Member states of the European Union (“EU”) were due to implement The Alternative Investment Fund Managers Directive 2011/61/EU (the “AIFMD”) by 22 July 2013. The AIFMD granted a transitional period of twelve months to allow EU alternative investment fund managers (“AIFMs”) to apply for authorisation to act as AIFMs under the AIFMD. In implementing the AIFMD, certain EU Member States extended this grace period for compliance with the AIFMD to non-EU AIFMs. Accordingly, the transitional periods provided for by the AIFMD expired on 21 July 2014. This briefing note reviews how non-EU AIFMs and EU AIFMs of offshore AIFs in the jurisdictions of Guernsey, Jersey and the Cayman Islands (“Offshore AIFs”) are dealing with the requirements of the AIFMD in developing and implementing their EU marketing strategies of the alternative investment funds (“AIFs”) for which they are responsible.
ROUTES TO MARKET SELECTED BY NON-EU AIFMS
We are seeing many non-EU AIFMs, with significant assets under management in respect of new Offshore AIFs, elect to market those AIFs under the national private placement regime particular to the relevant EU Member State where marketing is proposed. Some AIFMs however are taking the decision not to register under the national private placement regime of the Member State where their investors are based, and this can be for various reasons: e.g. the AIFM prefers to rely on reverse solicitation.
Those AIFMs that hold back from marketing into the EU on an active basis, relying instead on the passive route of reverse solicitation, perceive a lack of cohesion across the EU Member States in terms of the registration requirements leading to increased costs. The costs include identifying the requirements of each jurisdiction in order to proceed with marketing. It is also not attractive to many AIFMs that staff remuneration and carried interest mechanisms must be disclosed under the AIFMD, whether the AIFM is EU domiciled or non-EU domiciled.
EXPERIENCES SO FAR WITH CERTAIN NATIONAL PRIVATE PLACEMENT REGIMES
For now, as has been the case to date, AIFMs can only market Offshore AIFs which they manage under the prevailing national private placement regimes of EU Member States. This means that the legal processes and routes to market are prescribed entirely by the EU Member State where marketing is proposed. The jurisdictions with the quickest routes to market are those which require a notification process, immediately after the completion of which marketing can then commence e.g. UK and the Netherlands. Next are those where an AIFM will need to wait for the regulator to confirm that marketing can commence (which can take some weeks).
Jurisdictions such as Germany and Denmark are a little more stringent for non-EU AIFMs compared to UK, the Netherlands and Finland. For example, both require non-EU AIFMs to comply with the depositary-lite regime (to put them on a par with the requirements of EU AIFMs of non-EU AIFs). Further, the turn-around time for applications to regulators, which can take months, can be a disincentive for non-EU AIFMs trying to access an EU market. Such processes impact on timing for routes to market and contrast starkly with those Member States operating a “notification-only” regime. Nonetheless we have seen many structures involving Offshore AIFs where such jurisdictions are a target market.
AIFMD REQUIREMENTS FOR AN ABOVE THRESHOLD OFFSHORE AIFM
The AIFMD has set out a minimum compliance regime for non-EU AIFMs which are above threshold1 and which are seeking to market into the EU. These require that certain disclosures are made to investors, that there is regular reporting to regulators, that an annual report is prepared including certain specific disclosures and that the AIFM complies with certain stake-building notifications and asset stripping restrictions.
Disclosures to investors
Usually the enhanced disclosures required under Article 24 of the AIFMD are very easily incorporated into the offering document and it has become quite usual to do this by way of appendix (for ease of reference by any regulator or investor and to facilitate any required review by any EU counsel as relevant). So, for example, any details of preferential treatment of shareholders by way of side letters will need to be disclosed to investors. So too, the disclosure of leverage used will need to be calculated and disclosed in accordance with the EU Commission’s Delegated Regulation of 19 December 2012 supplementing the AIFMD.
Regular reporting to regulators
A non-EU AIFM to an Offshore AIF will be required to file an Annex IV report regularly with the regulator of any EU Member State where the AIF is being marketed. The form of the report has been specified by ESMA and has been adopted by and large wholesale in each EU Member State.
