AIFMD may capture club deals

A debate has erupted within the private equity legal community about whether or not a private equity club deal (or joint venture) meets the definition of alternative investment fund (AIF) under the pan-EU Alternative Investment Fund Managers Directive (AIFMD). 

If defined an AIF, club deal members would need to be authorized under the directive, and ensure the joint venture met all AIFMD reporting rules and other regulatory obligations.

One UK-based private equity lawyer believes legal structures created to execute club deals are excluded from the directive, which took effect last month, as the intent of policymakers was to regulate traditional hedge fund and private equity structures. 

However separate legal sources note ambiguity remains on what exactly constitutes a fund under the AIFMD, and many are concerned that club deals could be captured by the directive. 

UK securities regulator the Financial Conduct Authority (FCA) amplified worries when it said there was no fixed objective criteria for establishing whether a certain arrangement is a joint venture or an AIF for purposes of the directive. The FCA did not immediately respond to a request for comment. 

“The FCA cannot come out with a definitive view [on what is an AIF], instead they just say read the directive,” said a second UK-based regulatory lawyer.

However, the lawyer said the FCA has shown understanding of industry concerns in the past, and expects the regulator to view club deals as outside of the directive's purview.

EU securities watchdog the European Securities and Markets Authority (ESMA) offers more guidance on the issue. 

ESMA says there must be a degree of continual day-to-day control over the activities, often including key strategic financial, operating and planning decisions for the structure to be considered a joint venture. 

However, this could be tricky for private equity firms who organize their joint ventures as limited partnerships. The problem arises where certain GPs of the consortium have a passive interest as limited partners, whilst both economic control and management are the responsibility of the lead GP investor, according to a client alert from CMS Cameron McKenna.

The key question for firms in this situation is whether or not all limited partners participate in day-to-day management, the alert said. According to recent ESMA guidance, the ability for all consortium members to appoint directors at the portfolio company level, or which manage the structure as shareholders in the general partner, may be better defined joint ventures for purposes of the AIFMD.