Despite the so-called uniformity of the EU, the pan-European Alternative Investment Fund Managers Directive (AIFMD) is still being interpreted and applied by individual EU Member States. In theory it is meant to act as a standard framework to oversee the activities of AIFMs, but with National Private Placement Regimes still running, overseas fund managers are finding that navigating the different reporting requirements is a minefield. Different regulators simply have different takes on the Directive.
In musical terms, AIFMD is less an ordered symphony with everyone playing to the same tune, and more a jazz ensemble.
"Some countries are saying that when they have the passport in place for overseas managers they will end private placement altogether. There is a lack of clarity still among EU regulators, and it is therefore unsurprising that US managers find AIFMD rather confusing. It's not because they are on the other side of the Atlantic, it's simply the fact that there are still lots of grey areas. Each country has a slightly different take on the Directive, which further adds to the confusion," comments Marianne Scordel, Founder, Bougeville Consulting, currently working out of the United States.
Ingrid Pierce is Global Managing Partner at Walkers, one of the industry's leading offshore law firms. She says that some US clients have determined that "Europe is not for them" but for those who want to attract European investors they are having to decide what best to do; should they set up an EU vehicle or should they stick to using their Cayman vehicle and market it using private placement regimes?
"We've been doing a lot of advisory work relating to AIFMD. Given Brexit, US managers are thinking about where to have their EU Member State of reference. The UK is no longer the default option.
"I do think there is still a degree of confusion with respect to AIFMD. For the last year or two, whilst acknowledging that at some point private placement regimes are going to be turned off, managers have been advised that aside from setting up a fully-compliant EU fund, these regimes are the best way to access European capital.
"For the average US hedge fund manager contemplating raising assets in Europe, they need to know that not all of the EU is currently accessible via private placement. They will need to be selective about marketing only in those jurisdictions which are both attractive sources of capital, and have a manageable private placement regime," says Pierce.
Research conducted in early 2016 by IFI Global (`Impact of AIFMD on the European & US alternative fund industries'), sponsored by fund and corporate service provider Crestbridge, looked at how AIFMD has impacted US managers running the gamut of alternative fund vehicles. What it found was that the AIFMD has not caused US managers to take a strategic decision to expand into Europe or stay out of it.
Instead, said the report, US managers continue to take an opportunistic, investor-led approach to Europe. Most US managers are focusing on just one or two European markets (e.g. the UK and the Netherlands) and private placement is overwhelmingly the preferred option.
"Some US managers are happy to put Europe on the back burner, some say that it is too complicated. They don't know what to do from a capital raising perspective and are happy to wait on the sidelines. It's not a huge burden, having said that. US managers need to register and report to each EU Member State that they wish to privately place their fund(s) in to, and there are plenty of law firms and consultants that can help them with this," says Scordel.
Whilst pursuing private placement might be the preferred option, US managers have to get their heads around filing annually with local regulators, often in the local language. In that sense, the NPPR option is a bit of a minefield.
To support non-EU managers, London-based Lawson Conner, a market leader in investment management solutions for the hedge fund industry, has built a solution referred to as "EU Access".
In short, EU Access provides a full-service approach to private placement compliance. Lawson Conner assists managers to attain all the relevant regulatory licenses with the regulators and provides all reporting, notifications and necessary disclosures both during and after the marketing phase.
"The EU market has a total of $19 trillion in investable assets and so it is worth developing a solution. The market is just too hard to ignore. London not only serves as a hub for European capital, but also from capital from the Middle East and Asia. Serving these regions from New York is almost impossible," comments Gerhard Grueter, co-founder of Lawson Conner. He says that US managers should consider:
- Where are the target investors? Most of the investors will be in key countries like the UK, Germany, the Nordic countries and maybe Switzerland. A passport may not always be necessary.
- Marketing is not a short-term commitment to the region. Successfully raising capital in Europe requires a long-term commitment to build trust with investors. One or two flights over from New York are not enough.
"Key concerns from US based managers seeking access to Europe are timing, costs and complexity," says Grueter.
If the NPPR option is pursued, US managers should try to focus on a limited number of core markets.
"We have some larger clients who say they want to take in European capital. In order to make that work, they will typically run a parallel fund or market in some of the more flexible jurisdictions such as the UK and Denmark, but stay clear of markets such as Germany and France, which are more difficult to access," explains Pierce.
There are other options available. One is reverse solicitation but this is increasingly being avoided given the ambiguity over who contacted who in the marketing process. Another option is to charge head-on and become a fully authorised AIFM. This is an expensive option and only really open to large established US managers with the resources and budgets to make this adjustment. The benefit here is that the US manager can fully avail of the AIFMD passport.
Several prominent US hedge fund managers have been quick to recognise the opportunities on offer under AIFMD regulation in Europe and have set themselves up as AIFMs in Europe, benefiting from first-mover advantage.
Another option is to consider using a Management Company platform, or `ManCo'. This works well for some US fund managers who effectively become sub-advisors to the platform and piggyback on the AIFM's fund passport. The research report produced by IFI Global found that 36% of US managers active in the European market were using or were considering using a ManCo platform.
"US managers do not wish to undertake the burden of applying for the regulatory approvals to become an AIFM in Europe themselves," says Grueter. "As such, appointing a third party AIFM works particularly well for mid-sized managers, as they have a quicker route to market and have a trusted partner who understands the European regulatory landscape."
It is worth pointing out, however, that the platform option is culturally more accepted in Europe than the US.
"US managers want their own brand and even when you're a start-up with a good level of AUM the whole point is you want to have your name on the door. We have found that the platform option is really on suitable for a certain type of manager," says Pierce.
Circle Partners has operations in both the Americas and Europe and is able to assist US managers in determining the best European jurisdiction to set up an EU regulated fund. Circle has a platform in Luxembourg and can also help establish funds in The Netherlands and Malta.
David Payne, Head of Business Development for the Americas at Circle Partners makes reference to one particular client who was thinking about Europe.
"They thought it would be a lot easier than it actually is to market their fund across Europe. When they got in touch with a London-based law firm and they saw the price of setting up a European regulated fund (they wanted an Irish QIF), it simply wasn't attractive to them," says Payne.
He explains that when helping non-EU clients think about Europe, Circle Partners will initially ask them to complete a fund questionnaire. "This gives us an idea of what they are looking for and it allows us to advise them on the best European vehicle based on the contents of the questionnaire. We talk about the different jurisdictions and requirements and it's then up to the manager to decide how to proceed," adds Payne.
Looking ahead, ESMA recently published its advise on extending the AIFMD passport to 12 non-EU countries including the US, citing that there were "no significant obstacles regarding investor protection and the monitoring of systemic risk which would impede the application of the AIFMD passport".
This could mean that US managers will be able to passport their funds into the EU in the next couple of years but even when they do get the passport it is not expected to be a smooth process; at least in the near-term.
"The UCITS passport was difficult to implement initially because each jurisdiction tried to impose their own take on the rules. If you had a UK UCITS, typically the Spanish regulator or the Italian regulator would not let you passport the fund that easily. It took many years for the UCITS passport to really work properly. For AIFs, I don't know how easy it will be to passport them initially. The model still has to be tested," opines Scordel.
Pierce agrees. She says in conclusion: "The point is you can't make an assumption that merely having the pan-European passport is the end of the story because it's not. There's still more work to do."
As with any great jazz rendition, there are myriad ways to interpret it. In that sense, it seems, AIFMD is no different.