Update on the Alternative Investment Funds Managers Directive 21 July 2020

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Pierre Weimerskirch

Managing Director, LIS – a SANNE company

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On Wednesday, 10 June 2020, the European Commission (EC) published its assessment on the application and the scope of the Alternative Investment Funds Managers Directive (AIFMD).

Prepared under Article 69 of AIFMD, the report assesses on the impact of AIFMD on investors, Alternative Investment Funds (AIFs) and Alternative Investment Fund Managers (AIFMs) in the European Union.

Key points to note

  • A review of AIFMD is envisaged, albeit without a timeline. The arrival of ESG related regulations (Disclosure, Taxonomy) for 2021/2022 may coincide with AIFMD II.
  • Non-bank lending is noted as an area of risk, potentially triggering added regulations and/or disclosures for this asset class.
  • The need to have a depositary in the AIF jurisdiction may be removed, creating a European depositary passport.
  • Member States may be their own enemies by keeping National Private Placement Regimes (NPPRs) in place, without agreeing a way forward between harmonisation of regimes or third country passports.

Summary of impacts

AIFs and AIFMs

EU AIF Market

  • Growth of EU AIF market
  • Total net assets grew from €2.3 Tn to €5.9 Tn between 2011 and 2019.
    • Cross border distribution of AIFs nearly doubled from June 2017 to October 2019 (3% to 5.8% of AIFs).
  • AIFM passport considered to be an important factor to access markets, although time to access seemingly increased for 34% of participants.

Efficacy of EU AIFM passport

  • The efficacy of the EU AIFM passport is limited by national differences in marketing rules, notably through certain countries’ gold plating requirements.
  • MiFID II marketing restrictions to professional investors limit access to semi-professional and retail investors, the latter only being able to be approached under different and restrictive national rules.

NPPRs

  • NPPRs play an important role in the market, especially given the lack of an AIFM passport for third party countries.
  • Un-level playing field between EU and non-EU AIFMs as a result of the limited application of AIFMD for non-EU AIFMs.
  • Member States still do not agree between harmonising NPPRs or activating the AIFMD passport for third country entities.

Retail investors

  • Retail investors are still limited in their choices, as the main providers of such products, banks and insurance companies,  often offer their own products over those of third-party funds.
  • This trend is however changing, with the expansion of market shares of online platforms. Additionally, the work taking place on the Capital Markets Union (CMU) will likely improve the distribution of investment products in the Union.

Investors

Depositaries

  • Increased investor protection as a result of the regime focus on activities and liabilities of depositaries.
  • The lack of a depositary passport could lead to concentration risk, where a single depositary could hold all AIF assets in a Member State.

Valuations

  • Despite more discipline around valuation of AIFs’ assets, some areas, such as the liability of external valuers, remain uncertain. This is unlikely to trigger an amendment of AIFMD.

Disclosures

  • Disclosure requirements despite leading to increased costs, bring more transparency in the investors’ investment decision making process.

Monitoring & Systemic Risk

AuM threshold

  • No evidence to support that the current threshold applying to AuM should be adjusted.

Supervision

 

  • Measures available to National Competent Authorities (NCAs), such as suspension on redemptions and leverage limits, are deemed appropriate. The European Systemic Risk Board (ESRB) is also recommending these measures to be harmonised across Member States.
  • Annex IV reporting, despite being useful in monitoring risks to the financial system, can be streamlined and could therefore be potentially updated.

Non-bank lending facilities

  • Increased financial stability concerns with the rise of non-bank lending facilities, notably through the lack of detailed information on leveraged loans, Collateralised Loan Obligations (CLO) and the linkage between banks and non-banks.

Leverage calculations

  • Gross and commitment methods of calculating leverage are deemed appropriate by many stakeholders.
  • Calculation methods may however change, depending on the conclusions of the work of the Financial Stability Board (FSB), International Organisation of Securities Commissions (IOSCO) and ESRB.

Remuneration

  • Remuneration is moving from a variable to a more fixed model as a result of the introduction of AIFMD.
  • ESMA raised concerns around the increased call to align the remuneration model to the one established under the Capital Requirements Directive (CRD), in which there are set amounts exempt from deferring variable payments.

Investment in private companies and in/or for the benefit of developing countries

Managing specificities of Private Equity

  • Rules on supervisory reporting, depositary, risk management and remuneration do not explicitly take into account all of the specificities of managing private equity investments.
  • The report was unable to establish the benefits of transparency requirements linked to the acquisition of controlling stakes in private companies, as well as those related to asset-stripping provisions.

Barriers

 

  • Managers that do not adhere to AIFMD or EuVECA regulations (due to their portfolio size) encounter significant issues whilst marketing.
  • The report mentions a potential solution to accommodate Private Equity managers would be the removal of unnecessary charges and searching for better ways to protect non-listed companies and issuers.

Developing countries

 

  • There is insufficient evidence to determine the impact of AIFMD in or for the benefit of developing countries. AIFMD is also not noted to impact investment towards third countries.

Further regulatory developments to note

Cross-Border Fund Distribution of Investment Funds to increase transparency of regulatory fees charged by NCAs for processing AIF notifications in relation marketing of AIFs.

Asset segregation where custody is delegated to a third party have been rationalised by the CRD, provided that AIFMs belonging to the same corporate group will have to apply AIFMD rules on remuneration. They will then avoid becoming subject to multiple sets of rules regarding different financial intermediaries.

Key contact

For more information please contact Paul Séjournant, Pierre Weimerskirch and Christian Hertz.