The Alternative Investment Fund Managers Directive (AIFMD) sets out to ensure regulatory supervision of all EU alternative investment fund managers. The burdens of its ‘one-size-fits-all’ compliance regime are well known.
EU regulatory authorities now monitor systemic risk of all funds either established and/or marketed in Europe. Other than, prospectively, leverage limits which EU regulators can apply to given products, AIFMD does not impose any restrictions on the type of product which managers can sell, and there is no noticeable impact on the variety of products which managers have brought to market since its implementation date.
In applying a tailored compliance regime to EU alternative fund managers, AIFMD also introduced the marketing passport – a system to allow marketing of an alternative fund product to professional investors through the EU, on the basis of a single ‘home state’ approval.
How will this affect fund distribution? Authorisation allows marketing to professional investors – as well as institutional investors, this category includes sophisticated individual investors who have agreed to opt-up to professional investor status, typically through a financial adviser intermediary.
With the AIFMD marketing passport and pan-EU approval associated with the AIFMD brand, EU managers are no longer confined to Ucits for pan-European distribution. As awareness increases, they may be able to reach new distribution channels outside their home country and gain a much wider base of individual investors for non-retail products that have had limited distribution to date.
Early indications are that some managers see this as an opportunity, prompting them again to look at creative new products to fill demand for more sources of yield in this low-interest environment.
From the perspective of non-EU fund managers, AIFMD has imposed significant barriers on such managers seeking to market in Europe. Non-EU fund managers cannot, as yet, obtain the marketing passport but can market on the basis of member state private placement regimes, which have been significantly tightened following AIFMD.
Depending on an ESMA opinion planned for this year and subsequent EU legislation, non-EU fund managers may be able to obtain the marketing passport in 2016, by opting into the directive and obtaining authorisation as an AIFM.
For a non-EU manager, authorisation under AIFMD manager will entail heavy compliance costs. However, for US managers, the existence of a marketing passport for their funds represents a real opportunity.
Firstly, there is the legitimacy conferred by the marketing passport, an AIFMD-compliant product. Secondly, there is access to institutional mandates that restrict investment to EU-managed products or non-EU products which are determined to be equivalent. Thirdly, there is access to various distribution platforms that the passport may grant.
With its host of compliance, disclosure and reporting requirements, AIFMD should allow investors to participate in alternative investment strategies with a similar confidence to that offered for traditional strategies under EU Ucits rules.
Under the marketing passport, US managers will for the first time be able to offer their products to a vast base of EU professional investors in a manner which was never allowed before. With the benefit of the EU passport, any non-EU manager who is prepared to comply with AIFMD and to tap into EU distribution networks can now compete on an equal footing with its EU peers.