While born in Brussels, and something meant to provide EU sovereigns a shared private equity marketing regime, the controversial Alternative Investment Fund Managers (AIFM) directive is something that will significantly affect US-based managers too.
For the most part US managers are concerned about the directive’s so called “third country” rules which cover non-EU managers hoping to access EU markets and investors. To do so a non-EU manager’s home regulator must sign a cooperation agreement with its EU counterpart: the European Securities and Markets Authority (ESMA). Sources fear that such agreements will impose a duty on third country authorities to assist their EU counterparts in enforcing its rules, which in practice will prove problematic for governments who perceive the directive as having too much legal authority on their home turf.
For now non-EU managers may be able to bypass the directive by continuing to pitch their funds to EU investors in line with member states’ private placement regimes (subject to meeting certain information exchange agreements). But in 2018 EU regulators will review the directive’s success, and make a decision as to whether the patchwork of national marketing regimes should go by the wayside. Sooner or later, it seems, US managers will have to stomach the directive’s rules on general partners’ pay, fund transparency, and restrictions on asset stripping, to name but a few of its requirements.
What’s more is the directive’s language does not prohibit EU member states from reforming their national regimes. Sources expect a number of member states will review their private placement regimes – either relaxing their rules or beefing them up – following the directive’s implementation into local law by next July.
Pressure will also be brought to bear on the Channel Islands and other offshore jurisdictions to bring local regulatory regimes in line with European standards, according to some sources. However there remains limited visibility on what approach EU member states may take regarding their private placement rules following the directive’s implementation.
Here PE Manager provides a look into what actions countries already engaged in AIFM rulemaking have accomplished, with particular emphasis on controversial third country provisions:
FRANCE: The French government tasked its fund industry watchdog, the Autorité des Marchés Financiers (AMF), to set up a committee with stakeholders to assess and make recommendations in transposing the directive into law. Earlier this year the committee published a report with 25 recommendations, including a call to make the “Paris financial centre more attractive to French and foreign managers and investors” and for French GPs to be able to use marketing literature in a language other than French. As it stands France has no intention of removing its current private placement regime, though some in the industry expect France to harden the regime’s requirements in the year to come.
GERMANY: Germany is already ahead of many of its EU peers having published draft AIFM legislation in July. Despite maintaining a private placement marketing regime, the draft rules feature an unyielding position on non-EU funds. The proposals state that foreign funds must fully comply with the AIFM directive before being able to take advantage of Germany’s private placement framework. If made into law, Germany-based institutional investors will receive less marketing pitches from foreign funds unwilling to follow the country’s “strict” funds’ regime, according to sources. The German private equity industry is lobbying hard for its government to dial back from the decision, with a consolidated draft of the rules expected soon.
CHANNEL ISLANDS: Jersey, a popular offshore fund domicile, has unveiled a new “Private Placement Fund” designed to offer institutional investors a fast-track approval process at the local level. The fund’s purpose is to allow offshore funds a suitable structure for entering EU sovereigns’ individual private placement regimes. James Mulholland of offshore law firm Carey Olsen described the vehicle as “allowing GPs to quickly and efficiently establish a fund with few investment restrictions”. Closed-ended funds with no more than 50 LPs can now gain approval from Jersey regulators in as little as 72 hours, according to sources. Roughly 40 miles away, sister Channel Island Guernsey has begun its own preparations for AIFM implementation. Earlier this month PE Manager reported that Guernsey will offer GPs both a regime compliant with the pending AIFM directive, and one with a relatively lighter regulatory touch.
LUXEMBOURG: As with other popular fund centres, such as Jersey, Luxembourg has been keen to embrace the directive in order to win business. The fund centre is aiming to finalise the directive into law before the end of the year. In a bid to ensure that Luxembourg is ‘open for business’ it will have fund structures available for those who want to be AIFM compliant and also those who want to use private placements.
THE NETHERLANDS: The Dutch are the first EU state to adopt the AIFM Directive into national law. Concerning non-EU managers, the bill maintains the country’s “designated states regime”. The designated states regime allows certain developed states, including the US if the manager is SEC-registered, to market funds in the Netherlands without requiring them to obtain a license as it is assumed that the firm is already subject to adequate supervision from local regulators.
IRELAND: In November Ireland’s private equity regulator, the Central Bank, released a draft “AIF rulebook” that consolidates its current fund regime with rules required by the directive. The main change to the regime, as outlined by Matthew Elderfield ,the Central Bank’s deputy governor, was removing the promoter requirement from Qualified Investment Funds (QIFs) – Ireland’s most popular private equity fund structure. Currently the Central Bank requires promoters to maintain a level of capital that is typically higher than is required by the promoter’s own regulator despite the fact that the promoter does not have any contractual obligation to the fund. This was designed to give funds a regulated entity that would take moral responsibility but as all private equity funds under the AIFM will be managed by regulated managers this additional layer of regulation is no longer necessary.
UK: The UK, which is responsible for the lion’s share of Europe private equity activity, has adopted a ‘wait and see’ strategy on transposing the directive until further guidance is provided by EU authorities. However a discussion paper released by the UK Financial Services Authority (FSA) earlier this year said the country has no immediate plans to scrap its private placement regime. However the paper said UK authorities would need to create a way for non-EU managers to “prove they are complying with the directive’s minimum requirements, particularly the transparency requirements”. The FSA said one option would be for non-UK GPs to state in written attestation their compliance, and to then provide LPs an “easily accessible list” of non-EU managers marketing in the UK.