AIFMD II: WTF? (What the fund, obvs)
When the AIFMD was first introduced, a review was scheduled for 2017. And many will recall the KPMG report that came out in July 2017. Since then, however, little else has really happened, which is unsurprising given the major distractions caused by Brexit negotiations and drawn out uncertainty. But is that such a bad thing? According to Will Roxburgh director of fund management solutions at MJ Hudson, possibly not. “AIFMD I seems to have been working - it doesn’t get the credit it deserves. The aim was to force more liability on managers - previously it was all on the GP, which typically was a shell company - and there wasn’t much regulation, especially around reporting and risk management.”
Indeed, today, the majority of European investors know more about alternatives and what to expect from managers operating in this industry, which has resulted in a major confidence boost. “The aim was to create a European golden standard and they’ve done a good job. We’ve seen a huge rise in private equity allocations, which isn’t solely because of AIFMD but it can’t have hurt.”
The review that took place in 2017 found only small problems with the Directive. One was around marketing rules, which were unclear. Managers are unsure about when exactly pre-marketing becomes marketing. “That’s been the biggest issue and the biggest risk,” says Roxburgh. “If you get it wrong, and there aren’t many precedents, but if you wrongly market to an investor, do you give them a put option on your fund performance?” The wording around the marketing rules have been defined. “It’s what a lot of firms were already doing, and it hasn’t come into full force yet, but we’re already seeing that queries coming in from managers are much easier to navigate.” Roxburgh believes these sorts of targeted, subtle yet effective quick fixes will continue to emerge. “I suspect it will be more of a piecemeal approach.” The next area likely to be remedied could be leverage calculations, which was another problem highlighted by the review. Under the current rules, a manager can have no debt in its funds but still report a number. For less experienced investors, it would look as though the fund was fully leveraged.
However, Roxburgh warns: “There’s been very little talk, and very little released about what might come next; there’s no timeline.”
Yet comfort can be taken in the assurance that whenever regulatory amendments are released there’s always plenty of time before implementation. “I’m confident that anything that does happen will be positive; it doesn’t seem like they’re rewriting the book,” concludes Roxburgh. Furthermore, ESMA’s recently released 2020 Work Programme, which sets out priorities and key areas of focus, while AIFMD II doesn’t get a mention.
In early October, ESMA updated its AIFMD Questions and Answers document, adding in new responses on notification requirements with regard to AIFMs managing umbrella AIFs on a cross-border basis.
The main objective of the Q&A is to “promote common supervisory approaches and practices in the application of the AIFMD and its implementing measures”.
In other words, it is a tool to be used by managers who have detailed queries. By collecting a central repository of questions and answers, this is a way in which ESMA can promote harmonisation throughout Europe - as the wide variances in implementation have been a key issue with the directive.