The deadline for EU Alternative Investment Fund Managers (AIFMs) to submit their Alternative Investment Fund Managers Directive (AIFMD) authorization is now upon us. But all signs suggest that the vast majority of European managers may still not be fully prepared to take on the rigors of AIFMD. According to a study conducted in early July, only about 16 percent of managers were ‘very prepared’ ahead of July 22nd1 .
With just days to go before the deadline, Heleen Rietdijk, KPMG’s Global Lead for AIFMD, sat down with two senior European-based fund managers and a European service provider executive to find out more about the current state of preparedness among EU fund managers and to see where the major challenges and opportunities now lie.
Let’s face it: for most fund managers, getting to today’s July 22nd AIFMD authorization deadline has been a long and hard battle. In part, this is because many failed to fully recognize the strategic importance and operational impact of the regulation until it was almost too late. And, as a result, only a small fraction of managers are truly prepared for the requirements now ahead of them.
At the same time, there is still a sizeable backlog of AIFMD applications awaiting approval across the EU, particularly in those Member States that have allowed existing Markets in Financial Instruments Directive (MiFID) firms to continue operations past the deadline, albeit under the recognition that their authorization would be automatically updated to be AIFMD-ready. Perhaps not surprisingly, many of these managers now seem to be underestimating the challenges they will soon face in acting AIFMD-compliant.
Even those managers that were able to submit their authorizations on time face significant challenges post-July 22nd. Our discussions suggest that some are only now getting used to the fact that – by being at the ‘top of the pyramid’ – they need to take on additional responsibilities in coordinating all the players in the field (fund directors, depositories, fund administrators, prime brokers and valuers) and ensuring they have the right level of compliance.
Similarly, many firms are now sprinting over the July 22nd deadline only to discover that they still have to think about how they will operationalize their new or adjusted policies and procedures and then embed them into ‘business as usual’ operations. Others are finding that they failed to sufficiently communicate the impacts and changes that AIFMD would have on other departments (particularly Risk Management) and, as a result, many managers are now finding themselves thrust into the day-to-day operations to ensure that new procedures are properly integrated into existing systems and operations.
Another major challenge now facing post-authorization managers relates to marketing. The reality is that there is still some uncertainty about what ‘marketing’ actually means across the different Member States, particularly in situations where performance reporting to existing investors may blur the definition of marketing within the investors’ country of domicile.
Those that had hoped to rely on reverse solicitation tactics are also now struggling to adjust their marketing plans post-July 22nd. Most now see this strategy as overly-risky; some liken the approach to offering a ‘regulatory put option’ where investors may be able to cry foul and demand their subscriptions back when they see fund performance dropping or errors occurring.
Looking ahead, many managers are now focused on updating their transparency requirements and client communications to meet the AIFMD requirements across the EU. Most are also rethinking their marketing strategies by first identifying their potential investors and their respective domiciles and then addressing the requirements accordingly.
EU fund managers are not the only ones still facing a long battle post-July 22nd. Most depositaries, for example, are still negotiating the final details of their contracts with fund managers, particularly those clauses related to liability, reporting requirements, the inclusion of fund investments under financial instruments, and the provision of ‘depot lite’ services for private placement.
Fund administrators are also now looking into the reporting requirements to see how they might act as a ‘one-stop shop’ for reporting solutions which, in turn, is catalyzing some administrators to rethink their business and operating models in order to properly fulfill this new role.
For their part, non-EU managers also face considerable uncertainty post-July 22nd. Indeed, with the lack of clarity from European Securities and Market Authority (ESMA) regarding the future of the non-EU Passport, many non-EU managers are now looking into how they might take advantage of ‘alternative’ approaches (such as platforms or ‘AIFM for hire’ solutions) to maintaining an EU investor base.
Yet while fund managers and other parties may not be fully ready for their new roles post-July 22nd, it is worth noting that the regulators have also travelled a steep learning curve. The fact is that AIFMD takes a very different approach to the regulation of alternative funds and, as such, the regulators themselves have had to work hard to properly understand all of the different actors, managers and fund strategies and their respective roles.
The challenge is that – in the absence of clear guidance in areas such as private placement, marketing, transparency to investors, and passporting – managers will tend to take one of two routes: they’ll either take a good guess based on experience and sage advice, or they will do the minimum amount of preparation possible until clarity is achieved. The bottom line is that the onus now falls on the regulators within the Member States to provide much-needed guidance regarding what they consider to be the minimum level of compliance required in order for managers to maintain their authorization.
While most non-EU AIFMs seem rather reluctant to even talk about the possibility of domiciling within the EU for AIFMD purposes.