AIFM – A major opportunity for Luxembourg
Business Review
January 2011
The recently voted Alternative Investment Fund Managers (AIFM) Directive establishes a harmonized European regime for alternative funds and their managers. This new regime will have a profound structural impact on the fund industry, in Luxembourg, Europe and internationally. This shake-up represents a major opportunity, but also new challenges, for Luxembourg.
The overall shape and form of the regime for alternative investment fund managers was finalized when the European Parliament voted the AIFM Directive in November 2010. The Directive will have to be transposed into Luxembourg legislation by the second quarter of 2013. In the meantime, the regulators and industry bodies, such as ALFI, are working to flesh out the detailed provisions, while alternative asset management groups and managers are gearing up to understand what the Directive means for their businesses.
The Directive covers all alternative sectors such as hedge funds, real estate and private equity, but also traditional sectors where the fund products are not registered as UCITS. But it will impact each sector differently – for example, while many larger real estate funds and their managers may already meet most of the requirements of the Directive, a number of private equity type structures may have to boost the substance of their management entities (e.g., to comply with independent risk management and valuation requirements) or appoint third parties. Offshore hedge fund managers and private equity general partners may seriously consider migrating their structures onshore, or could alternatively stop raising money from European investors.
Given the Directive’s strategic implications, we believe that alternative investment groups should, on a case-by-case basis, conduct strategic review of their fund ranges and their operating models before focusing on achieving compliance with the requirements of the Directive. The initial cost of restructuring is likely to be borne by the alternative investment groups and managers, whilst the additional ongoing compliance costs are likely to be borne by the alternative investment funds, and thus the investors themselves.
Today, investors access alternative investment products primarily through national private placement channels; these will be replaced by the AIFM marketing passport - European products will be the first to benefit. In the traditional investment fund space, the UCITS brand is already renowned, not only across Europe but globally; however, achieving this leading position has taken many years of sustained effort by the industry. The AIFM Directive creates the opportunity to establish a recognized AIF brand in Europe and globally for regulated alternatives products.
Luxembourg is the world’s leading domicile for cross-border distribution, with funds marketed to investors in over 60 countries in Europe, Asia, the Americas and the Middle East. Luxembourg combines the right mix of qualities for alternative products and their managers including appropriate regulatory environment, reputation, stability, ability to achieve tax neutrality, infrastructure, qualifications and knowledge of the workforce, service provider expertise(including, inter alia, depositaries’ long experience of alternative funds) and multilingual and multicultural environment.
The Grand Duchy is therefore in poll position to take the lead in the cross-border alternatives space.
To reflect the strategic importance of AIFs for Luxembourg and our firm’s unique commitment to the future of the alternative industries, Ernst & Young is creating an Alternative Investment Fund Club (AIF Club). This exclusive community will offer alternative industries professionals a dedicated program of activities such as peer-to-peer workshops, trainings, thought leadership and social networking events tailored to the various alternative industry segments and specific hot topics.
By Michael Hornsby, Real Estate Leader, Ernst & Young, Luxembourg
For further information on the AIF Club, please visit our website.
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