Impact of the AIFMD on real estate funds
December 2014 | 10QUESTIONS | INVESTMENT FUNDS
FW speaks with Heleen Rietdijk, Global Leader of AIFMD at KPMG, about the impact of the AIFMD on real estate funds.
FW: Could you provide a brief overview of the purpose and provisions of the AIFMD?
Rietdijk: The AIFMD essentially lays down the rules for the authorisation, ongoing operation and transparency of fund managers that manage or market alternative investment funds (AIF) in the European Union. The AIFMD has significantly changed the regulatory framework for a wide spectrum of funds including hedge funds, private equity funds, real estate funds and infrastructure funds since its implementation deadline in July 2013. The new rules also signal some major changes for AIF depositaries, administrators and external valuers. The primary focus of the Directive is to regulate the fund manager, as opposed to regulating the AIF itself, although there are knock-on impacts at fund level. The key drivers behind the Directive are investor protection and limiting systemic risk. In return for regulation, fund managers will be able to benefit from a passport to manage and market AIF throughout the EU.
FW: Specifically for real estate funds, what has changed under the new regime?
Rietdijk: Real estate fund managers are impacted both at management and at fund level. The manager itself is now under regulatory supervision, and it has to be able to prove that it maintains overall responsibility and control over the fund, is able to ensure the fund’s AIFMD compliance, and can effectively oversee and control delegated activities. The management the activities in typical real estate group structures has had to change due to AIFMD requirements covering independent risk management, independent valuation and overall governance and responsibility of the manager’s board. The increased transparency and risk monitoring required at fund level impacts the management information and the monitoring activities of the boards of funds, and places requirements on leverage limits, fund risk profiles and portfolio liquidity which will affect fund operations.
FW: What steps must real estate funds take to ensure they are AIFMD compliant going forward? To what extent does this apply to non-European funds and non-European managers using private placement?
Rietdijk: Managers should ascertain who and where their investors are based. AIFMD has changed the rules regarding private placement, reverse solicitation and the authorisations that managers require. Professional and institutional investors are asking more and more about the applicable regulatory regime and whether firms are AIFMD compliant. AIFMD compliance will be required when actively marketing into the EU, either through an EU AIFM or through an offshore entity. At a minimum, AIFMD imposes transparency requirements where managers need to ensure that the investors have access to all available information before investing and ongoing updates are provided by the manager during the investment period. Furthermore, managers will have annual report requirements and regulatory reporting requirements, as well as the need to ensure that the manager and its delegates act in compliance with the Directive. This will underline the need for managers to have strong governance structures in place.
FW: How would you describe general awareness of the requirements such as reporting and disclosures?
Rietdijk: Until now, managers have focused their attention on implementing the required policies and obtaining authorisation. However, as the regulatory reporting and the annual report disclosures deadlines are rapidly approaching, managers are starting to assess the impact of these requirements. The financial statements will need to include a number of additional disclosures – in particular in the director’s report, the risk management disclosure and the remuneration disclosure. A number of the disclosures can be added to the unaudited sections of the financial statements. Managers, therefore, need to assess what they need to disclose and how they want to disclose this. In addition to financial statement disclosures, managers now need to report to their regulator on a regular basis depending on the size of assets under management (AuM) and the risk profile of the funds. As this is a fairly new requirement for most managers, an in-depth assessment needs to take place.
FW: In your opinion, how well are real estate fund managers coping with the complexity of AIFMD compliance? What more needs to be done?
Rietdijk: For many EU based real estate managers, centralised governance, compliance and regulatory supervision is a new concept, as in the past many real estate managers were not typically supervised or at least not supervised at fund and at manager level. As the AIFMD principally places requirements on the manager, real estate managers now need to be able to demonstrate to their regulator that they are in control of the underlying fund structure and that they are able to make the entire structure compliant with AIFMD. Real estate fund structures are generally established with multiple legal entities, general partners and limited partners, portfolio companies and portfolio managers, and so on. In order to maintain their AIFMD authorisation, managers will need to demonstrate that they exert overall governance over the fund and its service providers.
