The European Securities and Markets Authority’s (ESMA) two recent consultations on the AIFM Directive have now closed. ESMA is required to give its advice to the Commission resulting from these consultations by 16 November 2011.

The consultations highlighted some major areas of concern for real estate fund managers. In relation to some of these, areas of uncertainty remain, but the consultations in places make suggestions which bring some welcome clarity. Some key points arising are set out below.

Depositaries – the proposals relating to strict liability for depositaries and the level of their responsibilities as envisaged by ESMA raise the spectre of significant additional costs for real estate funds to bear.

Risk management – ESMA also proposes detailed implementing measures on risk management adapted to the nature, scale and complexity of the AIFM’s business and of the Alternative Investment Funds (AIFs) they manage. While this does support the concept of proportionality rather than a one size fits all approach, it is still likely to have negative cost implications for smaller managers.

Delegation – the requirements on AIFMs when delegating functions are, if anything, more onerous than existing FSA rules on outsourcing. Firms must ensure that service providers to whom they delegate functions are capable of effectively carrying out the relevant functions. This will require a relatively high initial and ongoing due diligence obligation on AIFMs.  

Leverage – ESMA clarified that when calculating the exposure of an AIF, corporate structures sitting below it (e.g. SPVs holding real estate assets) should be looked through only to the extent that those structures have recourse to the AIF via cross-collateralisation or guarantees. It seems therefore that where the AIF itself does not provide guarantees or collateral for any borrowing at the SPV level, such financing would not be considered as leverage for the purposes of the Directive.

Third country issues – the second ESMA consultation paper concentrates principally on co-operation arrangements for third country AIF and AIFM, delegation of portfolio/risk management functions to third country undertakings, assessment of third country depositaries and identifying the “Member State of reference”.