By Philippe Matélic, Director, Regulatory Compliance Team, Kinetic Partners (Luxembourg) Management Company – How to connect your ideas to the market: The fund industry is constantly generating new ideas. But, as in other industries, each needs to move through from creation, to production and then distribution. For the fund management industry, this focus on distribution is equally key.
For fund managers based outside of the European Economic Area (EEA), balancing the challenge of navigating each EEA State’s current regulatory requirements versus structuring to operate on a level playing field across Europe is a looming decision.
Where do you want to be five years from now?
The best option for any particular fund manager will depend on your fund distribution strategy. Now is the time for fund managers to ask themselves to what extent they would like to market to EEA investors.
Once you have identified these target markets, you will need to select – on the basis of proper assessment of capabilities – an effective distribution policy.
In our view, there are two options to market AIFs to EEA investors from July 2013:
1. Where funds promoters have appointed an EEA AIFM with an EEA AIF or set up an EEA Self-Managed AIF (which is authorised both as the fund and the fund manager) they can leverage the new AIFMD passporting possibilities (known as the Passport).
2. Non EEA structures may distribute in each EEA State in line with National Private Placement Rules (NPPRs) where they remain available, and properly monitor their evolution.
The AIFMD Passport is currently only available to EEA Managers of EEA AIFs but , following ESMA assessment, might be extended to non-EEA structures as from July 2015 at the earliest. For US and Asian funds wanting to market across the whole of Europe as from now however, waiting for the Third-Country Passport regime to be implemented is not an option.
Where Non EEA funds promoters are clear that there are only investors in a few territories that they wish to target, distributing funds in line with NPPRs for each Member State is a strong potential option. Some member states have already indicated their existing NPPR will be grandfathered until July 2014. However, these requirements can be different and are constantly evolving across territories.
For many non-EEA entities, a short term objective is to leverage these transitional provisions without excluding the potential use of a Third Country Passport which may become available from July 2015 or soon thereafter. The Third Country Passport, if it comes to pass, would enable all forms of AIFs (EEA and non-EEA) and Managers (EEA AIFMs and non-EEA AIFMs) to make use of an AIFMD Passport.
Equally, for funds wishing to market to investors across Europe now, then structuring in such a way as to take advantage of the Passport, is a pragmatic option. This is because over time the costs associated with the maintenance of local knowledge of each NPPR will increase and, as the 2018 deadline approaches, the number of EEA domiciled fund launches will probably increase. When reviewing your distribution strategy, you should also bear in mind the planned “impact assessment” of the National Private Placement Regime which is due by the European Commission between end 2017 and July 2018, as this will potentially result in the phasing out of NPPR.
Overview of the Passport
One of the objectives of the AIFMD is to facilitate the distribution of Alternative Investment Funds (AIFs) to institutional investors by way of the passport notification procedure. Once an EEA AIF is created, it can be distributed in all EEA jurisdictions merely by informing the Host Competent Authority in advance. In practice, the AIFM’s Home State Competent Authority will transmit your request to each EEA State’s Competent Authority in which the AIFM wishes to market each EEA AIF it manages. Therefore, your AIF’s eligibility to the passport will facilitate marketing to institutional investors in the chosen EEA markets and reduce the administrative burden associated with the past pan-European distribution strategy. UCITS promoters have experienced this advantage for many years.
The use of the AIFMD Passport has been possible since July 2013 for EEA AIFMs managing EEA AIFs and is creating straightforward distribution possibilities in countries like France, Italy and Spain where efficient private placement regimes do not exist.
Having your AIFs benefit from the passport in these jurisdictions will give you a clear competitive advantage which you will be able to leverage in other EEA countries if you decide to extend your distribution footprint in the future.
Management Company and Self-Managed AIF options
Given the cost of establishing operations in the EU, we believe non-EEA managers will most probably look for a cost-effective solution to facilitate efficient access to EEA investors via the passport.
Where Non-EEA managers have an EEA AIF, then Non-EEA based fund managers could consider contracting with an EEA-AIFM that outsources portfolio management to a third party (i.e. the fund portfolio manager). This will allow full access to European markets, whilst ensuring risk and portfolio management are undertaken effectively. This concept of a third party management company, which already exists for UCITS funds, might appear to be a good compromise.
Finally, Non-EEA fund managers without an EEAAIF can look to replicate their strategy in an EEA based vehicle via jurisdictions such as Ireland or Luxembourg and thenoutsource the management to a third party management company,or set the AIF as a Self-Managed AIF, with external support where required.
Both options above would give managers full access to EEA investors under the AIFMD.
If you are an EEA AIFM managing EEA AIFs, the passport is the most efficient solution to effectively improve the distribution footprint of your fund. You can of course continue to benefit from the current NPPR under the transitional provisions (where available) until July 2014, but why would you decide to restrict your offer to a few privileged clients when the passport gives you so many opportunities? Sound judgement should lead to reviewing distribution strategies and establishing a proper action plan as soon as possible.
It is important to be able to continue marketing a product to your investors today using the current tools and distribution channels which have proved to be efficient in the past. Conducting a proper assessment of the current distribution methods against the new regulatory requirements will enable firms to identify and address the gaps. This will allow them to adapt their strategy and to include the new opportunities which might become the effective drivers for future growth.
The fund industry has not always perfectly understood this challenge and so should look to optimise the time given by the transitional provisions to concentrate on the definition of a long-term distribution strategy.