Offshore practitioners can breathe easy that they will be able to cope with any hazards thrown up by the AIFMD. Ben Robins sheds some light on the issues likely to be facing investor clients
What keeps you awake at night? Professional investors, particularly pension fund managers, will have occasion to worry about maximising client returns, which requires access to a wide pool of investments, including a modest allocation to innovative, alternative investments. In the current climate the search for pre-crisis returns must be tough, but European baby boomers starved of bank interest will demand that the search is successful. Professional investors are earning their keep.
If you work in the field of alternative investment fund formation, you may have endured a few sleepless nights over the past 18 months worrying about the impact of the EU Alternative Investment Fund Managers Directive (AIFMD), the first draft of which appeared, largely unexpectedly, in April 2009. For those following its progress, what a roller-coaster ride it has been. For those smart enough to sit on the sidelines, waiting for it to slowly and erratically take shape, wise move.
Much has been written about the highly political origins and shaping of the AIFMD, but the most difficult area in negotiations proved to be the treatment of non-EU (third country) alternative fund managers and funds. The European Commission’s April 2009 draft went so far as to block certain third country alternative fund managers from marketing into the EU, potentially denying EU pension funds access to the very many offshore hedge, private equity, real estate and other alternative investment funds they had enjoyed access to in the past through national private placement regimes.
This, and many of the new regulatory requirements proposed by the initial draft, created a real risk that the European alternative funds industry, already challenged in delivering returns in tougher markets, would wither on the vine at the very time when it was required to flourish.
The constant ebb and flow of amendments to the draft AIFMD created real uncertainty in the minds of those looking to structure and invest in new funds; alongside the marketing uncertainties, the administrative burdens would give rise to additional costs impacting on the industry’s business models, but the extent of that impact could not be quantified. How can fees and targeted returns be disclosed with confidence against that backdrop?
There can be little doubt that uncertainty has stifled fundraising; not every fund manager has had the resources, or an investment strategy that allows it, to launch an Undertakings for Collective Investment in Transferable Securities (Ucits)-compliant alternative fund in the meantime.
In response to lobbying by groups – including the professional investor community, industry bodies such as the Alternative Investment Management Association and the European Private Equity and Venture Capital Association, and third country governments (notably the US) – the final text of which will be formally approved this month, rationalises the administrative burdens and permits the continuation of EU access to third country funds through a combination of national private placement regimes, followed by EU-wide passporting (likely to replace private placement from 2018) and the ability of EU professional investors to seek investment in third country funds by reverse solicitation. EU managers will enjoy an EU-wide passport sooner, but the carrot of a passport will come with the costly stick of full AIFMD compliance.
A measure of continued uncertainty arises for EU managers in the context of member states having to transpose the final administrative provisions of the directive into their national laws over the next two years, but hopefully pension funds, fund promoters and fund formation lawyers alike can all sleep a little easier.
In our home jurisdictions of the Cayman Islands, Guernsey and Jersey (the leading offshore fund jurisdictions), there is complete confidence that the islands will meet the minimum criteria attached to EU marketing beyond 2013, being proponents of international regulatory cooperation and world leaders in anti-money laundering compliance. To the extent that an EU marketing passport for 2018 and beyond is attractive and requires offshore managers to comply with the full requirements of the AIFMD, our regulators are standing ready to fine-tune our regulatory regimes to ensure continued EU access to our funds and managers.
We are anticipating that this new clarity will boost fundraising activity using offshore funds and managers that are and will remain subject to regulation in accordance with global (International Organisation of Securities Commissions) regulatory norms, using the pre-existing marketing routes. Cayman, Guernsey and Jersey continue to offer an appropriate and cost-effective level of regulation for alternative funds offered to professional investors, allied with ’simple’ tax neutrality and an inherent flexibility for the design of innovative products.
For promoters accessing investors in the rest of the world, including the emerging markets, offshore models are already in favour, and they can continue to provide appropriately regulated funds for non-EU investors, whether inside or outside an AIFMD-compliant environment.
Notwithstanding the political rhetoric, earlier this year, when the marketing provisions in the AIFMD were more restrictive than the latest text, a KPMG survey confirmed that “the overwhelming majority of existing alternative investors are happy to continue to allocate funds that are located in offshore jurisdictions”.
Ben Robins is a partner at Mourant Ozannes