The Alternative Investment Fund Management Directive (AIFMD) is now in effect, but a significant gap remains between how ready different member states are and how many have actually transposed it into local law. Some countries still have not even implemented the directive in full. The big question that arises is whether this situation is leading to some alternative investment fund managers (AIFMs) outside of the EU being reticent to raise capital from European investors.
There are two different options allowed for AIFMs outside of the EU hoping to market their funds under the AIFMD.
First, some jurisdictions only tolerate ‘reverse solicitation’. This is a passive policy regarding marketing, where the AIFM is only allowed to market funds to investors once the manager has been approached by an interested party. The manager cannot directly or indirectly solicit investors.
Second, a number of jurisdictions are offering private placement regimes. This allows non-EU AIFMs to market directly with investors in member states under the Directive; however, doing so requires adherence to a number of different transparency and reporting conditions.
The fact that some jurisdictions allow private placement, whereas others have restricted or abolished solicitation, means that non-EU AIFMs must be very careful and fully understand what the local laws dictate. Otherwise, fund managers face the risk of opening themselves up to unexpected penalties.
Read more: Q&A with Daniel Godfrey, CEO of Investment Management Assotiation (IMA)
US hedge funds in particular have concerns of this complexity. A recent KNEIP study showed that 68% of New York-domiciled hedge funds surveyed thought that the AIFMD made operating in Europe more complicated for them. A further 41% said that they were unprepared to market in the region under the Directive.
For private equity firms, who tend to raise capital more infrequently, there have been some instances of firms adopting a ‘wait and see’ attitude by focusing first on investors not based in regions where the AIFMD applies. This is particularly the case for smaller firms, who do not wish to fall foul of solicitation rules and therefore are prepared to wait until there is more clarity and direction from different jurisdictions.
Ultimately, Europe remains a key geography for capital raising in the alternatives industry and therefore it will only be a minority of AIFMs who turn their back on the region due to the current uncertainty surrounding marketing under the AIFMD.
However, it will be important for the alternatives fund industry that each different regulator across the EU works hard to make a more uniform and standardised regulatory landscape that can offer a level playing field to on-shore and off-shore fund managers.