New AIFM directive set to spawn new business for specialist investment managers

The new AIFM directive due to take effect on 22 July will generate new business for the German fund sector, says sector association BVI

Germany's open-ended fund sector is on the brink of putting its turbulent past behind it. Following several years plagued by massive runs on real estate funds and mass liquidations, the sector is finally about to get a boost in the form of the new AIFM (Alternative Investment Fund Managers) directive, which will come into force in markets such as Germany, the UK and Italy on 22 July this year.

The directive requires all alternative investment funds, including open and closed-end real estate funds, spezialfonds, hedge funds and other private equity funds to upgrade their compliance and operational frameworks and comply with increased regulatory and investor reporting obligations. While hedge funds and private equity funds will be impacted most by the changes, they only make up a small part of the German market unlike the UK. Overall, around 75% of the fund business in Germany will now be classed as AIF, compared to just 5% in Spain. As such, Germany has the biggest AIF market in Europe.

In an interview with PropertyEU, Thomas Richter, head of Germany’s fund trade association, the BVI, explains why the industry needs this latest directive and how it will help put the market back on track.
PropertyEU: How will open-ended real estate funds be affected by this directive?

Richter: The most important change concerns redemptions. Previously, people could redeem up to €30,000 of their shares in an open-ended real estate fund on a daily basis. This has now been abolished and people now have to wait 12 months before they can make any redemptions. This makes these funds safer from a liquidity perspective and creates greater stability in the sector. (As of end-April, Germany’s open-ended real estate funds had a combined total of €82 bn of AUM.)

PropertyEU: Some fund managers, such as KanAm, have already said that they will launch new retail funds once the tighter redemption rules are in place next month: do you think this new directive could unleash a sizeable number of new funds this year?

Richter: Certainly, fund managers are likely to feel safer with this directive in place, which could prompt some of them to think about new fund launches.

PropertyEU: The AIFM directive has been years in the planning, following massive runs on open-ended real estate funds and many subsequent fund liquidations. What will the biggest benefits be for the alternative investment fund industry?

Richter: The main benefit will be the new business that it will generate. Under the new directive, funds such as closed-end funds will have two main investment choices: either they can apply for a licence to operate a fund via BaFin, which can be slow and costly, or they can appoint an external investment company to operate the fund for them. That option is much quicker and cheaper, and takes advantage of the specialisation that such fund managers already have and the service they offer.

PropertyEU: The BVI has campaigned for around 70 changes to the German government’s draft legislation for this directive. Which of the most important changes have now been implemented?

Richter: The most important change has been the government’s stance on spezialfonds and open-ended real estate funds. Initially, the government had proposed abolishing both of these vehicles, even though they have a combined total of more than €1.1 tln of AUM. In 2000, this figure was just €570 mln, which shows that spezialfonds have grown very rapidly. The government has since relented and spezialfonds will now remain untouched with some small changes made to open-ended real estate funds. It would have been insane to abolish these and would have led to turbulence in the market that would have been beyond our control.

PropertyEU: What have been the biggest hurdles concerning the AIFM directive?
Richter: Bureaucracy! It has been a painful - and slow - process. Over the next year, our members will have to fill out around 900,000 pages of AIFM-related paperwork that will then go to ESMA (the European Securities and Markets Authority) and BaFin. I don’t know what they will do with it all! But it does show you the level of bureaucracy created by this directive.

Sara Seddon Kilbinger
Correspondent German-speaking countries