle – and can back it up with evidence – should find they can still accept investment from EEA investors, unaffected by the AIFMD. However, the concept of reverse solicitation is approached differently by different regulators and other market participants – therefore, advice on its scope should be taken before relying on it in any particular country. Managers seeking to rely on this principle should review their understanding of the process and related sales procedures and maintain a robust compliance protocol that can also provide the appropriate backup should the sale be queried by a regulator or, potentially, an investor seeking its subscription money back on grounds of a non-compliant sale. These difficulties frequently mean that reverse solicitation is not a complete marketing strategy.
For investment advisers seeking to target European investors more actively, new private placement regimes have been adopted by most (but not all) EEA countries, which offer a more robust and certain alternative. In general, these regimes permit registered marketing to professional investors. The nature of private placement permitted in any given EEA Member State is a matter for the national law of that Member State. While certain countries (such as the UK) have implemented relatively “light touch” regimes, others (such as Germany) have imposed additional requirements that make the registration process more time consuming and complicated – although perfectly achievable for most funds.
The registration process itself is, however, only part of the story. U.S. AIFMs registering for private placement in EEA countries need to familiarise themselves with the extensive disclosure and reporting requirements that such registration will entail, as well as any restrictions on conduct that will be triggered (such as the restrictions on asset stripping and additional reporting requirements aimed at private equity and other managers taking controlling positions in portfolio companies). Fund documents need to be bought into compliance with the local requirements and regulatory reporting procedures must be put in place. Managers should ensure they are comfortable with these requirements and the inevitable time and cost commitment.
It should be borne in mind that geographic Europe involves 32 jurisdictions within the EEA and several more outside it. With requirements differing across the map, careful planning and good advice are important when planning a distribution strategy.
ESMA Issues Call for Evidence on AIFMD Passporting
By Gus Black and Simon Wright
On 7 November 2014, ESMA published a call for evidence on the operation of the “passport” available to AIFMs under the Alternative Investment Fund Managers Directive and on the experience of marketing under the AIFMD by non-EEA AIFMs. This will inform the opinion/advice ESMA needs to issue by 22 July 2015 – specifically:
(A) an opinion on the functioning of the passport for EEA AIFMs and on the functioning of the national private placement regimes (NPPR); and
(B) an advice on the application of the passport to non-EEA AIFMs and AIFs.
If ESMA issues a positive advice and opinion, the European Commission will then have three months to adopt a delegated act specifying when the passport option would be extended in respect of: (i) the marketing of non-EEA AIFs managed by EEA AIFMs; and (ii) the management and/or marketing of AIFs by non-EEA AIFMs in the EEA. In order to issue a positive advice, under Article 67 AIFMD, ESMA must be convinced that “no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk” impede the application of the passport, in the circumstances in (i) and (ii).
The call for evidence expands on these Article 67 concepts, with investor protection assessed relative to the degree of co-operation between EEA and non-EEA authorities, and systemic risk monitoring assessed by demonstrating evidence of adequate surveillance of systemic risk in the relevant non-EEA country, and existence of co-operation between EEA and non-EEA regulatory authorities in monitoring systemic risk.
If the passport is extended, it can only be used where the AIFM is in compliance with the full scope of the AIFMD. For non-EEA AIFMs, this would mean needing to be fully authorised in an EEA Member State of reference – and so being subject to the same requirements applicable to an EEA AIFM authorised in that same Member State. Further, non-EEA AIFMs would also be required to appoint a legal representative in their home Member State of reference.
The process under the AIFMD for the extension of the passport interacts with the eventual termination of NPPR in 2018 (or later): Unless and until the first step of extending the passport in respect of the circumstances in (i) and (ii) occurs, the mandatory termination of NPPR cannot happen. However, there is no prohibition on individual Member States that currently offer NPPR from discontinuing those regimes at any point before the mandatory termination of all NPPR.
With respect to passporting, ESMA has focussed on high-level questions as to the issues and difficulties that AIFMs have experienced, though ESMA has not specifically addressed one of the more pertinent problems faced by smaller managers operating under the passport – namely, that local regulators can and do charge greatly varying authorisation and fund registration fees.
Within the analysis of NPPR, while ESMA has focussed questions about the costs and benefits of marketing under NPPR, ESMA is also considering whether marketing under NPPR has a long-term future – hence, its questions regarding whether NPPR has been so demanding that AIFMs have decided to exit a particular jurisdiction or no longer consider NPPR a valid route to market.
Given that the call for evidence represents an opportunity for AIFMs to highlight discrepancies in the operation of the passporting processes among EEA Member States, as well as to shape the operation of NPPR until 2018, we would urge AIFMs to respond to ESMA, and would be pleased to make a submission on their behalf. Responses are due to ESMA by 8 January 2015.
