Fixing AIFMD

Before retiring for the holiday break, both EU and non-EU fund managers alike should answer ESMA’s call to improve the directive’s highly valuable marketing passport feature.

If you want a sense for how EU managers are faring with the Alternative Investment Fund Managers Directive (AIFMD) since its July effective date, you don’t need to search very long before hearing moans of frustration. One EU regulatory lawyer went so far as to call the pan-EU marketing regime “a complete and utter nightmare” before uttering a more expletive ridden response. We can sympathize. For all the extra regulatory scrutiny, the directive promised GPs the ability to seamlessly fundraise across EU borders. But after witnessing the jumbled manner in which EU sovereigns transposed the directive into national law – with many missing that July deadline or gold-plating the directive’s original text – it’s a promise that appears only half-delivered.

Here’s the good news: GPs have a chance to improve the directive by engaging with the regulator responsible for its enforcement, namely the European Securities & Markets Authority (ESMA).

The pan-EU regulator issued a “Call for Evidence” asking fund managers, investors, legal advisors and more for their experiences with the pan-EU marketing passport as well as the effectiveness of individual country’s legacy private placement regimes in a post-AIFMD era. Non-EU managers should be aware of the consultation too. Part of what ESMA is doing is gathering evidence to decide if the passport should be extended to non-EU fund managers next year (which the European Commission will decide, based largely on ESMA’s advice).

It can't be stressed enough that GPs should seize the opportunity to air their AIFMD-related grievances before ESMA begins its deliberations. There’s an argument to be made that the passport feature is still untested until every EU jurisdiction finishes transposing the directive. And we’ve already witnessed France, a key EU market, show the limits of the passport by asking AIFMD-authorized managers to first hire a ‘local correspondent’ before speaking with French investors. Meanwhile non-EU managers are witnessing major EU jurisdictions like Germany and Denmark add more rules to their private placement regimes as part of their work on AIFMD implementation. In fact, the patchwork of marketing rules across the EU are now so unclear for non-EU managers that many of them have written the continent off for their next fund. That can’t be what ESMA and EU policymakers had hoped for when first writing the directive five years ago.

Non-EU managers must also appreciate that EU private placement regimes may ultimately be scrapped, leaving only AIFMD-authorization as the gateway to EU investors. In 2013, the total amount of cash raised in Europe for private equity funds was €54 billion, a hard to ignore figure and twice the amount of volume raised in 2012, according to EVCA stats. If the passporting regime ends up being a failure for EU managers, it’s by default a dud for those outside the continent too.

Lastly, investors should join the fight for more sensible rulemaking. The investor community, which was quietly criticized by fund managers for not engaging with AIFMD policy makers the first time round, will have less access to top fund managers in the US, Asia and elsewhere if the compliance burdens of AIFMD prove too much trouble than what a (possibly failed) passport is worth to them. The reverse solicitation loophole can only take LPs so far before this becomes more apparent.

Here’s the bad news: ESMA set a January 8 deadline for responses. It’s the holiday season, yes, but if the industry wants to see the AIFMD passport really mean something, it’s worth giving your feedback, both from trade bodies and individual GPs. Click here to submit your response.

PS – Before going on our own break, we here at pfm wish everyone a happy and safe holiday season! We look forward to continue bringing you all the latest news, intelligence and analysis on private funds management in 2015.