Gaining access to Europe’s single market from outside the EU has never been easy, and the UK’s vote to leave makes it politically difficult to liberalise access rules while the Brexit negotiations are imminent. That is unfortunate for non-EU private equity fund managers, who had been promised a third-country passport when the Alternative Investment Fund Managers Directive (AIFMD) was finalised in 2011.
That third-country passport is important because, while EU fund managers who are fully authorised pursuant to that directive get a management and marketing passport across the EU, those outside have to deal with 28 national private placement regimes (NPPRs). And, although in most countries those NPPRs have proved manageable, a few countries have made it virtually impossible to actively sell a private equity fund to professional investors in their territory.
However, these country-by-country rules were only intended to be a temporary solution: the AIFMD contemplates that a “third-country passport” will be made available to qualifying non-EU managers who opt in to full compliance with the directive and submit to the jurisdiction of one of the EU’s regulators. The timetable for introducing this passport has already slipped, but it had been expected to be made available to managers in some countries (including the Channel Islands, Switzerland and, possibly, the US) quite soon, following a positive opinion from Esma, the pan-European regulator, issued earlier this year.
But the process is not straightforward.
First, many of the directive’s third-country passport provisions are complex and may even be unworkable. For example, managers cannot choose which EU regulator will oversee them; instead, this will be determined by a variety of factors, including their fund marketing strategy – which gives rise to uncertainties and anomalies. It is also not clear what presence they will need to have on the ground in the EU, but there clearly will need to be a local representative with whom their EU regulator can communicate.
Second, the interaction of the new passport with the NPPRs is far from clear or satisfactory. The AIFMD contemplates that NPPRs could be switched off on a pan-EU basis three years after the passport is made available, but it remains unclear whether that will happen and, if it does, whether they will be switched off for all countries, or just those who have had the benefit of the passport. In any case, some countries – including, most significantly, Germany – will switch off NPPRs earlier, as EU rules permit them to do. That means that access to German investors for managers from passport-eligible countries will get significantly more difficult.
And finally, there is politics. The Commission’s delegated act will need to be approved by the Council (made up by the member states) and the Parliament. Giving EU-based institutional investors access to alternative funds managed outside the EU is, of course, absolutely essential. But, in a post-Brexit world, there is a risk that the EU turns inwards and adopts a more protectionist stance, especially if it wants to punish London.
It is to be strongly hoped that it resists that temptation, and that the transition to a level playing field for properly regulated funds can be dealt with in a coherent and level-headed way. The passport is not the only way to achieve that (and NPPRs might prove to be a better way forward), but private equity is now caught up in the EU’s increasingly complex politics.
Tim Dolan, partner and Simon Witney, consultant, King & Wood Mallesons
©2016 funds europe