From 22 July 2013, the ability of Australian fund managers to market to European professional investors will be constrained by the implementation of the Alternative Investment Fund Managers Directive (AIFMD).
This article will focus on the ability of Australian fund managers to continue to market in Europe after July 2013 under the existing national private placement regimes. It is not until 2015 at the earliest that Australian fund managers may be able to take advantage of the passport introduced by the AIFMD in which case full authorisation under the directive will be required. 2018 is the earliest in which the private placement rules may be revoked leaving full authorisation as the only route available to market in Europe.
What is the AIFMD?
The AIFMD introduces a regulatory regime for the authorisation, ongoing operation and transparency of fund managers who manage or market alternative investment funds in Europe. Whilst the primary focus is to regulate the fund manager (as opposed to the funds), fund operations will be indirectly impacted by provisions around leverage limits, fund risk profiles and portfolio liquidity.
What is an AIF?
The AIFMD applies to investment vehicles which are alternative investment funds (AIFs). AIFs are collective investment undertakings which raise 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. This will include private equity funds, hedge funds and real estate funds. This directive does not cover UCITS (Undertakings for Collective Investment in Transferable Security) which are the open ended retail products in Europe. UCITS are governed under a separate directive. Single investor vehicles, managed accounts, joint ventures and family office vehicles that do not raise external capital won’t generally be regarded as AIFs and therefore fall outside the AIFMD.
The AIFMD captures any AIFs being marketed to one or more European persons. Therefore, Australian domiciled funds as well as offshore funds managed by Australian managers which are being offered to European investors may be subject to the AIFMD.
Marketing under the AIFMD is broadly defined and captures more than direct marketing to European investors. Marketing means any offering or placement of shares/units in the fund at the initiative of the manager or on behalf of the manager to EU investors.
This means that passive marketing when the investor initiates contact with the manager would generally not be caught. However, to rely on passive marketing you will need to put in place procedures to be able to demonstrate that a particular EU investor made the initial contact. Such procedures should also ensure that you don’t market a different fund to the investor than the one they contacted you about.
In addition, if you have appointed a third party marketer or distribution agent to market the fund in European jurisdictions, you will be regarded as actively marketing to European investors (even though you are not doing this directly) and accordingly subject to the directive.
Requirements for Australian managers marketing into Europe after July 2013
After 22 July 20131, the following four conditions must be met before an Australian manager can market its funds to European investors:
- The relevant EU state must have a private placement regime which permits Australian managers to market their AIFs in that member state. Whether an EU state has a private placement regime is optional. The UK has confirmed that it will not change its existing marketing regime and it will only require the minimum disclosure and transparency requirements. It is still unclear whether many other important European countries such as France and Italy will have a private placement regime which is accessible by Australian managers.
- The Australian manager must comply with the disclosure and transparency (but not other) requirements of the directive as well as any additional local requirements of the relevant EU state.
- Cooperation arrangements must be put in place between the regulator of the EU state in which you are marketing and the regulator of the manager’s home country, and if the Fund is a non EU fund, such as a Cayman fund, the regulator of the country of establishment of the Fund. ESMA has recently announced that a Memorandum of Understanding in relation to cooperation arrangements has been reached with ASIC and the Cayman Islands Monetary Authority (amongst others) and all
27 EU Member State securities regulators.
- The home country of the Australian manager and the non EU fund must not be listed as being a non-cooperative country by the Financial Action Task Force which is the global standard setting body for anti-money laundering.
Disclosure and Transparency requirements
Information is required to be given to investors and regulators prior to an investment and on an ongoing basis. Such disclosure includes the investment policy and strategy, risk and liquidity management systems, any preferential treatment offered to investors (i.e side letters), use of leverage and risks. There are also specific requirements for private equity funds. Many of the requirements are consistent with information currently contained in disclosure documents. However, one of the new requirements is in respect of disclosure of the annual remuneration of the manager’s senior staff. The provision of an audited annual report to the member state regulator and to investors on request will be an additional obligation for many wholesale funds.
These requirements are going to result in additional compliance costs. Managers will need to consider whether the benefits of actively marketing the funds into Europe exceed these compliance costs. If so, whether relying on the reverse solicitation is a realistic alternative.
If you intend to market to new EU investors after July 2013, it will be necessary to understand the detailed requirements for marketing in each European member state under the local private placement regimes in so far as these are available.
1 The AIFMD provides a one year transitional period for EU managers to get authorised. In the UK, Australian managers will also get the benefit of this transitional period. This will mean that you will have until July 2014 to comply with transparency and other provisions. However at the moment this only applies to limited EU jurisdictions.