UCITS has become a global brand. As uptake of AIFMD increases, can the EU’s directive for alternative investment funds achieve the same status? Justin Partington, recently appointed group fund solutions leader at SGG in Luxembourg, ponders this and other questions.
There was a lot of concern about the Alternative Investment Fund Managers Directive (AIFMD) when it was first mooted. Has it now come in from the cold?
Yes, definitely. That’s because it was implemented in a pragmatic and proportionate way in the major markets, which allowed alternative investment fund (AIF) managers to benefit from the brand without it being too onerous in terms of regulation. It’s a mixed picture, though. There has been a reasonably high adoption rate in every European country, including the UK. Adoption rates outside Europe have been lower than expected. Some managers have chosen private placement rather than fully opting in to the AIFMD, particularly if they are only targeting a small number of EU countries.
At some point, there will be more adoption by managers whether they privately place or not. A recent survey related to EU sources of capital showed that EU innovation capital will go to AIFMD regulated funds.
A recent statistical release by EFAMA showed a record high of €184bn going into new AIFs in 2016 versus €148bn in 2015 – a 24% increase. At this rate of growth, AIFMD-compliant funds will soon reach the level of UCITS funds, which have averaged €274bn annually over the last 10 years.
Many AIFs have a 10-12 year lifespan. If you take the long-term view, the direction of travel is for AIFMD-compliant funds rather than private placement – and if it allows funds to have access to investor capital they would not otherwise have access to, that’s surely a good thing.
As more managers opt to run regulated funds, how can they get the best out of AIFMD?
AIFs are very different from UCITS, and so it is important to have specialist expertise. Flexibility and bespoke tailoring are key for AIF fund managers and their investors. Some fund managers are happy to be regulated under AIFMD and may have particular risk management requirements.
ManCos were popular under UCITS and people thought AIFMD would be a great opportunity in the same way. However, some AIF managers believe the way they operate is one of the unique ways they create value, and we are also seeing demand from clients to set up their own ManCo and outsource ManCo support services, including risk management and reporting. Some clients are looking for a ManCo incubation service to cover the time it takes to set up their own regulated ManCo.
AIFMD II is due in 2018. How are regulations being fine-tuned in the run-up?
In Luxembourg, one key area is the reserved alternative investment fund (RAIF). It offers an attractive solution for clients, as it regulates at the fund manager level more than the fund level. It allows managers more flexibility and quicker time to market with new funds. This avoids regulatory delays at the fund level while still offering a compliant and regulated product, helping fund managers to launch new funds and co-invest vehicles on a timely basis.
Do you think AIFMD can achieve the global brand status of UCITS?
Whenever you create new regulation, fund managers and investors need time to adjust. The difference with AIFMD is that it affected a group that had not been significantly regulated in the same way in most jurisdictions. The demand has been more EU-centric than global, though this is changing as the investor base values AIFMD-compliant structures. We have had discussions with US funds looking to set up AIFMD-compliant structures to attract both US and Asian institutional investors – which is an interesting sign of the times. When it emerges, AIFMD II will be another chance to further advance the brand globally.
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