As policymakers finish constructing a new private funds regulatory framework around the perimeter of Europe, standing on the sidelines have been non-EU managers wondering how to best access European investors once the dust settles.
In fact, since the introduction of the Alternative Investment Fund Managers Directive (AIFMD) in 2011, countless non-EU managers have told pfm that they are in a “wait-and-see mode” when it comes to marketing in Europe. The hope is that individual EU countries will maintain the private placement routes non-European managers have traditionally traveled to meet their clients on the continent; the fear is that the AIFMD will prompt regulators across the EU to abandon the continent’s patchwork of private placement regimes in favor of the more holistic AIFMD regime, but in a way that limits who can access the directive’s pan-European marketing passport.
If the latter, a hotly-anticipated opinion issued recently by the European Securities and Markets Authority (ESMA) on extending the passport should be worrying news for any non-European manager wishing to access EU investors beyond 2018 – the time when ESMA will decide whether to scrap private placement regimes.
To decide which third-country managers could access the passport, ESMA has elected to embark on a country-by-country analysis of regulatory regimes with no clear timetable in sight of when this could be accomplished, in effect prolonging uncertainty around the directive indefinitely. ESMA started its work by reviewing six territories known for having active private equity markets, but only gave its blessing to managers based in Guernsey and Jersey to obtain the passport (subject to the approval of the European Commission, Parliament and Council in the coming months). Before diving deeper into the details, it’s worth noting now that confusion already exists on that point alone.
Guernsey and Jersey were presumably awarded a positive opinion by ESMA for having implemented dual regulatory regimes in full compliance with the directive, but “it currently looks as if ESMA thinks managers based in those islands necessarily have to use those fully AIFMD compliant vehicles to gain the passport,” notes KWM partner Tamasin Little. ESMA’s selection of which jurisdictions to review initially also appears to be done on an ad-hoc basis. With no clear methodology, it’s impossible for a non-EU manager to know when their home regulator will be given attention.
The ESMA review itself is shrouded in mystery. The birthplace of private equity, the US, wasn’t given a positive opinion, despite having escalated oversight of its private funds industry in 2012 via Dodd-Frank. It appears that ESMA believes AIFMD-like rules on remuneration do not exist at the moment in the US (something American regulators are still working on), which raises questions of how far third-countries must mimic requirements of the AIFMD to gain ESMA’s approval.
Even more confusing is ESMA citing restrictions on marketing to retail investors (the AIFMD concerns institutional investors only) as reason to delay its opinion on the US. Some suggest, on account of EU mutual fund managers wanting easier access to US investors, that politics are at play; which would be concerning.
In issuing its opinion, ESMA was not given an easy task. Some EU countries haven’t finished implementing the directive, making it difficult for the regulator to even ascertain the passport’s success domestically within the EU. But ESMA’s unclear, lengthy approach to the passport question will mean more non-EU managers waiting on the sidelines until more regulatory certainty is in view, an outcome few wanted when work on the directive began four years ago.