As Europe’s managers migrate en masse to a new regulated world, Jeff Rupp considers the long-term effects and short-term pressures
After several years of development and preparation, the Alternative Investment Fund Managers Directive (AIFMD) finally came into effect on 22 July 2013. Although it was set to change the structure and operations of the non-listed real estate fund-management industry in Europe, the day came and went much like any other.
The immediate impact of the directive is that new fund managers and managers of newly launched funds will have to obtain authorisation from national financial authorities to operate. However, for now, most existing fund managers only have to use their best efforts to comply with the directive’s requirements as transposed into national law. More importantly, though, 22 July 2013 started the one-year countdown for existing fund managers to apply for AIFMD authorisation. They now have until 22 July 2014 to submit their applications to national authorities, which will need to detail their qualifications to manage funds and how they are in compliance with the directive’s far-reaching new requirements.
Although some small fund managers and managers of joint ventures and separate accounts will not have to comply with the directive, the overwhelming majority of real estate fund managers will. And the new rules are quite extensive. The directive sets out requirements in areas such as general operating conditions, ‘own funds’ and indemnity insurance, the use of depositaries, liquidity management, limits on the delegation of risk and portfolio management, the use of leverage, valuation, transparency and reporting to both regulators and investors, and the remuneration of fund mangers and some of the entities that have been delegated responsibilities.
With less than a year to go before existing fund managers have to apply for AIFMD authorisation, the pace of activity is increasing. Many managers are reviewing the directive’s requirements and measuring them against their current procedures and structures. Some of the biggest challenges across the industry include the need to appoint new service providers such as depositaries, valuers and administrators that can perform the functions required under the directive. Funds that already use depositaries and other service providers also need to review their current contracts to ensure that the scope of services provided and terms are consistent with the directive.
Information flows and fund decision-making processes are other areas where fund managers are scrutinising their current systems and comparing them with the directive’s requirements, along with the formal processes used when making transactions. Taking a step away from the check-the-boxes approach to compliance, managers are also focusing on how the costs of compliance are being managed and whether newly enacted systems and procedures are being efficiently integrated. Unintended consequences and knock-on effects are equally critical – for example, to determine whether measures adopted to comply with AIFMD might negatively impact a fund’s tax status.
For European real estate fund managers, AIFMD has evolved in a short period of time from a theoretical challenge to a very real one. And with the clock ticking down until full compliance and authorisation are mandatory, significant efforts are being made in reaching that goal. INREV is conducting a survey of fund managers to gauge their readiness for AIFMD that will be released shortly. Preliminary results, though, indicate that most fund managers expect to apply for authorisation within the next six months and nearly all feel confident that they will meet the directive’s deadlines. Nevertheless, they face some significant challenges in getting there.
And what about non-EU fund managers that market and manage funds in Europe? For now, the private placement regime remains in effect, allowing them to conduct business as usual. However, that regime is being gradually phased out and, by as early as 2015, they will have to comply with a light regime and obtain authorisation from one of the EU member states.
As European fund managers wait to obtain their AIFMD authorisation, they can continue to take advantage of the private-placement regime to carry on business in other EU countries. However, once they obtain their AIFMD authorisation from their national authorities, they will be able to manage and market funds throughout the EU under the AIFMD passport rules. This is arguably the single biggest benefit to fund managers of the new regulatory regime.
The discussion about what both European and non-EU fund managers need to do to get ready for AIFMD begs the question: how ready are regulators to process a flood of fund manager applications and grant authorisation? And how prepared will they be to review funds’ compliance and set up enforcement procedures? After all, AIFMD is a brave new world for overworked and under-resourced regulators as well; they have much to do and face a steep learning curve to carry out their important role in the system.
Regulators throughout the EU are reportedly making good progress, but the level of preparedness differs between member states. Hopefully, the experiences of the first countries that move to full implementation will produce useful lessons for the rest. Patience and extra time, however, should be built into expectations on both sides of the regulatory equation.
The term ‘the great migration’ has been coined to describe the shift by investors from bonds back into equities, but it could also be used to describe the massive shift of EU alternative asset managers from an unregulated environment to a regulated one. The long-term effects of this shift are equally hard to predict. Although the goals of AIFMD are to increase investor protection and lower systemic volatility, it remains uncertain whether those goals will be achieved. And, as most fund managers expect the costs of compliance to be significant, it is uncertain whether the benefits of the directive will justify the price. For now, however, most fund managers are focused on a shorter-term goal: ensuring they have the systems and procedures in place to be able to successfully apply for and obtain AIFMD authorisation in the few months remaining.
Jeff Rupp is director of public affairs at INREV