After being introduced 18 months ago, the Alternative Investment Fund Managers Directive (AIFMD) is starting to make its presence felt among investors.
The Private Equity International LP Perspectives survey found that almost half of respondents had felt the impact of the directive, with 44 percent saying it had affected their ability to invest in European managers, and 7 percent of those saying that effect was substantial.
AIFMD does not allow non-European managers to market their funds to investors in Europe without complying with strict rules, which vary from country to country, and paying fees to local regulators.
Penny Walker, general counsel at placement agent Campbell Lutyens, says: “The hardest issue for offshore managers is whether they do or don’t come to Europe any longer. We know from investors themselves, and from various market surveys, that European investors feel they are not being shown as many opportunities from non-EU managers these days.”
But Walker says overseas GPs should sign up. “The message is that, with good planning, European capital is still available,” she says. “We are trying to impress upon our non-EU clients that they have a first-mover advantage if they take the necessary steps to comply with AIFMD now. They can then access investors in Europe, who are seeking diversification in their portfolio and who would like more access.”
For any non-EU manager with a non-EU fund, there are hoops to jump through in each jurisdiction to either register or to get approval to market a vehicle.
“It certainly doesn’t match that the easiest jurisdictions are where the capital is coming from,” says Mateja Maher, deputy general counsel at Campbell Lutyens. “The Nordics, for example, have a really decent amount of capital flowing from the region, but are hard regulatory jurisdictions to access.”
Germany requires non-EU managers to appoint a depositary, for example, while UK requirements are relatively simple, focused only on identification to the Financial Conduct Authority. But in any event the regime can significantly impact fundraising timetables, as well as strategies.
Jonas Nyquist, the head of buyout fund investments at Skandia Mutual Life Insurance Company, says: “AIMFD is another regulation that reduces European LPs’ chances of meeting with US-based managers in Europe. This could limit the investment universe for certain European LPs, with potentially lower returns as a consequence.”
It had been hoped that the European Securities and Markets Authority (ESMA) might lift a bar on US managers using ‘third country passports’ to access European investors, thereby allowing them to register once with a local European regulator and then sell funds across the continent. But in July ESMA said it had looked at whether funds in Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the US should be allowed to passport, and concluded that only Guernsey, Jersey and Switzerland should be allowed to do so.
Advisors do not expect that stance to change any time soon.
Paul Ellison, a partner in the investment funds practice at law firm Macfarlanes, says: “The proposal now is for ESMA to conduct a review of countries in bulk, rather than one by one, so that there is no need for multiple pieces of legislation. We don’t know when the US is likely to be recognised for those purposes. What we do know is that this is not just a bureaucratic issue – there are still fundamental differences between the US fund regulation regime and the European regime, which make passporting more difficult than it is for jurisdictions like the Channel Islands.”
Work is scheduled to start on AIFMD II in 2017, a second iteration of the directive, and it is possible that third country passports will not now be addressed until then, according to some lawyers.
Most LPs have yet to make AIFMD registration part of their standard operational due diligence processes, according to the Perspectives survey, with just 22 percent so far having done so, and a further 24 percent considering implementation. But 2016 does not include any significant dates for AIFMD, which is now largely implemented, and the most notable development is likely to be enhanced policing of what firms have done so far by regulators.
Perhaps an issue higher on the agenda for GPs in 2016 is the arrival of MiFID II, Europe’s directive on markets in financial instruments, which is due to be implemented in 2017 and will require work next year. Not all private equity firms are subject to MiFID, but for those that are, there will be a strengthening of corporate governance requirements, among other things.
Tamasin Little, who specialises in financial markets at the law firm King & Wood Mallesons, says: “There are some quite important changes, including a lot of new stuff around ‘product governance’, which means designing all funds to be appropriate for the target market and defining who they are not suitable for. For those houses that are only selling to big institutional investors that might be fine, but most actually do access others, either directly or indirectly through wealth managers or investment banks, and so more people than yet realise may get caught.”
The Common Reporting Standard (CRS) also comes in to force in early 2017, extending the Fatca reporting requirements that GPs already have to deal with for US investors to cover all foreign investors.
Laura Charkin, a King & Wood partner specialising in fund taxation, says: “The big one for GPs is CRS and getting reporting up to speed to deal with a much greater volume. They will now need to look at each investor, each account holder, and say where they are resident and report on them. In terms of the volume of data that requires, it’s a massive difference.”
The Financial Transactions Tax, which proposes to charge a levy on financial transactions across the EU, has yet to reach political consensus and so now looks unlikely to come into play before 2017. The Senior Managers Regime, however, comes into force in March and requires GPs to map out and allocate responsibilities for individuals in key positions to meet the new conduct rules.