Some 10 months on from the July 2013 deadline for AIFMD, a third of EU member states still have not fully transposed and implemented the legislation at national level, says Bill Prew CEO of Indos Financial.
Remuneration and Capital
Ten months ago, many firms were concerned about the impact the Directive would have on remuneration (in terms of the ‘Pay Out Process Rules’ i.e. the amount and length of deferral) and capital (in terms of the potential increase in regulatory capital required to be held by managers). For UK managers at least, the FCA introduced a £1bn AUM threshold (£5bn for closed end unleveraged AIFs) below which the Pay Out Process Rules will not apply. The FCA also plans to consult on the treatment of derivatives when determining funds under management which drives additional ‘own funds’. For now at least, managers will be allowed to value derivatives at their market value rather than requiring them to be converted to their equivalent underlying positions.
Determining the AIFM
Because of the breadth and impact of the changes introduced by AIFMD, there had been predictions of firms restructuring their businesses to take themselves out of scope of as much of AIFMD as possible. In practice, most managers appear to be seeking AIFM authorisation for their existing UK management entities. A number of AIFMD Management Companies (ManCo) have been authorised, largely in Ireland and Luxembourg, where the ManCo is appointed as AIFM to an AIF, undertakes the AIFMD risk management function and delegates portfolio management to the existing investment manager. There are some advantages to this model, particularly for non-EU managers seeking to market EU AIFs through the AIFMD passport, as opposed to establishing a local EU presence themselves.
EU AIFMs managing EU AIFs are, once authorised, able to market their AIFs via a pan-European marketing passport introduced by AIFMD. All other managers, including those based outside of the EU (so-called ‘non-EU AIFM’), managing AIFs domiciled outside of the EU, can only market through national private placement regimes. Approximately two-thirds of the EU is continuing to allow the marketing of non-EU funds via private placement. An alternative to marketing is to seek to rely on so-called ‘reverse solicitation’ where investors approach managers at their own initiative. There is still very little regulatory guidance as to what constitutes marketing vs. reverse solicitation but there is a growing recognition that the risk (both regulatory, and what some refer to as the investor ‘put option’) of non-compliance with marketing rules has increased as a result of AIFMD. Others question whether reverse solicitation is a viable business strategy for managers looking to attract investors and grow their business.
Whether the AIFMD passport will be extended to non-EU AIFs remains an open question and subject to ESMA review in 2015. Given very few firms are understood to have begun marketing through the passport, some question whether ESMA will have sufficient information on which to base their review, and may simply seek an extension to the date by which they are required to report on the matter to the European Commission.