By Marc Schubert, Weil, Gotshal & Manges
AIFMD aimed to harmonise the regulation of fundraising across Europe – to what extent has this been achieved and what does the future hold?
AIFMD entered into force in July 2013 and, following a one year transitional period, applies to EU-based fund managers and managers marketing their funds to EU-based investors. EU managers above certain size thresholds have to comply with the Directive in full and in return are granted access to the AIFMD marketing passport, theoretically allowing their funds to be freely sold to professional investors across the EU. While managers initially struggled with the complexity and lack of clarity surrounding the practical application of many of the requirements – AIFMD was written with hedge funds, rather than private equity funds, in mind – several years on, market practices are beginning to develop and there are now practical answers to most of AIFMD’s questions.
Although cost and timing implications still remain an area of concern, in particular for smaller or first time managers seeking access to the marketing passport, many managers have found compliance with the Directive less of a traumatic experience than was first feared. Areas of frustration still remain, for example the long authorisation process and the imposition of fees by some regulators on incoming passporting notifications (considered by some to be unlawful constraints on access to the single market), though some barriers have been removed (France recently dropped the requirement to appoint a local French agent).
For "third country" managers, such as those based in the US and Asia but also Guernsey, Jersey and Switzerland, the experience has been entirely different. Without access to the marketing passport, such managers have had to rely on a combination of the national private placement regimes (NPPRs) and reverse solicitation. As those who have dealt with these regimes will know, the NPPRs are about as far away from being harmonised as can be – many jurisdictions adopted their private placement regimes with individual twists and, as a result, registration processes, timelines, fees, reporting formats and ongoing compliance obligations differ widely between different countries with some not having implemented a regime at all.
However, despite the lack of coordination across Europe, many countries now have NPPRs which have been thoroughly tested and can be navigated efficiently by well-prepared managers, including key investor jurisdictions such as Denmark, Finland, Germany, Luxembourg, the Netherlands, Sweden and the UK, among others. As the regimes in these countries have become established, the NPPRs have not proved a huge burden for managers but simply an additional cost of raising capital, the key to success being engagement with the process early in the fundraising. While use of "reverse solicitation" (where an investor contacts a manager about a fund on its own initiative) was initially widespread in the market, given the increasingly viable NPPRs and a growing sense among industry participants and regulators that reverse solicitation has been overused, third country managers are finding the balance of risk / reward to have shifted toward NPPR registration in the countries where this is possible. Other countries such as Austria, France and Italy have implemented unworkable regimes leaving third country managers with reliance on reverse solicitation as currently the only practical option.
The next phase of AIFMD is expected to give third country managers another option – access to the marketing passport. While this is a welcome development, it is likely to bring its own issues. The extension of the passport regime has long been delayed (initially expected in late 2015 but now more likely to arrive in 2017) and ESMA appears to be taking a country-by-country approach in determining whether to grant individual third countries access. While Guernsey and Jersey have provisionally been given the green light, the US has not. The current risk to managers relying on NPPRs is that these could be shut down by individual countries once the passport is available (Germany in particular is a concern) even if only a handful of third countries are given access to the passport.
Ultimately, AIFMD envisages the NPPRs being shut down completely. While initially expected in 2018, such a drastic change would not occur until at least three years after the third country passport is made available and is then only expected if the EU Commission is comfortable that the passport is working. Given the relative ease of the NPPRs compared to the full requirements of AIFMD, we predict that many third country managers will stick with the NPPRs for as long as possible, rather than adopt the passport.
Although still a while off, practitioners are already talking about AIFMD II. Potential tweaks to the existing regime could include elimination of passporting fees, a ban on inducements / fees from portfolio companies (following in the footsteps of MiFID II), tightening of reverse solicitation rules and restrictions on the use of proportionality to disapply aspects of the remuneration code. Also, the UK’s recent vote to leave the EU could have a significant effect on regulation of UK-based managers and marketing of their funds to EU investors. The message is clear - managers will need to remain vigilant and continue to keep an eye on coming changes to the AIFMD regime.