Time is running out for alternatives managers to prepare for the Alternative Investment Fund Managers Directive, says Mario Mantrisi, of Kneip, who looks at the final stages of implementation.
On December 19, the European commission published its level 2 Alternative Investment Fund Managers Directive (AIFMD) measures, triggering the start of a complex implementation process for alternative investment managers.
This process will undoubtedly create new costs that will need to be absorbed or transferred directly to clients and, from the perspective of the alternatives industry, neither scenario is desirable.
Either outcome will have a limiting effect on managers’ ability to deliver net outperformance against the market to investors: one through increased management fees and, the other, through constraints on time and resources, taking managers’ focus off their day jobs.
This will be especially frustrating for managers who are already facing increased scrutiny of fee levels and diminished returns.
While the proposals were still subject to a three-month scrutiny period by the European Parliament and Commission, neither is able to propose amendments; they are limited to vetoing the level 2 measures outright. Given that this is unlikely to happen, AIFMD is being treated as final and, unsurprisingly, is being met with a mixed response from the European financial community.
Custodian banks have been particularly frustrated by the proposals as they indicate that depositaries will be liable for lost assets held in their custody, unless they are able to prove that such losses were caused by events beyond their control. Even then, it must be shown that all possible precautions had been taken to protect the asset. Depositaries will further be unable to delegate liability risk to sub-custodians.
On the other hand, the Alternative Investment Management Association (AIMA) has welcomed the fact that the measures have been published, noting that this will enable the industry to start making its final preparations. However, AIMA also noted that there was still some contention with the directive in areas such as depositaries and delegation.
On delegation, AIFMD seeks to limit managers from outsourcing to the point where they become a “letter box” entity that no longer has the power or ability to effectively implement a fund’s investment strategy.
Fund managers wishing to delegate a core fund manager function must now provide authorities with an objective reason for doing so. Fund managers that fail to provide an adequate reason may be required to insource certain activities and reorganise their delegation structure.
While these requirements may seem burdensome, there have been some concessions made in the level 2 measures. For instance, a number of qualitative factors, such as the geographical and sectoral spread of assets and the risk profile of the alternative investment fund will be considered in the appraisal of a manager’s delegation structure.
Furthermore, outsourcing non-core supporting tasks like basic administrative functions will not be considered to constitute a delegation of AIFM functions. This is fortunate for alternative asset managers because they will face a number of new administrative challenges which will create a time burden and limit their flexibility. As such, there will be an important role for outsourcers to play in supporting fund managers in implementing the directive.
This will be especially true for the non-core activities which the regulation requires fund managers to conduct such as regular transparency reporting and registering funds with regulators.
While the resources required to meet these AIFMD obligations may have a constraining effect on alternative investment managers, the reality is that they are not alone.
An interesting parallel can be drawn with traditional fund managers’ experience with Ucits regulation in Europe, where third-party service providers have stepped into a support role. Whether it is by fully outsourcing, helping fund managers balance their back-office responsibilities, or assisting in their efforts to adhere to new legal developments, external help can be vital.
While some larger alternatives houses will be able to find the resources to meet the obligations of AIFMD on time and without the need for external support, this process will divert their attention away from core AIFM functions. The burden of AIFMD will also fall much more heavily on the smaller managers that lack significant back-office infrastructure.
Smaller firms are particularly vulnerable to increasing regulatory requirements and while there are clauses in AIFMD which will allow managers with less than €500 million of assets under management to be exempt from the regulation, the rule is by no means universal. Germany, for example, has opted not to include it.
Despite the fact that it will be an unequivocal burden, a recent Kneip survey of fund managers from over 130 global fund companies, both large and small, revealed that almost 40% of asset managers did not have a strategy in place for handling investment transparency, or the communication and reporting requirements of AIFMD.
Time is now running out for the significant proportion of alternatives fund managers that have admitted to a lack of preparation for AIFMD. As we approach the July deadline for implementation, the priority for alternatives fund managers must now be to ensure that they have the appropriate resources in place before it is too late.
Mario Mantrisi is the chief strategy and research officer at Kneip
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