The Alternative Investment Fund Managers Directive is one of a host of regulatory developments that fund managers will have to adapt to over the next few years.
The Alternative Investment Fund Managers Directive subjects managers of alternative investment funds (AIFs) to compulsory regulation in the EU and will require significant modifications to the way they do business. The Directive must be transposed into national law before 21 July 2013.
For the real estate fund industry, this will have significant effects on all managers who cannot avail of the exemptions provided by the Directive. When it becomes national law, many unregulated real estate fund managers will need to become regulated for the first time. The Directive will also apply to entities such as managers of qualifying investor funds (QIFs), although it is likely that they are almost fully compliant with the requirements of the Directive already. The Directive will change the business of many real estate fund managers and new systems and procedures will need to be implemented to comply with it.
One main issue will be the identification of the alternative investment fund manager in real estate structures. There are many cases where it is not yet clear which entity should be regarded as the fund manager. For example, in limited partnership structures it remains unclear how the role of the fund manager should be seen. The EU Commission’s Level 2 Regulations will first need to be implemented at national and European levels so as to provide more clarity in respect of the definitions in the directive.
SCOPE OF THE DIRECTIVE
The Directive will regulate fund managers who manage AIFs. It therefore applies directly to the fund managers and only indirectly to the AIFs they manage. Nevertheless, an AIF must be present before a fund manager can be identified.
An AIF means “any alternative investment undertaking, including investment compartments thereof, 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 which does not require authorisation pursuant to the UCITS Directive”.
Each fund must have a single alternative investment fund manager and that fund manager is responsible for compliance with the Directive. The definition of an alternative investment fund manager is “any legal person whose regular business is managing one or more AIF”. Although real estate funds are not typically classified as alternative investment funds, such funds will be deemed to fall within the scope of the Directive and will have to comply with its rules and requirements. However, there are a number of exemptions available.
The Directive provides for two useful exemptions. First there is the “de minimis” or small funds exemption. This is a partial exemption as it allows managers to seek a registration from the relevant competent authority (Central Bank of Ireland) instead of a requirement to obtain a full authorisation.
The exemption is available for managers managing AIF with assets under management which in total do not exceed one of the following limits:
- EUR500 million, provided the AIF is not leveraged and the investors have no redemption rights for the first five years; or
- EUR100 million, including all assets acquired through leverage.
The second exemption is a “grandfathering” provision which applies to certain existing closed-ended funds (funds where redemptions are not permitted). This exemption provides for a lighter level of regulation involving certain disclosure requirements, including the publication of annual reports.
The grandfathering provisions provide that:
- A manager of a closed-ended AIF that is fully invested by 21 July 2013 may continue to manage such AIF without authorisation under the Directive; and
- A manager of a closed-ended AIF whose offer period closed prior to 21 July 2013 and which has a fixed-term that requires it to be liquidated by 21 July 2016 may continue to manage the AIF subject to complying with the annual reporting and disclosure requirements under the Directive.
Finally, the Directive also provides exemptions for the following vehicles:
- Holding Companies
- Institutions for Occupational
- Retirement Provisions (i.e. Pension Funds)
- Securitisation Special Purpose Entities
- Family Offices
- Joint Ventures
- Fund managers where investors are members of the same group of companies
Depositary. Real estate funds must appoint a depositary which will have responsibility for custody of investments together with governance oversight of the manager’s key functions. The requirement to appoint a depositary will have less impact on Irish regulated funds such as QIFs as this requirement already exists. Also, as the Directive requires that the depositary will be responsible for all assets and changes the circumstances when the depositary can be liable for losses incurred by investors, existing agreements between funds and depositaries may need to be reviewed.
Valuations. The Directive provides that independent valuations must be carried out for each AIF. This will be a new requirement for many real estate funds. The manager can carry out valuations, but the valuation function must be separate and independent within the manager’s organisation.
Leverage. Each fund must have a liquidity management system. The manager must adhere to leverage limits set by national regulators and regularly disclose changes to the leverage limits together with the total amount of leverage employed by an AIF. The Commission’s Level 2 Regulations will have a significant role to play in providing guidance to national regulators regarding the setting of leverage limits and the calculation of leverage within an AIF.
Capital: The manager must maintain a minimum level of own funds of €125,000 plus 0.02% of the amount by which the total value of its gross assets under management exceeds €250m (capped at €10m).
The increased capital requirements may push managers to reconsider the types of structure they employ going forward and to look at alternatives to reduce their regulatory capital requirements.
The European Securities Market Association (ESMA) issued its advice on the implementing measures of the Directive last November. Draft Commission Regulations were issued in April of this year and they are "still a work in progress" and so we need to wait until publication of the final version of the Commission’s Regulation before we have full clarity on the new rules.
NEXT STEPS… The basic framework of the Directive is reasonably clear and managers should now take the following steps
- Analyse existing funds and see how they will be impacted by the introduction of the Directive.
- Consider what new funds the manager may wish to launch in the future and analyse how the Directive will impact their plans.
Doing nothing is not an option.