Prior to entering into any co-investment arrangements (including term sheets) consideration should be given at an early stage on whether the Alternative Investment Fund Managers Directive (AIFMD) applies to your co-investment vehicle – if it does, there is a risk, if proper consideration is not given to the structure, that the vehicle may be caught by the AIFMD, and require approval from (and be subject to ongoing authorisation by) the FCA or other European regulators.

AIFMD may apply where:

  1. there is an Alternative Investment Fund (AIF) – this is defined as a ‘collective investment undertaking which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors’; and
  2. the AIF has a territorial link to the European Economic Area (EEA) (through the registered office (or domicile in the case of an individual) of either the AIF, the AIF’s manager or any direct investor in the AIF).Co-investment vehicles at risk of falling within the AIFMD framework may have several options available to them, including:

Both of these tests are widely drafted, and all new co-investment vehicles have the potential to be an AIF if they raise new capital from one or more passive investors (other than employee participation schemes which are exempt). Examples may include co-investment vehicles, syndicate vehicles, joint ventures with any passive investors, restructurings, secondaries and managed accounts.

Co-investment vehicles at risk of falling within the AIFMD framework may have several options available to them, including:

  • adjusting its structure so that it does not fall within the definition of an AIF (for example giving all co-investors sufficient decision-making power);
  • using a structure with no EEA nexus;
  • seeking to fall into a category where a lighter touch regime applies (such as being classified as a “small” AIF / AIFM); and
  • finally, full compliance with AIFMD.