July 22, 2018 marked the four-year anniversary of the Alternative Investment Fund Managers Directive (AIFMD) legislation coming into full effect throughout the European Union, including the end of the one-year grace period.
There had been concerns from the financial sector surrounding the legislation in the years leading up to its implementation. Many managers were hopeful that exemptions or milder treatments would apply for them, as AIFMD seemed expensive, time-consuming, complicated, and nearly impossible for small-to-midsized managers to comply with.
Today, AIFMD is the new normal within Europe. Looking back, much of what seemed impossible in the beginning is now part of regular day-to-day business.
AIFMD for the non-European manager
Though we might be getting used to this new normal in Europe, the perception of legislation among non-European managers still largely differs. As a global administrator working alongside managers across the world, we have come to realise that there is a level of misconception about the options available to non-European managers.
A significant number of non-European managers are focused on raising capital in a select number of European countries, and have come to realise that they simply don’t need to market EU-wide – making the benefits of a passport irrelevant for them. National Private Placement Regimes (NPPR) can be an alternative for such managers.
Subject to the NPPRs in place in each European Member State, private placement is available to Non-European AIFMs marketing AIFs, both European and non-European AIFs.
AIF under AIFMD
An alternative investment fund (AIF) under AIFMD regulation is a ‘collective investment undertaking’ that is not subject to the UCITS Regime, and includes hedge funds, private equity funds, retail investment funds, investment companies and real estate funds, among others
The aim of this article is to outline the private placement solution, including a high-level comparison of the requirements under NPPRs versus being fully AIFMD compliant. In closing, we will also describe what could be a viable alternative for certain non-European managers who want to market into Europe.
National Private Placement Regimes (NPPRs)
Non-European managers can market funds into Europe under NPPRs – provided that the manager reports to each applicable national regulator. A significant difference is that many compliance obligations are replaced by reporting obligations.
For non-European managers who are looking to reach out to investors across the entire European continent, the NPPR solution might not be the most suitable. However, for non-European managers who are interested in a select number of countries operating under the NPPRs, it can be an excellent solution.
Each regulator has a slightly different reporting format and time line for submission of these reports.
In summary: AIFMD aims to regulate the management and marketing of collective investment undertakings into the EU that are not subject to the UCITs regime. It applies to all Alternative Investment Funds (AIFs) with very few exemptions. In general, unleveraged funds of EUR 500 million in assets under management (AUM) or leveraged funds with EUR 100 million in AUM fall under the scope.
The differences across the Member States, and the fact that a small number of countries do not have NPPRs in place, have added to confusion among non-European managers. The result is that managers for whom this would be a perfectly manageable solution have held back from using the NPPRs, due to their unfamiliarity.
NPPR is a mechanism that allows non EU alternative fund managers/non EU alternative funds to continue to market in Europe without using the Alternative Investment Fund Manager Directive (AIFMD) passport. It is important for managers to ensure that they are complying with the NPPR rules outlined in the AIFMD and the requirements of local regulators. Europe cannot be seen as one homogenous block in this regard as the requirements differ from country to country.
With the right guidance and the right partner(s), using the NPPR solution is straightforward for non-European managers and investment advisers.
One alternative can be to appoint a third party off-shore management vehicle, under the NPPR as non-European AIFM for clients with AIFs based in Delaware or Cayman Islands – for example.
The benefit would be that, when using a management vehicle that remains outside of Europe, you can take advantage of the NPPR, while removing the need to comply with the full scope of requirements under AIFMD.
In such scenario the non-European AIFM can delegate the portfolio management to the investment adviser, while retaining general oversight and the risk advisory function. The remuneration and disclosure requirements will then be dealt with on the level of our non-European AIFM management vehicle – which investment advisers often perceive as a major advantage. This in addition to the potential cost and time efficiencies gained.
Requirements under private placement versus full AIFMD
- Marketing registration/notification with the competent authorities and ongoing statistical reporting
- Transparency requirements:
- Annual report
- Disclosure on remuneration (for AIFM not investment adviser)
- Disclosure to investors
- Asset stripping provisions
- Separate portfolio from risk functions
Requirements when fully AIFMD- compliant and passporting:
- Authorization with the regulator.
- Enhanced transparency requirements.
- Enhanced annual report:
- Disclosure on remuneration (for AIFM).
- At least 50% of any variable remuneration consists of units or shares of the AIF.
- At least 40% of the variable remuneration is deferred over a period of at least three to five years.
- Disclosure to investors.
- Asset stripping provisions.
- Capital requirements.
- Leverage restrictions.
- Liquidity analysis.
- Depositary requirements.
- Separate portfolio from risk functions.
- Valuation requirements.
- Delegation requirements.
Deciding how to enter the European market as non-European manager is a major decision, for which it would be worthwhile running a cost-benefit analysis. While for some managers launching in Europe and using the AIFMD passport is the most suitable solution, we’ve seen that the NPPR solution can be an efficient alternative for others – from both a cost and operational perspective.
This article was first published by EisnerAmper, 8 August 2018.