Originally conceived in the midst of the financial crisis, the Alternative Investment Fund Managers Directive (AIFMD) has generated years of negotiation and intense political wrangling. The AIFMD entered into force on 21 July 2011, with EU Member States given until 22 July 2013 to implement its requirements.
The primary purpose of the AIFMD is to create a broad regulatory and supervisory framework for fund managers across Europe while also providing consistent regulatory standards across the region. The AIFMD creates a homogenised ‘one size fits all’ set of rules which will apply across industries encompassing a number of different operating models.
The AIFMD has long attracted controversy. Hailed by some as a new dawn for managers of alternative investment funds, others believe that the adoption of the AIFMD will lead to a more protective and less competitive European market.
Existing fund managers can, in many EU Member States, rely on a transitional period of 12 months to 22 July 2014 to comply with the relevant provisions of the AIFMD (including its implementing Regulation and technical guidelines) and apply for authorisation. Such managers must be AIFMD compliant and have submitted an application for authorisation before this date.
The implementation and adoption of the AIFMD is clearly a transformative event for the European private equity market. However, it may be difficult to fully appreciate the impact the AIFMD will have on the industry. Matthew Baker, a senior associate at Berwin Leighton Paisner LLP, agrees. “It will be difficult to pinpoint the exact impact of the AIFMD as opposed to the general fallout from the economic crisis,” says Mr Baker. “Because the detail of the AIFMD took so long to emerge, and with the continuing lack of certainty as to how it will be implemented, we have been caught in a holding pattern. Now that the detail is at last solidifying, we will begin to see the approach that the market is taking.”
The AIFMD’s new authorisation and supervisory regime is, in many respects, similar to the system for managers of UCITS funds. It will encompass EU AIFMs, non-EU AIFMs managing EU AIFs and non-EU AIFMs who market their funds within the boundaries of the EU. Under the scheme, AIFs will be obliged to have a depository hold custody of their assets as well as provide governance oversight, again similarly to the UCITS regime. Additionally, the AIFMD also requires managers who manage AIFs to be registered in their home member state.
However, despite the similarities with the UCITS regime, the AIFMD may be particularly taxing for new entrants to the European market, says Mr Baker. “Newcomers will face a huge challenge in getting to grips with the weight of regulation whilst trying to build a track record and investor base, which risks adversely affecting competition in the market,” he notes.
Yet, despite the obvious challenges presented by the AIFMD, it should be viewed as an opportunity for many managers. According to Mr Baker, if done well, the AIFMD has the possibility to set a gold-standard in the same way that UCITS has taken off for Asian investors. “Whilst it may be possible to construct fund structures that minimise the potential impact of the AIFMD, managers need to do their market research as many target investors are now actively looking to keep their investments onshore to satisfy regulatory, political or reputational pressures,” he adds.
The implementation of the AIFMD has been a long time coming and achieving compliance with the legislation could prove to be an expensive operation for some managers. “For managers who are already regulated in their home jurisdiction, the running costs of the AIFMD should not be significantly higher than they already are,” says Mr Baker. “There are, however, likely to be significant one-off costs for managers in implementing the AIFMD and, where necessary, reorganising their business. One of the real tests will be how much cost is added in to cover the depositary’s fees and increased insurance coverage costs. The use of depositaries and whether it will be possible to make use of the ‘depositary-light’ option will be a crucial consideration in structuring funds in future. Depositaries will have to be able to explain to investors what benefits they provide in the context of investor protection to justify their fees.”
Despite its detractors, it is clear that the AIFMD will help shape the private equity landscape of Europe for many years to come. Its repercussions will be felt beyond merely the realms of regulatory compliance and operational changes. Distribution, business strategies and market composition will also be impacted by its adoption, and managers should be aware of this impact and plan accordingly.
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