3 questions to smart minds

Impact of the AIFM Directive

For this 3 questions to O. Luck

27. Febru­ary 2013

The Capi­tal Invest­ment Code (“KAGB”) propo­sed as part of the imple­men­ta­tion of the AIFM Direc­tive is likely to have a drastic impact on the entire German fund indus­try — espe­ci­ally that of closed-end funds. In Decem­ber, the German govern­ment adopted the draft AIFM Imple­men­ta­tion Act (“Govern­ment Draft”). As reques­ted by the indus­try, the govern­ment draft conta­ins a number of chan­ges compared to the discus­sion draft of July 20, 2012, both with regard to the requi­re­ments for the capi­tal manage­ment compa­nies (Alter­na­tive Invest­ment Fund Mana­gers = AIFM) and in the area of product rules for the funds (Alter­na­tive Invest­ment Fund = AIF) them­sel­ves. What will happen in summer 2013?

For this 3 ques­ti­ons to Part­ner at GSK STOCKMANN + KOLLEGEN Attor­neys at Law Certi­fied Public Accoun­tants Tax Consultants

1. To what extent does the Alter­na­tive Invest­ment Funds Mana­ger (AIFM) Direc­tive affect the private equity indus­try? Which funds are mainly affected?

The regu­la­tory addres­sees of the AIFM Direc­tive (Direc­tive 2011/61/EU) are the mana­gers of alter­na­tive invest­ment funds (AIFM).

All open-end and closed-end funds that are not subject to the UCITS Direc­tive (Direc­tive 2009/65/EC) qualify as alter­na­tive invest­ment funds (AIF). All AIFs where inves­tors have a right to redeem the AIF units or shares at least once a year are conside­red “open”; all other AIFs are closed. Moreo­ver, an AIF is mate­ri­ally defi­ned as any coll­ec­tive invest­ment under­ta­king that raises capi­tal from a number of inves­tors in order to invest it in accordance with a defi­ned invest­ment stra­tegy for the bene­fit of those inves­tors. The German legis­la­tor wants to addi­tio­nally rest­rict the AIF defi­ni­tion with the charac­te­ristic: “and which is not an opera­tio­nally active company outside the finan­cial sector” .

All mana­gers of PE funds, which are usually (closed-end) AIFs, are affec­ted by the AIFM regu­la­tion. In Germany, both PE funds aimed at the public (public AIF) and so-called special AIF, (profes­sio­nal or semi-profes­sio­nal inves­tors) are covered; the German legis­la­tor goes beyond the AIFM Direc­tive by regu­la­ting (also) public funds. — Whether the (full) AIFM regu­la­tion is appli­ca­ble to PE fund mana­gers requi­res a careful case-by-case assess­ment, as the Direc­tive provi­des for secto­ral exemp­ti­ons and tran­si­tio­nal arran­ge­ments as well as faci­li­ta­ti­ons for so-called small AIFMs.

2. What measu­res must private equity funds take to prepare for the future AIFM regu­la­tion? When do the AIFM regu­la­ti­ons come into force?

The AIFM Direc­tive will enter into force in Germany on July 22, 2013. The core of German regu­la­tion is the German Invest­ment Code (Kapi­tal­an­la­ge­ge­setz­buch, KAGB).

Accor­din­gly, AIFM domic­i­led in Germany must, as of July 22, 2013 apply for a permit from BaFin if they (conti­nue to) manage AIF. It should be noted that both risk manage­ment and port­fo­lio manage­ment lead to a licen­sing requi­re­ment; for licen­sing, the respon­si­bi­lity for both areas must be bund­led with the AIFM. For AIFM domic­i­led in other EU or EEA states, the same applies in accordance with the respec­tive appli­ca­ble natio­nal super­vi­sory rules. For AIFM domic­i­led outside the EU and the EEA, sepa­rate third coun­try regu­la­ti­ons are appli­ca­ble — stag­ge­red over the next few years — which provide for special requi­re­ments for the manage­ment and marke­ting of AIF within the EU and the EEA. — To the extent that AIF mana­gers wish to take advan­tage of tran­si­tio­nal arran­ge­ments (in parti­cu­lar, the possi­bi­lity of apply­ing for permis­sion only until July 21, 2014), it is neces­sary that these “AIFM candi­da­tes” alre­ady carry on the busi­ness of an AIFM before July 21, 2013.

