By Ben Cook, Managing Director, Ipes UK
Annex IV filings, as required under the Alternative Investment Fund Managers Directive (AIFMD), have been required since January 2015. The reports, which are highly detailed, must be supplied to European regulators in jurisdictions where Private Equity Managers are actively marketing through National Private Placement Regimes (NPPRs). If a Private Equity Manager has become a full scope AIFM, then it must submit Annex IV reports to its EU home member state. More than one year after the first Annex IV submission, challenges remain. Ben Cook, Managing Director at Ipes UK, answers questions about some of the ongoing issues that Annex IV presents for Private Equity Managers.
Continuing challenges faced by AIFMs around Annex IV reporting
Most non-EU firms privately place their vehicles into the EU. This subjects them to Annex IV filing requirements. Annex IV reporting is a forensic document, with a number of data points for AIFMs and AIFs to deal with. Collecting and collating the relevant data is a time-consuming task for Chief Financial Officers (CFOs) who are saddled with this work during the audit season and at other points during the year depending on the frequency of reporting. The methodology behind some of the calculations can also be complex and subjective. Many Private Equity Managers would argue they are unleveraged, although Annex IV refers to firms with revolving credit facilities as being leveraged. This is not market interpretation but it forces managers to complete additional sections of the Annex IV report. Fortunately, much of the data for Annex IV is static. This means the bulk of the heavy-duty work has been completed for the first filing round. However, the reporting challenge is compounded by the fact that there is often a lack of consistency between different EU regulators in Annex IV formats and requirements. For example, the Annex IV XML filing templates in Germany needed to be zipped using a specific and uncommon format, as opposed to the UK filing, which required the XMLs to be submitted on the FCA’s web portal. Sweden requires a card and a card reader to be used in the filing. Navigating these nuances between regulators can be an operational headache for managers.
How have Regulators amended Annex IV requirements
Some regulators have stipulated that voluntary sections in Annex IV are now mandatory. It is not uncommon for EU regulators to make changes to the filing requirements without notifying the market. For example, Denmark amended a mandatory question in relation to investment strategy which meant that, unlike in the UK, further details were needed depending on the answer to it. Full scope AIFMs only have to supply Annex IV reports to their EU home member state, as opposed to all of the jurisdictions they are marketing to. For firms continuing to use NPPR, it is important that they routinely check the Annex IV filing requirements in all of the jurisdictions where they are fund raising. This is a time consuming and complicated process and it is worthwhile for managers to work with a service provider who keeps fully up to speed with market and regulatory developments.
How much convergence is there between Annex IV and other regulatory filings such as Form PF in the US?
There are similarities between Annex IV and Form PF, which is submitted by Private Equity Managers to the Securities and Exchange Commission (SEC) under Dodd-Frank. However, there are also differences, particularly around the methodologies behind calculating Regulatory Assets under Management (RAuM). RAuM under Form PF incorporates uncalled commitments whereas Annex IV does not. This means RAuM reported by Private Equity Managers under Form PF is far higher than in the calculation under Annex IV. This could cause some investor confusion as they may see inconsistencies in RAuM in the different regulatory filings. However, I do not see the US and EU regulators harmonising the rules anytime soon.
How can Private Equity Managers ensure they keep on top of their Annex IV requirements?
Outsourcing to a service provider like Ipes can assist managers with regulatory filings. It also means they can focus on their core business, which is delivering consistent returns to clients. We keep on top of all of the changes to Annex IV templates happening across the EU and can tailor the filings accordingly. Continually checking regulators’ websites is an administrative headache better left to a service provider, which is also more cost effective. Ipes maintains excellent relations with regulators and will routinely liaise with them to iron out any issues. Managers typically will be given a generic email address to reach out to regulators in the event of a problem, and the responses can be slow. Having access to regulators is key to keeping ahead of the curve. Moving forward, managers need to ensure they prepare Annex IV filings in advance and are consistent in how and what they file.
You can read the other articles from Ipes' Private Equity update (edition 21) at the following links: