This article is sponsored by SANNE and first appeared in The CFO Guide to Fundraising that accompanied the December 2018/January 2019 issue of pfm.
The aim of the Alternative Fund Managers Directive implemented in 2013 was to better protect the investors in alternative funds and form a common financial market for these funds by harmonizing the alternative funds arena in Europe – thus making capital raising in Europe easier.
Five years have passed since the implementation of AIFMD and it is about time to ask where we stand today in raising capital in Europe. Has it really become easier and more efficient?
Market participants agree that after extensive education over the last five years, the alternatives industry now has a profound amount of experience in how to deal with the AIFMD. The AIFMD is an important step forward concerning the formation of a common financial market within the EU. However, at the same time, market participants also discovered – and are still discovering – that the directive was not transposed into national law in a fully harmonized way in the different EU jurisdictions. Discrepancies remain in the way the directive is applied.
For an AIFM established in an EU member state and managing an EU AIF, the directive foresees that by notifying the local regulator, the AIFM can start marketing the fund once the notification is accepted. However, the contents of the notification letter may vary slightly country by country as local regulators may require specific additional information.
Some local regulators may ask for a processing fee for the notification file, which was not foreseen in the directive. The French regulator, for example, asks for proof that the upfront fee (currently €2,000 per AIF) has been paid.
By filing your notification, these country-specific requirements have to be taken into consideration. Whereas at the beginning these differences might have led to delays in the notification process, today the turnaround time for a complete notification is for example five to 10 business days in Luxembourg or Ireland. The UK and the Irish regulator make it easy for fund managers, as you can download the notification forms directly from their website.
Larger uncertainties exist regarding pre-marketing activities of fund managers. Generally, before officially launching a new fund, a fund manager wants to speak to a limited number of prospective investors to test the demand and the key terms of the product. Under current rules there is no definition of pre-marketing, and local regulators have taken different approaches, making it difficult for managers to know what activities are permitted without having to submit a formal regulatory notification. Several EU jurisdictions such as Spain do not even foresee pre-marketing. These discrepancies are an impediment to the smooth marketing of alternative funds into the EU.
In March 2018, the European Commission issued a proposal to clarify the concept of pre-marketing and make it available in all EU jurisdictions under the AIFMD. Moreover, the commission took the opportunity to also make proposals regarding the harmonization of some of the inconsistencies in the marketing process.
Unfortunately, the proposed amendments are of no great help to non-EU managers as they cannot take advantage of the AIFMD marketing passport. They are left with the national private placement regimes, or so-called reverse solicitation, as a means for raising capital and have to abide by the rules of each country where they want to market their fund.
Thinking back to 2011 when the AIFMD was proposed, the concept was that by 2015 there was going to be a passport that non-EU managers could use, and that by 2018 the national private placement regimes would be gone. Today, we are behind schedule. Brexit is the intervening thunderstorm. And as long as the EU and London have not agreed on a Brexit plan for financial services there is little hope that the EU marketing passport will be extended any time soon to non-EU managers and funds. So waiting for the extension for the passport is not a fruitful strategy at present. The uncertainty around the Brexit plan has also encompassed the UK managers who are looking for alternative ways to access the EU market post-March 2019.
There are a number of different options managers can consider:
- Set up their own AIFM
Managers can set up their own AIFM within the soon to be 27 European jurisdictions. But this is going to be costly. In an opinion issued in July 2017, the European Securities and Markets Authority (ESMA) clarified their expectations in terms of substance and governance with respect to an AIFM. Local regulators, such as in Luxembourg, have recently followed by issuing clarifying documents. One of the main considerations in relation to setting that up is looking at the AUM and size of the operation.
- Outsourcing to a third-party AIFM
Another option worth considering is hiring a third-party AIFM and working with their partnership network. That includes the administration, the depositary and having the right people on the ground. The AIFM assists the fund sponsors with the identification and set-up of the appropriate fund distribution model and will monitor the marketing activities. Moreover, as authorized AIFM for the fund, the AIFM takes care of the drafting and filing of the marketing notifications with the regulator. The third-party AIFM model is a proven model in Luxembourg and Ireland.
- A hybrid solution
A third option is using a hybrid solution at the beginning, where you have your own AIFM but are supported by a specialist third-party AIFM service provider. As AUM grow, you equip your AIFM with more and more substance of your own in key areas, like risk management, portfolio management or compliance. This doesn’t mean that you cannot continue to work with specialist service providers.
So, where do we stand today?
Five years on since the inception of the AIFMD, one can say that the world of the alternative investment funds has become more professional. The directive has enabled fund managers to review and properly document their procedures and created a common market for alternative funds in 28 European jurisdictions. Although small inefficiencies still exist, the passporting concept has made the cross-border marketing of alternative funds within the EU easier. Passporting does come at a cost, which is evaluated differently by market stakeholders. However, the country-by-country approach is a lengthy and cumbersome process, especially if you would like to market your fund to a larger number of countries. Unfortunately Brexit has postponed the foreseen access of third-party countries to the passport. Nonetheless, managers from non-EU countries have other options at their disposal and outsourcing to an expert third-party AIFM is often the preferred choice.
Pierre Weimerskirch is a managing director at LIS, a leading Luxembourg-based AIFM which is owned by SANNE.