With the release of level-two measures, fund managers can no longer maintain a wait-and-see approach to AIFMD. Michael Hornsby and Axelle Ferey explain
Structuring their future operating platforms in Europe under the Alternative Investment Fund Managers Directive (AIFMD) has become a key concern for real estate players. Since the release of level-two measures in December, the wait-and-see attitude of many managers can no longer be maintained. Some have stood back, citing a lack of clarity surrounding the regulation as a barrier to fully engage with it. We are of the view that AIFMD and its implementing measures, as drafted, present opportunities to realign and simplify the structuring of more complex European real estate platforms, and positioning market participants with different investor groups going forward.
What are the main structuring options for designing pan-European AIFMD-compliant platforms? Before deciding which path to follow regarding structuring options, managers should clarify some basic business questions about their organisation, strategy and approach to different investor groups, such as:
• Which legacy fund structures are in scope and where are their existing operational hubs in Europe?
• How open are management to optimise (in other words, change) the current platform design?
• What are the target investor groups and what is their likely attitude towards the AIFMD?
• Do managers want to focus solely on their competences and track record as an investment adviser (sourcing, structuring and financing transactions), which is essentially an unregulated activity, and thus potentially render themselves outside the AIFMD remuneration rules, or do they also want to present themselves as experts in the governance and oversight of commingled funds (that is, AIFMD-regulated activities)?
• What is the intended balance between offering regulated fund products (AIFs) and unregulated services (segregated accounts, joint ventures, and so on)?
• Will non-EU-based asset managers continue to target European investors as a significant part of their capital-raising strategy?
• To what extent do managers want to adopt voluntary corporate governance protocols (such as the INREV guidelines) at the level of their products?
• Where do managers need to reinforce their tax substance?
• To what extent are managers or advisers sensitive to being subject to AIFMD remuneration rules, thereby determining the footprint of the AIFMD in terms of its employees.
Having considered these, and many other strategic questions, the manager will be led down different broad structuring pathways. First, where the volume of assets managed and the resources available remain relatively small (for example, in mid-market boutique real estate funds), or that the managers want to position themselves solely as investment advisers, outsourcing AIFMD compliance to an independent third-party ManCo may be considered. Players in the market, notably fund administrators have already started developing such service offerings. This approach is common today in UCITS and hedge-fund structures.
Others, managing large autonomous REITS and autonomous funds with an established governance framework will favour the self-managed option whereby the legal structure of the AIF enables it to designate itself as the AIFM.
For those managing or marketing a variety of EU fund ranges in several locations across Europe, a key question is whether the group intends to maximise the use of the management passport available to EU AIFMs. If the answer is yes, the group may consider rationalising its operations by setting up a centralised ‘super AIFM’, aligning operating hubs around Europe with this new model. In practice, this can be implemented with or without local branches.
If, to the contrary, the group is doubtful about the ability of the AIFMD to make the management passport work in practice, or if for cultural, political or any other reasons, restructuring is not possible, then having a family of AIFM’s covering each key hubs of operations is the preferred model, although with higher cost implications.
Managers may also host non-EU AIFs raising money in Europe. This also requires some strategic thinking. However, the pressure is less intense in so far as these will not benefit from the AIFMD marketing passport prior to 2015 and can be considered in a second phase.
What are the practical steps that should be taken in implementing an AIFMD-compliant platform? The first step is to establish a comprehensive inventory of entities potentially in scope. For most of them, their qualification as an AIF should be easy to determine. Legacy funds can benefit from grandfathering provisions. Other ‘corporate’ structures, such as joint ventures and REITs, may require a more in-depth analysis to document whether they are in the scope of the AIFMD.
In a second stage, managers should perform a gap analysis. The aim of this is to identify which policies, procedures, and operational assets are missing within the existing platform and to define the remedial actions required to meet the new standards.
The third initial step is to decide which broad strategic structuring path is to be taken, as presented above. This is often established through a series of strategic workshops with key stakeholders.
It is possible that the AIFM will rely on detailed investment advice and risk analysis performed outside the AIFM. Indeed, it has the option to fully delegate one of these two core processes to another regulated entity, although it must be careful not to undermine its substance in doing so. In this respect, it is important that the AIFM carefully documents how it retains oversight over these key functions from an overall governance and compliance perspective.
The final question is when should managers be ready? AIFMD foresees a transitional regime whereby existing management companies acting as AIFMs prior to July 2013 would have until July 2014 to file for authorisation. What remains unclear, though, is what the marketing regime will be for EU AIFs raising new capital under AIFM’s ‘preparing for’ but not yet duly authorised as AIFMs.
AIFMD forces pan-European real estate players to rethink their European operating platforms; this is a challenging and creative exercise. However, if approached in a strategic way, this exercise may well unlock new opportunities, such as a more efficient and homogeneous platform for back and middle-office operations, a refocus on core investment skills, and ultimately a more favourable position with different investor groups.
Michael Hornsby, far left, is real estate fund leader, and Axelle Ferey is a director at Ernst & Young, Luxembourg