Just as regulations contained in the Alternative Investment Fund Managers Directive (AIFMD) can differ among the 28 member countries, so can the costs of compliance, depending on where GPs choose to raise funds. The rule of thumb is that if the regulatory fees can be attributed to a specific fund, its fair game to pass along to investors.
But for those GPs (either EU-based or not) that want or require their own AIFMD license at the firm-level, such costs are generally the manager’s responsibility. A few non-EU firms have explored employing a third party as an AIFMD-regulated entity, so the majority of costs might be passed directly to investors, but there is no standard yet in administering such arrangements.
For those firms without such an option, the AIFMD license is viewed as a manager expense exclusively. “The costs to be licensed have always been taken by the fund manager because the license can be used for different fund vehicles,” says Bob Brimeyer of AlterDomus, a major EU fund administrator.
Large non-EU managers that already have offices in multiple EU member countries are choosing to acquire their AIFMD licensing, given they have the means and local operations to qualify. But for smaller non-EU funds looking to market to LPs on the continent, they can register in a few key countries on a fund-by-fund basis, allowing them to charge investors for a fund’s marketing costs.
“Ignoring placement agent fees, there’s a principle in traditional LPAs that marketing costs specific to the fund are beneficial to the fund as a whole and should be borne by the fund,” says Sally Gibson of the law firm Debevoise & Plimpton.
But the costs can vary wildly. The countries with the lightest regulatory requirements naturally have the least costly processes. Experts cite the UK, Luxembourg and the Netherlands as among the cheapest and easiest places to register a fund. In some cases, the UK charges as little as £250 to register.
Sweden and Belgium remain quite affordable but have a longer approval process, though the next class of regime is quite a leap in terms of cost and effort. “Germany and Denmark require several months to approve an application and the appointment of a local depository, a service provider that provides various functions, usually for a few basis points, which can be €60,000 to €130,000 a year,” says Stephen Fox of the law firm Weil, Gotshal & Manges. Other countries such as France and Italy require a level of compliance that makes it prohibitive to market without being a fully licensed AIFM.
Ongoing compliance costs are normally drawn from the management fee, but if the GP set up a separate German or even pan-European fund vehicle, the depository costs could be passed along to those LPs. “If you have sufficient European LPs, they might be willing to absorb such costs,” says Fox.
AIFMD also increases reporting requirements, and the expense to meet them. “A lot of non-EU managers are looking to third parties to help them with reporting, as those requirements can be quite intensive, which adds an additional layer of cost,” says Imogen Garner of the law firm Norton Rose Fulbright. Most expect that will be paid from the management fee.
A few non-EU managers are exploring the option of tapping a third party to act as the AIFM. “These structures are new to the PE industry and there is no standard,” says Patricia Volhard of the EVCA. There are cases where the third party cost is treated as a licensing fee and absorbed entirely by the manager, or others where it’s shared between GPs and LPs.
But the third parties present operational complications. “This is a hard sell to LPs who are committing to a given manager, who is then outsourcing the actual fund management,” says Fox.
Should the remaining costs exceed a GP’s management fee, it’s likely they’ll have to pay that out of pocket. Industry lawyers report that currently most fund managers aren’t able to negotiate higher caps on organizational expenses to fully cover the increased costs of these and other new regulatory requirements. Little wonder that last year’s GPs rushed to raise their last fund in the good old days… before AIFMD.