The EU Alternative Investment Fund Managers Directive (AIFMD) came into play on 22 July 2013. Five years on Matt Tostevin and Fèmy Mouftaou in JTC’s funds team in the Channel Islands and Luxembourg, reflect on how the regulation has impacted European funds business and what the future might hold…
Has the AIFMD panned out as expected?
Matt: In the run up to its introduction, there was a lot of apprehension about what AIFMD might mean for European alternatives. Ultimately, though, the industry has responded and adapted pretty well, and actually it has provided those managers, service providers and jurisdictions that have been forward-thinking and innovative with some opportunities.
Whether or not the directive has achieved what it set out to do – work in favour of investors in the aftermath of the global financial crisis – is another matter. Yes, it’s added some protection and transparency for investors, but it’s also added layers of administration, red-tape and ultimately cost, which has inevitably eaten into returns. That’s clearly not in anyone’s interest. Indeed, one of the key areas of focus was executive remuneration and conflicts of interest, which have been more effectively impacted by changes to individual countries’ domestic legislation and shareholder pressure.
How has the alternatives sector responded over the past five years?
Matt: Large managers and investors haven’t been put off Europe as an investor destination as a result of the directive, and we’ve seen sustained strong deal flow, particularly in the real estate, infrastructure and private equity asset classes, and a desire to find solutions to ensure funds can continue to be marketed into the EU.
From an onshore EU perspective, the AIFMD passport has been popular amongst some managers wanting blanket EU coverage and investors wanting full compliance and regulatory reassurance. Luxembourg has been particularly successful in promoting the benefits of the passport and its alternatives sector has benefited considerably as a result.
The offshore specialist fund centres like the Channel Islands were also quick to put themselves in the frame for a ‘third country’ passport, when they received approval from ESMA back in 2015. Back then it was a regulatory issue, and there was a lot of effort put into achieving that. Perhaps regrettably it’s now become a political issue in light of Brexit, but it’s not impossible the passport could be an option again for the islands in the future.
That said, very few investment firms are using the passport to access more than a few EU jurisdictions, with most limiting their marketing activities to one to three. National Private Placement Regimes continue to be more popular due to the speed at which new managers and products can be registered for marketing, especially in jurisdictions such as the UK, Netherlands and Ireland.
Has the rise of the ManCo been a surprise?
Matt: The rise of the Luxembourg ManCo as the go-to solution for managers wanting to establish an EU presence has been one of the main outcomes of AIFMD. It’s really changed the face of alternative fund structuring in Europe, and I’m not sure anyone necessarily saw that coming back in 2013. Luxembourg has really grasped the opportunities presented by ManCo and brought it to market as a core solution to the AIFMD challenge.
Perhaps equally surprising is the migration of the ManCo model to the offshore centres too – JTC’s ManCo in Guernsey is an example of that. But actually, there’s no reason it can’t be just as successful in an offshore context. In fact, given Guernsey and Jersey’s position outside of the EU, it could act as a really dynamic approach to global alternative structuring into the future. Indeed, with Guernsey and Jersey having several years of experience of operating ManCos marketing into the EU as a third country and with the uncertainty of the UK’s regulatory position post Brexit, the Channel Islands are an attractive stable alternative. Many UK-based investment houses are actively looking at utilising offshore ManCos instead of UK ManCos precisely because of this stability and certainty.
Has its introduction had any unforeseen consequences?
Fèmy: As far as the Channel Islands are concerned, the fact that the passport didn’t materialise has perhaps worked out for the better. It’s given private placement an opportunity to thrive, when back in 2013 people were forecasting it would be quickly phased out.
The reality is that few alternative funds actually want blanket marketing into the EU – EU figures suggest that 97% of EU funds actually market to three countries or less, and private placement is perfect for that. Guernsey and Jersey have shown that it can work really well in practice and provide a good, cost-effective alternative to full AIFMD compliance.
From an onshore EU perspective, AIFMD has prompted a good deal of discussion around governance, substance and expertise in relation to ManCos but also more widely, and driving up standards in these areas has got to be a good thing. Overall, it’s the ManCos that can demonstrate these qualities that are seeing success.
We’ve also seen a massive emphasis being put on technology as a result of AIFMD. The smart firms, particularly service providers, have seen AIFMD as an opportunity to invest in their systems and this trend has clearly been accelerated by the rise of FinTech. This is certainly JTC’s experience, and it’s had a really beneficially knock-on effect across our business lines.
What does the future hold for AIFMD?
Fèmy: Five years on, and the AIFMD has established itself pretty well as a European alternatives brand, alongside UCITS’ directive for retail and plain vanilla funds. Interestingly, we are only really now seeing US and Asian managers looking more closely at how they can navigate the AIFMD to access EU investors, and we see a good long-term future for the AIFMD brand globally.
Of course, we’re now in a very different landscape to 2013, and Brexit is going to form the backdrop to how European regulation evolves. The UK will be a third country next year, for instance. Surprisingly, Brexit could reinforce the success of AIFMD, as we see more and more “non-EU AIFMs” having difficulties registering and marketing their funds in European countries and then looking to setup their investment firm in Europe. It seems obvious that the simplicity offered by EU passporting is becoming the easiest option.
We’re also expecting rewrites in the form of AIFMD II to take into account necessary developments in the landscape, so the story is certainly not over, and firms will have to continue to work hard to ensure managers and investors have the right tools at their disposal, whether onshore or offshore.
What’s certain though is that global alternatives are on an upwards trajectory as they continue to move into the mainstream, and we feel positive that we are well placed to support managers across our network.