AIF Distribution Options in the EU – A Short Story

In response to the gathering and ongoing confusion about AIFMD and what a US alternative manager can do to distribute their AIF in the EU, I have gathered some general information with regard to alternative strategies distribution in the EU post AIFMD. This body of information includes the information in the matrix below, which was developed by PWC Ireland.

Essentially, there are two available modes of distribution sanctioned by the EU regulators and laid out below, one is registering as an EU Alternative Investment Fund Manager (AIFM), filing a EU registered Alternative Investment Fund (AIF) and distributing (eventually) via the EU passport facility. Or, the second distribution option of a EU AIFM (or non EU registered AIFM) distributing a non EU registered AIF via the national private placement regimes (NPPRs) that are currently still in force.

The first option gives a non EU alternative investment manager EU wide access to distribute their Irish registered AIF via the new AIF passport facility. This option is a well trod path based on the paradigm of the UCITS manager registration and distribution regime that exists today. This existing process has been applied with asset and remuneration specific changes to the new AIF regime.

The second distribution option is that of a non EU AIFM selling a non EU AIF into the EU. This option required a filing for AIFM registration exemption (until mid 2014), then subsequently filing a full AIFM registration and then complying with the National Private Placement Regimes (NPPRs) on a country by county basis for as long as those regimes continue. ESMA is reviewing this mode of distribution, but has indicated it will not close this avenue until 2018 at the earliest. This distribution option is less well know as the NPPRs have not been commonly invoked by the pre AIFMD non EU managers. It has been the habit previously to “fly in” and sell to larger institutions under a non existent, but de facto, de minimus regime. Because of this general unfamiliarity with NPPRs, I have included a short discussion (again borrowed from PWC) of this topic below.

One can see the confusing registration options and combinations of options in the matrix below and that for some time, the NPPRs will still exist as a possible avenue for EU distribution. However, as of mid 2015, there is a high likely hood that the EU passport only requirement will be invoked.

Domiciles / marketing

Does AIFMD apply?

Marketing Arrangements

EU AIFM/ EU AIF – marketed in EU Yes EU Passport (July 2013)
EU AIFM/ EU AIF – not marketed in EU Yes None
EU AIFM/ Non-EU AIF – marketed in EU Yes NPPRs
(2013 to 2018)
EU Passport (from mid 2015) *
EU AIFM/Non-EU AIF – not marketed in EU Yes None
Non-EU AIFM/ Non-EU AIF – marketed in EU Yes NPPRs
(2013 to 2018)
EU Passport (from mid 2015) *
Non-EU AIFM/ Non-EU AIF – not marketed in EU No None
Non-EU AIFM/ EU AIF – marketed in EU Yes NPPRs
(2013 to 2018)
EU Passport (from mid 2015) *
Non-EU AIFM/ EU AIF – not marketed in EU Yes None

One issue that no one addresses with any clarity is selling to and maintaining client relationships with existing customers and/or reverse enquiry situations for those non EU managers who do not register as AIFMs. The first seems to be permitted, especially for the near term. The latter seems to be problematic but hardly stoppable. Both instances would assume the EU investor is an institution and sophisticated enough to deal with a non EU AIF in a variety of jurisdictions.

Not very encouraging options but this is how the distribution market is shaping up in Europe for the non EU AIFM and the regulators seem to be inclined to harmonize with the UCITS paradigm going forward so this may not be the final word for some time.

The following helpful write up about NPPRs, is from the most recent Distributing our Knowledge Fund Distribution: UCITS and Alternative Investment Funds (AIF) by PWC Ireland.

How do the NPPRs work?

National Private Placement Rules (NPPRs) must be used by non-EU AIFMs that cannot avail of the European passport in order to market their AIFs in Europe. However, individual member states may move to abolish or restrict the use of NPPRs, now that the AIFMD is in force. The majority of EU countries intend to allow some form of private placement but the requirements vary among member states. All countries that intend to allow private placement will apply at least the minimum AIFMD standards outlined below and require notification to the home state regulator of the intention to market in the country.

AIFM Minimum Standards

-the manager must comply with the provisions of the AIFMD relating to the annual report and disclosure to investors (including disclosure as to aggregate remuneration);

-the manager must comply with detailed reporting requirements under the AIFMD to national Regulators in each of the member states in which they intend to privately place their AIFs. Such reporting must be completed quarterly, semi-annually or annually depending on the value of the assets under management of the AIFM. The reporting requirements includes details on the principal markets on which an AIFM trades, instruments traded, principal exposures, important concentrations, illiquid assets, special arrangements, risk profiles, risk management systems, stress testing results, list of all AIFs managed, leverage in the AIFs and sources of leverage. Individual Member States may impose stricter reporting rules;

-if the manager manages an AIF which acquires control of a non-listed company, the provisions of the AIFMD relating to major holdings and control must be complied with;

-appropriate cooperation arrangements must be in place between the regulator of the member state where the AIF is marketed and the regulator of the AIFM’s non-EU country;

-appropriate cooperation arrangements must be in place between the competent authorities of the member state where the AIF is marketed and the country where the non-EU AIF is established; and

-the non-EU country must not be listed as a Non-Cooperative Country and Territory by the Financial Action Task Force.

Some countries have additional requirements to what is outlined above. For example, France has elected to impose such significant additional requirements on non-domestic AIFMs seeking to market under France’s private placement regime that it could be extremely difficult to market AIFs in France. Germany is one of a small number of EU countries that will require non-EU AIFMs of non-EU AIFs to appoint an entity to carry out the so called “depositary-lite” duties of cash monitoring, safekeeping of assets and oversight and verification, a requirement under the Directive applied only to EU AIFMs marketing non-EU AIFs. Austria has imposed a tax treaty condition for non-EEA AIFs. The UK, Ireland, Luxembourg and Sweden are part of a group of countries that have not imposed additional conditions. The list of countries that are open for private placement are as follows: Austria, Bulgaria, Cyprus, Czech Republic, Estonia, Finland, France, Germany, Ireland, Lithuania, Luxembourg, the Netherlands, Romania, Slovakia, Sweden and the UK.

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