By Michael Rucci (pictured), head of fund ervices Americas, UBS Global Asset Management – How does AIFMD impact how I can market in Europe?
AIFMD will challenge many managers but it will also, over time, offer opportunities to attract capital that has previously been unavailable to the alternative asset management industry. Consequently, as a result of the Directive all EEA managers need to make an application for authorisation by July 22, 2014 Regulators are urging the industry to apply sooner rather than later in 2014.
From the date of authorisation these managers will have a passport to distribute EEA AIFs across all 31 EEA member states. Subject to certain provisions non-EEA AIFs (i.e. Cayman funds) can be sold but only via National Private Placement Rules (NPPR) or on a reverse solicitation basis. Non-EEA managers (such as US managers) will also be able to market their non-EEA AIFs under NPPRs but can only avail of the passport in July 2015 if they wish to access the passport regime and not have to set up an EEA AIFM. NPPRs will remain in place until mid-2018 when the commission will look to abolish them completely leaving the passport and reverse solicitation regimes as the only options available for European distribution to professional investors after this date.
Do I need to have a presence in Europe?
If you are looking to market to European investors there are three options: a) NPPRs; b) reverse solicitation or c) become AIFM authorised and market through the passport regime (not available to non-EEA managers until mid-2015).
Most managers will focus on NPPRs to begin with as they can continue to market their existing offshore funds but there is a risk that NPPRs will be reinforced over time or even closed off (i.e. Germany, Denmark & Austria look like gold-plating their NPPRs). US managers should note that reverse solicitation may only be an option for some managers meaning private placement is the only immediate option short of establishing European substance. There will be an emergence in Europe of platforms to facilitate small-medium non-EEA managers to setup EEA AIFs and this may be a very credible alternative, which is not cost prohibitive and gives non-EEA managers immediate access via the passport.
What are the primary cost-drivers of AIFMD?
If managers want to avail of the AIFMD passport the two primary cost-drivers under AIFMD are the cost of compliance at the AIFM level encompassing delegation, transparency, remuneration, capital, risk and liquidity requirements as well as general business conduct, and secondly the costs associated with the implementation of a Depositary/Prime Brokerage framework which meets the requirements of the Directive.
Such a framework implies a strict liability for the restitution of the client and therefore who takes this liability has been a topic of much debate over the last 12 months. Although these costs were greatly exaggerated in the past it is generally accepted that the industry is working to a consistent framework that will not be cost prohibitive. In terms of marketing through NPPRs there will be additional reporting and managers will have to deal with specific issues relating to certain EEA member states’ local rules but this will be another alternative to the passport with the most cost effective approach being to rely purely on reverse solicitation.
Are Remuneration arrangements impacted by AIFMD?
Remuneration guidelines under AIFMD are the most sensitive and highly topical discussion point. Although these provisions only affect AIFMs marketing under the passport the wider implications are potentially far reaching such as the implementation of such provisions to non-EEA managers operating under delegation from an EEA manager.
The remuneration guidelines require that identified/coded staff (i.e. risk takers, certain control functions, senior management etc.) defer at least 40% of their variable and take 50% in shares of the underlying fund. On top of this they also need to make certain disclosures to investors through the annual reports as well as establishing a Remuneration committee whereby the scope, size and complexity of activities of the AIFM are extensive. This will obviously have implications for how managers organise and implement remuneration structures especially where US managers are managing EEA AIFs under delegation from an EEA AIFM.
There is a level of proportionality that a manager can take when applying these provisions and we are awaiting further guidelines in this respect. For example, the FCA published a constructive and helpful consultation paper in early September proposing how managers can approach the proportionality provisions. It needs to be stressed that Remuneration guidelines affect those funds captured by AIFMD and if a US manager is marketing through private placement rules or reverse solicitation these rules will not apply.
What AIFMD solutions are on the market to support my European distribution strategy?
There are a number of AIFMD solutions evolving in the market to support managers. First, the Depositaries are working with Prime Brokers to finalise the AIFMD Operating models and administrators are working on supporting their clients with the necessary AIFMD reporting solution (similar to Form PF reporting).
On top of this it is anticipated that a platform concept could start to evolve whereby non-EEA managers of a certain size look to be hosted on a European AIFM platform (similarly to UCITS platforms) to access European investors via the passport. It is generally expected that managers will in the short-term at least try to continue to market via NPPRs or reverse solicitation.
Nonetheless as NPPRs become more onerous in Europe and the 2018 deadline approaches the pace of European domiciled fund launches will grow significantly. Therefore, having a partner that can facilitate a cost effective way of reaching this market will be an appealing solution to managers of a certain size when targeting professional investors in Europe.