AIFMD: the practical implications
By Kerry Jane Nichol*, Ernst & Young Luxembourg
Business Review
September 2010
The proposed Alternative Investment Fund Managers (AIFM) Directive will have a significant impact on the fund industry, both in Europe and internationally.
It will impact not only EU and non-EU AIFM, but also EU and non-EU domiciled Alternative Investment Funds (AIFs), service providers to these funds and their investors.
In return for more regulation of AIFM, their service providers and funds, the proposed Directive provides for the introduction of passports enabling AIFMs to offer their management services and market their AIFs throughout the EU.
Looking beyond industry discussions on some of the key provisions of the Directive, what are the practical implications for asset managers, service providers and investors?
Asset managers
Promoters and asset managers should consider a strategic rethink of their fund ranges and a review of their operating models before executing a detailed compliance process.
The strategic review of products will focus on such aspects such as investor base, marketing, product styles and strategies. The review may result in re-domiciliation of existing funds, mergers/liquidations, creation of new funds onshore in Europe.
Operating models will then need to be optimized. Promoters and asset managers will need to ask themselves such questions as: will functions (such as administration, valuation, marketing) remain in-house or be outsourced?, what will the domicile of choice be for the AIFM and service providers?
The strategic choices of domiciles and locations will be dependent on factors such as reputation, regulatory environment, stability, operational factors (such as relocation costs, local infrastructure, experience of workforce), achieving tax neutrality for products, service providers (such as experience and ability to meet local market requirements) and other location influencers such as proximity to investors, language and cultural alignment.
Once the strategy is clear, a program of business reorganization may follow. Optimization of organizational models creates new opportunities as well as threats; significant levels of M&A activity, liquidations, relocations and outsourcing are anticipated.
Once the reorganization stage is complete, AIFMs will need to complete a more detailed compliance review, on an on-going basis, to ensure that all of the requirements of the Directive are met.
Service providers
Service providers, such as depositaries and fund administrators, will need to re-assess their strategy and operations in the light of market changes triggered by the AIFM Directive. They may, for example, decide to concentrate activities in key hubs, relocate to other domiciles, buy or sell service provider businesses or set up new joint ventures. The AIFM will bring both opportunities and threats for service providers as asset managers may outsource more activities to remain competitive and at the same time concentrate assets in a few domiciles with preferred service providers.
The key challenge for service providers will be meeting the initial surge in demand and maintain strict quality and risk management standards at competitive prices.
If the provisions on the depositary are implemented, there will be a significant restructuring in the depositary space in particular to achieve the scale needed, and to cover emerging and exotic markets.
Investors
Last, but by certainly no means least, investors. They too will have to perform strategic reviews of the new requirements and new opportunities.
As some markets and products may no longer be accessible to them, institutional and professional investors should review the investment options open to them as the full impact of the AIFM Directive becomes clear. No doubt compliance with this Directive will form a pillar of investor due diligence going forward.
Conclusion
In conclusion, the industry discussion on the provisions of the Directive is simply the beginning. Asset managers, service providers and investors should not underestimate the time and resource required to assess the full impact of the Directive.
* By Kerry Jane Nichol, Partner, Asset Management, Ernst & Young, Luxembourg
Posted on 17 September 2010
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