FW: What operational challenges do real estate fund managers face under the AIFMD?
Rietdijk: Managers are required to conduct valuation, risk and liquidity management functions independently from portfolio management. Real estate managers are dealing with multiple parties and multiple service providers, which creates organisational challenges for managers as they need to be the ‘spider in the web’ ensuring the compliance of everyone involved and coordinating the overall fund structure. Typically, fund managers in real estate have a limited number of people in the management entity, so independence of functions in smaller entities will pose particular challenges. However, sensible use of outsourcing, appropriately detailed service level agreements, and legally robust documentation should enable managers – including smaller managers – to construct an AIFMD compliant solution. This will require the provision of complete, accurate and timely management information to the board of the manager so that it can fulfil its responsibilities regarding these functions.
FW: To what extent might fund managers need to adjust their external strategy, fund offerings, fund structures and fund domiciles? What options are available?
Rietdijk: When commencing or continuing marketing to EU investors, managers need to be mindful of the specific EU countries where the investors are based as requirements from country to country vary to some degree. Managers need to be up to speed with investor requests regarding the regulatory status of funds, the manager and applicable regulatory requirements. However, it should be remembered that alternative routes to EU investors remain available for now in many EU countries – for example, private placement, appointing an EU based manager to act on behalf of the fund manager, or joining a platform. Managers should ensure a sustainable solution is put in place that addresses current and future needs of the investors and enables the manager to continue to raise capital in the EU.
FW: In what areas are you seeing additional costs arising for real estate fund managers as a result of AIFMD compliance? How are relationships with service providers, such as external valuers, impacted by the AIFMD? How can these costs be managed?
Rietdijk: Additional costs are due to the appointment of the depositary, changed contracts with external valuers, disclosure requirements to investors and regulators and the restructuring that was needed for AIFMD compliance. Some of these costs can be charged to funds as they specifically relate to fund operations, however other costs specifically relate to ongoing operational requirements placed on the manager. Service providers are also impacted by the transparency requirements of the Directive. Therefore, managers have had to update the majority of their service level agreements in order to address the AIFMD, which has subsequently resulted in adjusted costs both at fund and at manager level. As compliance and transparency are key areas of focus for European regulation, the cost of compliance will in all likelihood increase in the near future.
FW: What long-term impact do you believe the AIFMD will have on the European market for real estate funds?
Rietdijk: In the short term, AIFMD has resulted in major organisational and structuring impacts for funds and their managers and service providers. However, this will ultimately transform into business as usual and now fund managers can seek to benefit from the opportunities created by the AIFMD – that is, the EU wide management and marketing passport and access to EU professional and institutional investors. Hopefully, AIFMD authorisation will, in the future, be regarded as a quality label in the way that UCITS authorisation currently is, so that alternative managers have better access to professional and institutional investors both inside and outside of the EU.
FW: What final advice can you offer to fund managers on establishing, marketing and operating real estate funds under the provisions of the AIFMD?
Rietdijk: Talk to investors and ask them what they need in order to be able to invest in your product. Remember that the AIFMD also creates opportunities because it comes with both an EU wide management and marketing passport, so it could open doors. However, first assess the needs of the investors, and subsequently create a sustainable solution to be able to raise capital in the EU both for the short term and in the future.
Heleen Rietdijk is a Director working in KPMG Ireland – Investment Management Regulatory & Compliance Services group. She is Global program leader of the Global Proposition on AIFMD and the Technical Lead on AIFMD within KPMG. She is in charge of the global core team of partners from the US, Switzerland, Ireland, Luxembourg and the UK. She develops tooling in cooperation with IM Global for the support of the segment in Europe with respect to changes in legislation and provides technical knowledge for the construction of the tooling. She can be contacted on +353 1 700 4111 or by email: email@example.com.
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