Where offshore feeder funds are marketed into the EU, in respect of offshore master AIFs, an Annex IV report should only be required in respect of the feeder fund. However, to comply with ESMA’s guidance, each EU Member State is likely to ask for basic information about the underlying master fund concerning its investment strategies, principal exposures and concentrations, risk profile and leverage.
Annual Report of the Offshore AIF
The Offshore AIF’s annual report must be made available to investors based in the EU and filed with the relevant regulator in the EU Member State where marketing is conducted within six months of the AIF’s financial year end. Disclosures to be included in the financial statements include the total remuneration for the financial year, split into fixed and variable remuneration, paid by the AIFM to its staff, as well as the number of beneficiaries and (where relevant) any carried interest paid by the AIF.
Stake Building Notifications and Asset Stripping Restrictions
In the event that an AIF holds investments in companies which have their registered offices in the EU, certain notifications to EU regulators will be required where interests in unlisted target companies exceed or fall below certain thresholds. Where control is acquired by the relevant AIF then certain information might need to be made available, not only to the applicable regulator, but also to the company (whether listed or not) and its shareholders.
Restrictions on certain transactions (commonly known as asset stripping) apply for a period of 24 months following a transaction where any AIF individually or jointly acquires control of a non-listed company.
For those AIFMs who wish to avoid active marketing in the EU, it will be critical that they understand what activities constitute “marketing” in their EU target markets. The AIFMD defines marketing as meaning a “direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the Union”. The AIFMD does recognise that it does not intend to regulate the circumstances where an investor approaches an AIFM on the basis that it is seeking an investment at its own initiative. There may be varying interpretations between EU Member States of what constitutes “marketing” and there may be different ways across the EU jurisdictions of evidencing that a specific investment is made at an investor’s initiative. All AIFMs should take measures to understand the varying requirements of the jurisdictions where their potential investors are based before transacting with them.
THE AVAILABILTY OF A PASSPORT FOR NON-EU AIFS/AIFMS
The AIFMD sets out a process whereby (by 22 July 2015) ESMA issues an opinion to the European Parliament, the Council of the European Union and the European Commission on the functioning of the passport for EU AIFMs and on the functioning of the marketing of AIFs by non-EU AIFMs in the EU and gives advice on the extension of the passport to the marketing of non-EU AIFs by EU AIFMs and of AIFs by non-EU AIFMs in EU Member States.
If the opinion and advice favour the same, then the passport will be extended to non-EU AIFs and non-EU AIFMs. However, the AIFMD provides that the earliest date for the phase out of national private placement regimes is to commence is at the end of 2018. Accordingly, there would be a period of at least three years during which non-EU AIFs and non-EU AIFMs can access both the national private placement regime and the extended passporting system. Even after the end of 2018, national private placement regimes will only be phased out if ESMA opines that a phase out is feasible and recommended and (after input from the industry) these recommendations are accepted.
It is possible to establish offshore investment vehicles which will not constitute AIFs under local law in order to permit institutional investors to acquire portfolios of assets that are for sale without delays and working within very tight timescales. The benefit of this is that where such investment vehicles are managed by a non-EU AIFM, they will not constitute a material change requiring the pre-approval of regulators in the EU. For EU AIFMs a pre-approved process may give rise to the deal falling through given that they are usually completed within very short timescales.
The AIFMD requires that by 22 July 2017 the European Commission conducts a review of the various aspects of the AIFMD including the marketing of AIFs by non-EU AIFMs, which may culminate in a revision of the AIFMD.
Some AIFMs of Offshore AIFs are continuing to market actively, using national private placement and are obtaining duly updated advice about the changed regulatory landscape in their target EU markets: some, most notably US AIFMs are relying on reverse solicitation or avoiding raising capital in the EU altogether. The one commonality is the need to seek advice in each EU target market jurisdiction to ensure that the AIFM (and its investors) are clear about the legal routes being taken to attract EU investment in respect of any Offshore AIF. A large percentage of fund managers regard the AIFMD as unpalatable or simply unsuitable for their businesses for a variety of different reasons. Consequently some structures which may have been set up using EU entities will instead be domiciled in non-EU jurisdictions or parallel non-EU structures will be deployed alongside EU entities. Offshore centres will therefore have a big part to play going forward whether that is to support the needs of clients wishing to operate non-EU structures within AIFMD using national private placement regimes or where clients are keen to remain entirely outside the EU for AIFMD purposes.