Months after the July deadline for authorization, and with the first tranche of reporting for most firms due in the New Year, you’d be forgiven for thinking we’re over the hump when it comes to AIFMD. Unfortunately, nothing could be further from the truth: for many firms the complex minutiae of Annex IV reporting will present the biggest challenge yet.
For a start, the industry is, by its own admission, unprepared. In a recent survey, more than half the fund managers polled had yet to begin Annex IV preparations, and 92 per cent expressed concern about the deadline. But it isn’t just firms: many unanswered questions remain regarding just how the reporting will work in practice. Hence the spectacle of regulators across the continent scrambling to issue last minute clarifications and guides.
Earlier this month ESMA published its long-awaited update to its AIFMD Q&A. We now know that AIFMs should total the assets of all AIFs under management (whether EU-based or marketed in the EU) when calculating the threshold for Annex IV reporting. But non-EU AIFMs, when calculating the frequency with which they need to report, should only count assets of AIFs that are marketing in the EU, and apply that to all member states. Interestingly, ESMA has also made it clear that a manager’s reporting obligations to a particular national regulator will continue as long as the AIF has investors from that jurisdiction. This applies regardless of whether the AIF is still being marketed there or not.
At the same time as EMSA, the FCA released further guidance of its own. For example, the FCA has made it clear that EU AIFMs marketing feeder funds in the UK will need to report on master fund investments, whether or not the master fund is invested in the UK. By contrast, non-EU AIFMs in the same position need only report on the feeder fund for now.
Private equity companies will face additional challenges stemming from the fact that AIFMD was primarily designed with hedge funds in mind. For example, funds will need to submit IRR and GIRR figures as calculated on a monthly basis. This data is generally only calculated on a quarterly basis but will now need to be calculated monthly (albeit submitted quarterly). In addition, NAVs must be analyzed by geography and this is not completely straightforward (e.g. a US dollar deposit with a European bank is considered a US asset). And finally most funds will need to submit this data within an onerous thirty day window at what is an already busy year-end period. This will take some getting used to.
The challenge associated with the frequency of reporting is not just a cultural and logistical one. The difficulty is partly that private companies and real assets are inherently harder to value (and more time consuming) than public ones. Thankfully the good news is that the FCA, for one, has confirmed that it will accept estimates for now. While this is a welcome reprieve for the imminent January deadline, the FCA may change this going forward.
There is also the pressing issue of varying geographical implementations of the Directive. The transmissions process for reports is fragmented and chaotic. Whilst ESMA has released XML V1.2 for reporting the FCA is still accepting V1.1. Meanwhile the Netherlands regulator has released its own separate version. Luxembourg’s regulator is pushing for filing to go through a secure channel, which will incur considerable provider costs. Finland and Belgium are currently developing their own reporting systems.
Guidance documents also vary between jurisdictions. In addition to the ESMA and FCA guidance, both the Netherlands and Luxembourg regulators have issued their own documents. This is particularly relevant for non-EU AIFMs looking to market under the National Private Placement Scheme, who will need to file reports with each relevant regulator. These guidance notes are extensive and not an easy read.
So what does this all mean for private equity funds? Firstly, companies need to consider the specifics of how the reporting requirements apply to the distinct business model of private equity. Secondly, private equity firms cannot afford to take a pan-European approach to the Directive. Lastly, it is clear that even at this late hour, AIFMD is still in flux. As different jurisdictions plan their own implementations, funds that market across Europe will struggle to keep up with the fragmentation of operational processes. For every welcome clarification, there remain uncertainties. The situation will continue to evolve over the next year as the regime beds in. The devil, as always, is in the detail.
Sarmad Naim is an AIFMD reporting project manager at Augentius, a private equity and real estate fund administrator.