After more than 32 months of intensive debate and negotiations the Alternative Investment Fund Managers Directive (AIFMD) has been finalised. Now the two-year implementation phase across the European Union (EU) for the legislation drafted in response to political pressure for greater regulation of Alternative Investment Funds (AIFs) has started.
To support this implementation process the European Securities and Markets Authority (ESMA) has issued technical advice on the implementation measures (so-called Level 2 Measures) to the European Commission and AIFMD is due to be transposed into UK national law by 22 July 2013.
While the publication of the technical advice and finalisation of the Directive have made the rules of the future game clearer, the question on everyone’s lips, including family offices, is still: “what does it mean for my business?” This is, however, not a simple question to answer and while this article goes some way to identifying the potential impact, professional advice should always be sought.
To understand the impact of AIFMD one needs to take a step back and consider the genesis of the Directive and its key objectives. As already mentioned, the Directive is a response to the recent global financial crisis and the assumption that managers of AIFs can exercise an important influence on financial markets and “may also serve to spread or amplify risks through financial systems.” As a result the Directive seeks to provide direct regulation of Alternative Investment Fund Managers (AIFMs), indirect regulation of AIFs and the creation of a European market for alternative investments via passports for management and marketing activities.
According to the Directive an AIFM is the entity whose regular business is managing one or more AIFs, i.e. providing at least the portfolio management services and/or risk management services in the course of its investment management activities.
The Directive indicates an AIF is any non-UCITS (Undertakings for Collective Investment in Transferable Securities) managed and/or marketed in the EU, and that raises capital for the purposes of collective investment, involving “some kind of communication.”
The latter is central to defining the impact of AIFMD on family offices as ESMA has provided additional guidelines that state: “the investment in an undertaking by a member of a group of persons connected by a close familial relationship that pre-dates the establishment of the undertaking, for the investment of whose private wealth the undertaking has been exclusively established, is not likely to be within the scope of raising capital.” Based on this it is likely family offices will be out of scope for the AIFMD.
However, this does not mean there will be no impact on family offices as AIFMD does affect the members of the family office indirectly. This impact is primarily in terms of the increase in cost that is expected as a result of AIFMs complying with the Directive, which is likely to be passed on to AIF investors. Funds that are complying with the Directive are therefore expected to be more expensive than before. As a result investors will need to pay closer attention to the investment performance of the AIFs that they are invested in to ensure the increase in cost is warranted by the delivery of acceptable performance.
As all AIFs in the EU are likely to increase their cost it will be very difficult for family offices to avoid paying higher charges. In fact, unless AIFMs take the decision to absorb the cost of complying with the Directive, family offices will only be able to avoid the additional cost by seeking out AIFs that are not actively marketed in the EU, i.e. investing only in non-solicited AIFs from outside Europe. This, however, poses its own challenges as it will require an increased focus on AIFM research and due diligence to ensure members of the family office remain protected. Also, non-EU AIFs may reject EU investors if that potentially brings them into scope of the AIFMD.
Finally, this expected increase in cost is likely to require family offices to revisit their overall cost structure and seek ways to offset the additional cost incurred through greater operational efficiency and, potentially, outsourcing specific services e.g. risk management, performance management and tax.
