When is a joint venture not a joint venture? The Alternative Investment Fund Managers Directive should tell us, says Shayla Walmsley.
"All new, each perfectly unlike his neighbour," was how poet Robert Graves described the things never seen or heard or written about in Welsh Incident. Judging by the responses to ESMA's consultation on the Alternative Investment Fund Managers Directive (AIFMD), which closed this week, he was probably talking about joint ventures.
The definition of a joint venture is proving problematic and is in danger of throwing up some inconvenient issues for an already harried real estate fund management industry. Identifying features suggested to ESMA include: the involvement of no more than two partners; no sponsor; the absence of a defined investment policy; and the partners' ability to choose tenants.
Credit is due to fund management associations for reducing the potentially long list of issues to this relatively short one, especially given the sheer scope of the AIFMD. The draft directive covers four major asset classes, and one of them – real estate – is quite unlike the others in some important respects.
There has been a fair bit of mutuality. The non-listed fund association INREV, for example, has supported the concerns of EPRA, its listed counterpart, regarding REITs being inadvertently caught up in the definition of funds, for example. The 'T' in REIT is misleading, says EPRA; they are companies, not trusts.
The primary concern of INREV's members is the ability to form a joint venture without needing to comply with the AIFMD. At first glance, there does not seem much reason to be concerned, since joint ventures do indeed fall outside the scope. But there are ambiguities, and the industry being consulted wants them clarified.
"We need to know the extent of the exception," says Melville Rodrigues, real estate partner at CMS Cameron McKenna, who sits on INREV's public affairs committee. Club deals represent a potential grey area. Are they funds or joint ventures? This is a key point of clarification, Rodrigues says.
The trick is to persuade the drafters of the directive to amend so far and no further. INREV has resisted calling for a redefinition of joint venture – primarily, it can be surmised, out of a fear the regulators will come up with something worse. The Investment Management Association (IMA), categorising joint ventures as one of the "bespoke structures around the edges", likewise resists redefinition. "Some joint ventures are clearly [funds] and operate as such, while others are clearly not," it said in its submission.
So INREV has instead focused on the detail, particularly what is meant by 'day-to-day' control, a requirement of parties involved for joint venture status to be accepted. The concern is that a joint venture partner may have ongoing operational control of the assets, but this does not necessarily entail actual day-to-day activity. "Day-to-day control doesn't mean shovelling the snow," says INREV public affairs director Jeff Rupp.
For those who have identified joint ventures as potentially contentious, the concern is what happens when member states implement the AIFMD. The German Property Federation (ZIA) points out the fact that there are many types of joint venture and that borderline cases increase the risk they will be treated differently by national regulators.
"The industry wants clarity between what is within the scope of the directive and what isn't," says Rodrigues. "Clearer definitions would facilitate a more consistent approach to implementation across Europe.
"What is important is maintaining a level playing field – that structures are comparable between Germany and the UK, for example. The concern about definitions is that the scope for maintaining a level playing field will be eroded. The more clarity there is on the meaning, the more consistent interpretation is likely to be."
This is ESMA's territory, and the good news is that it is listening to industry supplications. Rupp says, to date, it has been willing to accept comment and adjust.