Many Private Equity, Property and Venture Capital (“PEPVC”) firms have benefitted from the light touch regulatory regimes available to investment advisors or operator/managers of collective investment schemes (Exempt CAD and Exempt MiFID firms). While a smaller number, authorised as MiFID investment managers (BIPRU 50k firms), have faced a heavier regulatory burden.
The Alternative Investment Fund Management Directive (“AIFMD” or “the Directive”) regime will potentially transform the regulatory landscape for many firms during 2013, irrespective of their previous regulatory classification. However, in Kinetic Partners’ view, the available AIFMD exemptions and transitional reliefs offer PEPVC firms more scope to fall outside AIFMD than other types of alternative managers. We set out below a quick guide to help PEPVC firms determine how AIFMD may apply.
Please refer to our separate guide to the European Venture Capital (“EuVECA”) Social Entrepreneurship (“EuSEF”) regimes available to firms managing less than the AIFMD Article 3 2. (b) de minimis of €500m.
1. Do entities within your group undertake AIFM functions?
AIFMD applies to Alternative Investment Fund Managers (“AIFM”s), which are defined as legal persons whose regular business is ‘managing’ one or more AIFs.
“Managing AIFs” is further defined as performing at least one of the Portfolio Management (discretionary investment management) or Risk Management Functions on behalf of an AIF.
PEPVC firms providing investment advice only (typically as Exempt CAD firms) will not ordinarily satisfy the AIFM definition. However, such firms will need to identify whether any other Group entities undertake AIFM functions.
2. Are you providing services within the EEA?
AIFMD impacts firms conducting business (managing AIFs or marketing) in the EEA (all 27 EU member states plus Norway, Iceland and Liechtenstein). If your firm neither manages nor markets AIFs in the EEA then AIFMD will not apply. However, in all other cases, an AIFM must be appointed and AIFMD will apply to a greater or lesser extent depending on the domicile of the AIFM and AIFs. You can refer to the Kinetic Partners AIFMD/R Decision Tree to assess the impact:
3. Is your Firm managing AIFs?
To fall within AIFMD scope, AIFM(s) managing or marketing in the EEA must do so in respect of AIFs, which are defined as:
“Any collective 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”.
- Vehicles outside the scope of the AIF definition include:
- Managed accounts/single investor vehicles
- UCITS funds
- Family office vehicles which invest the private wealth of investors without raising external capital.
- Holding companies/Groups
- Securitisation SPVs
- Joint Ventures
- Commercial enterprises
- Pension funds
- Employee participation or savings schemes
- Insurance contracts
4. AIFMD exemptions and transitional reliefs
Having identified, in stages 1, 2 and 3 above, that your group has a firm which is managing AIFs or marketing them in the EEA, you will need to consider whether any AIFMD exemptions and transitional reliefs apply including:
- Article 3 (2)(a) €100m de minimis exemption (where the AIFs use leverage) calculated on aggregate AIF AUM (excluding non-drawn commitments) managed by the AIFM.
- Article 3 (2)(b) €500m de minimis exemption provided the AIF is not leveraged and does not permit investors redemption rights for at least 5 years following initial investment. Calculated on aggregate AIF invested AUM (see below) managed by the AIFM.
- AIFMs managing closed ended AIFs before 22 July 2013 that do not make any additional investments after 22 July 2013 may continue to manage such AIFs without AIFM authorisation.
- AIFMs managing closed ended AIFs whose subscription period closed before 22 July 2013 and where the AIFs expire no later than 3 years after that date may continue to manage such AIFs without AIFM authorisation.
Exempt AIFMs fall within a lighter AIFMD regime and will be required to register with competent authorities, identify their AIFMs and the AIFs they manage, provide details of their AIF investment strategies, their main instruments, principal exposures and most important concentrations.
5. AUM calculation
The calculation of AUM for exemption purposes is defined in the ESMA level 2 Delegated Regulation Articles 2 – 5. The total value of all AIFs managed by the AIFM, and other Group companies linked by management or control, must be calculated at least annually using the latest valuations produced within 12 months of the threshold calculation date. AIFMs must continually monitor total AUM against the relevant threshold and, where the breach is not temporary, should seek authorisation within 30 days.
- AIFM must value the portfolio of assets in accordance with the valuation rules applicable where the AIF is established.
- Include assets acquired using leverage and derivative positions (converted into equivalent positions of the underlying asset).
- Include any AIFs where the AIFM has delegated portfolio or risk management functions to others.
- Exclude any UCITS for which the AIFM acts as designated management company, any AIF assets managed under delegation by the AIFM, cross held assets (where an AIF invests in other AIFs managed by the same AIFM or assets in another compartment within an AIF).
- Based on the above, you should be in a position to determine how AIFMD applies to you; whether you are full scope or sub threshold and next steps required for both.
6. Full scope AIFMs
Firms unable to rely on exemptions or transitionals and those that have decided to opt into the AIFMD regime will be “full scope UK AIFM” and will be subject to the full requirements of AIFMD and need to be authorised by the FCA. Nevertheless, firms managing AIFs before 22 July 2013 can continue their activities for a further 12 months until 22 July 2014 without needing to obtain FCA authorisation. However, the FCA has announced Firms must apply no later than 22 July 2014 in case they require the full six months processing the application by 22 July 2014.
FCA Variation of permission
UK full-scope firms must vary their FCA permissions to obtain the ‘managing an AIF’ permission and should complete the following forms:
- Variation of Permission (VoP) form for full-scope AIFMs.
- Schedule of AIFs for full-scope UK AIFMs.
- Passporting forms as relevant (see AIFMD outward passporting below).
7. Sub-threshold AIFMs
Based on the transitionals and exemptions outlined above many Private Equity firms will be sub-threshold AIFM below the AIFMD article 3 (2)(b) €500m de minimis (see above) and therefore must decide whether to:
1. Opt into the Full Scope AIFMD regime.
2. Consider whether they qualify for European Venture Capital (“EuVECA”) Social Entrepreneurship (“EuSEF”) regimes (refer to our separate EuVECA and EuSEF guide); or
3. Register as a “small authorised UK AIFM” or a “small registered UK AIFM”. Both types of AIFM are required to comply with the requirements set out in Article 3 of AIFMD (which mainly relate to reporting).
Small authorised UK AIFM are pre-existing FCA authorised sub-threshold firm. Such firms must complete the: following FCA forms:
- Variation of Permission (VoP) form for small authorised UK AIFMs.
- Schedule of AIFs for small authorised UK AIFMs.
Small registered UK AIFM fall into one of the categories set out in regulation 10 of the AIFMR Regulations 2013 (SI 2013/1773), which, in summary, allows for the registration of:
- Internally managed, closed-ended investment companies (such as investment trusts);
- External managers of certain property funds; or
- Managers of EuSEF and EuVECA Funds.
Firms qualifying and registering as EuSEF and EuVECA should refer to our separate guide. Other firms requiring registration as small registered UK AIFM should complete the following forms:
- Application for entry on register of small registered UK AIFMs.
- Schedule of AIFs for small registered UK AIFMs (please complete the AIFs tab).
Sub-threshold AIFMs marketing AIFs in other EEA States
Small authorised UK AIFMs and small registered UK AIFMs (other than EuSEF or EuVECA managers) cannot take advantage of the AIFMD marketing passport to market the AIFs they manage to investors in other EEA States. To determine whether they are able to market AIFs in another EEA State they will therefore need to consult the national law in that jurisdiction.
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