Does my PE or VC fund come under the directive?
The answer to this key question is actually quite straightforward - any undertaking which manages a PE or VC fund will come within the scope of the directive if the fund it manages meets the directive’s definition of an AIF. The directive requires that every AIF has a single fund manager to manage the fund.
So what defines an AIF under the directive?
The directive’s definition of an AIF is actually quite broad and essentially includes almost all non-UCITS funds. If a fund does not have a general commercial or industrial purpose and it meets the criteria below then it will be be deemed to be an AIF under the terms of the directive.
So what are the criteria?
A fund will be deemed to be an AIF if:
So what’s considered not to be an AIF?
Basically, any undertaking which is involved in what the directive considers:
Who defines what constitutes a “commercial” or “industrial” activity?
The European Securities and Markets Authority (ESMA) and the European Commission provide guidance on what defines an AIF.
Who is the Alternative Investment Fund Manager of the AIF?
The alternative investment fund manager (“AIFM” or the “fund manager”) is broadly defined as “any legal person whose regular business is managing one or more AIFs”.
Can the AIF fund also act as fund manager?
Yes, the AIF can be its own fund manager - what is defined as a “self-managed AIF”. Alternatively, the fund can appoint on outside fund manager, defined as an “externally managed AIF”.
What does all this mean in an Irish context?
In an Irish AIF structured as a limited partnership, the fund manager will either be the general partner or a third party appointed by the general partner such as an investment manager.
What if the general partner is a MiFiD firm?
If this is the case, then it is crucially important to know that a firm can’t be authorised both under MiFiD and as a fund manager under the directive. In this situation, a decision has to be made - does the general partner give up its MiFiD authorisation so it can act as the AIFM or should another entity obtain authorisation as the fund manager.
Does the directive provide any exemptions for existing funds?
The directive includes a “grandfathering” provision for fund managers if they only manage funds that are closedended and either:
Make no additional investments after 22 July 2013; or
Will expire by 22 July 2016 and have closed their subscription period before 21 July 2011.
This may be of particular relevance to PE and VC funds.
What investment vehicles are not covered by the directive?
The directive generally does not apply to so-called “exempt investment vehicles” such as segregated managed accounts, family offices and similar private investment vehicles, joint venture schemes, insurance contracts, some securitisation special purpose vehicles, employee participation and saving schemes and holding companies.
Joint ventures, however, which have fund-like characteristics such as capital-raising, passive participants and defined investment policies may be considered as AIFs and as a result may be covered by the directive.
PE and VC funds should note that the European Commission considers that the exemption for holding companies does not cover private equity and venture capital.
What fund managers are exempt from the directive?
The directive does not apply to fund managers if they manage AIFs whose only investors are the fund manager itself, its parent company or subsidiaries of the parent company provided that none of those investors is the AIF itself.
What are the implications for limited “1907” partnerships?
First of all we need to understand what a 1907 partnership actually is. In Ireland the vast bulk of PE and VC funds use limited partnerships for their legal structure. In these limited partnerships, one or more general partner has unlimited liability while the liability of limited partners is restricted to the amount they have contributed to the fund.
Before the directive was implemented in Ireland, limited partnerships, in general, were not subject to regulation. As a result of the absence of regulation, these “1907 partnerships” were able to set up unregulated investment funds as long as funds were not raised publicly and its funding came solely through private placement.
In many cases, the general partners in a 1907 partnership could avail of an exemption from MiFiD authorisation on the basis that they were providing portfolio management services to fellow partners and not to any third party. This “communality of interest” concept had been generally accepted by the Central Bank of Ireland.
The introduction of the AIFMD directive in Ireland has, however, resulted in most limited partnerships falling under the definition of an AIF and previously unregulated undertakings now being regulated.
For example, where joint ventures take the form of limited partnerships, in order to retain their limited liability the investors must not be involved in the management of the business which must be vested solely in the general partner and therefore the directive does apply.
Another example is the number of partners involved. Normally 1907 partnerships have up to 20 partners, but in some cases this can be up to 50. In the context of the directive’s definition of an AIF (among other things the raising of capital from a “number of investors”), the limited partnership falls under the definition of an AIF.
The FCA has decided that where there is a single limited partner making a substantial contribution and a general partner making a nominal contribution, then it will not be deemed an AIF as it not raising capital from a “number of investors”.
However, it should be borne in mind that, if the constitution of the limited partnership allows for more than one limited partner, then it will be deemed as raising capital from more than one investor even if in reality there is only one limited partner. The fact that a fund has only a single investor does not automatically put that fund beyond the definition of an AIF. ESMA has also made it clear in its guidelines that there must be a legally enforceable restriction from a single investor. Without this legal restriction, the fund would be regarded as having a “number of investors”.
From the above, it is clear that there is a level of ambiguity about what constitutes an AIF under the terms of the directive, particularly in relation to 1907 partnerships. General partners in 1907 partnerships will need to look closely at their particular structures to see whether they are subject to the directive.