Finally there is the possibility

  • for so-called small AIFM (manage­ment of a total fund volume of up to € 100 million / incl. leverage or up to € 500 million / excl. leverage and compli­ance with further requi­re­ments) only a regis­tra­tion proce­dure and no full licen­sing proce­dure with BaFin has to be carried out or
  • for AIFMs that exclu­si­vely manage funds that have alre­ady been disbur­sed before July 21, 2013 to act without BaFin authorization.

Against this back­ground, measu­res to prepare for the new AIFM world are recommended:

  • an analy­sis of the company struc­tures and the AIF product range; objec­tive: to deter­mine the need to apply for an AIFM autho­riza­tion and the possi­bi­li­ties to use the tran­si­tio­nal arran­ge­ments and / or the sector exemptions;
  • Corpo­rate (group) struc­tu­ring in order to achieve the defi­ned objec­ti­ves, in parti­cu­lar timely selec­tion of an AIFM candi­date that — if the tran­si­tio­nal provi­si­ons are to be used — alre­ady carries on the busi­ness of an AIFM before July 21, 2013;
  • If seeking own AIFM autho­riza­tion: timely prepa­ra­tion (approx. 2 months prepa­ra­tion time) of autho­riza­tion requi­re­ments, in parti­cu­lar selec­tion of suita­ble mana­gers, selec­tion of depo­si­tary and valuer, estab­lish­ment of adequate risk manage­ment and prepa­ra­tion of a busi­ness plan cove­ring three full finan­cial years.
3. What advan­ta­ges / disad­van­ta­ges can insti­tu­tio­nal and private inves­tors expect?

The cate­go­ries of insti­tu­tio­nal and private inves­tor fami­liar from the fund busi­ness will no longer exist in the future. Accor­ding to the current state of legis­la­tion (see the German government’s draft bill on the AIFM Imple­men­ta­tion Act, BT-Drs. 17/12294 of Febru­ary 6, 2013), thenew inves­tor cate­go­ries in the KAGB will instead be as follows:

  • Private inves­tor (may invest in public AIFs);
  • Profes­sio­nal inves­tor (may also invest in special AIFs if it meets the crite­ria of a profes­sio­nal inves­tor as defi­ned in Annex II of the MiFID Directive);
  • Semi-profes­sio­nal inves­tor (may also invest in special AIFs if it meets the crite­ria of a semi-profes­sio­nal inves­tor in accordance with the regu­la­ti­ons of the KAGB);

  • Quali­fied private inves­tors (may also invest in closed-end mutual funds without risk diver­si­fi­ca­tion if they meet the crite­ria pursu­ant to section 262 (2) KAGB‑E).

Various advan­ta­ges and disad­van­ta­ges are linked to the inves­tor cate­gory (private inves­tors on the one hand, semi-profes­sio­nal and profes­sio­nal inves­tors on the other), e.g.

  • On the product side, public AIFs are limi­ted in their invest­ment opti­ons to certain assets and by rest­ric­tions on the possi­bi­lity of borro­wing / leverage and by the prin­ci­ple of risk diver­si­fi­ca­tion: In this way, the legis­la­tor wants to take inves­tor protec­tion into account. Also for reasons of inves­tor protec­tion, stric­ter requi­re­ments apply to sales and increased docu­men­ta­tion requi­re­ments (e.g. mini­mum infor­ma­tion in the sales pros­pec­tus, etc.) vis-à-vis private investors.
  • In parti­cu­lar, through the (new) cate­gory of the semi-profes­sio­nal inves­tor, high net worth indi­vi­du­als and other typi­cal “special fund inves­tors” (such as family offices, foun­da­ti­ons, pension funds, etc.) can (conti­nue to) invest in special AIFs without exces­sive docu­men­ta­tion requi­re­ments and without rest­ric­tions on the product side and thus enjoy full “invest­ment free­dom”. The so-called small AIFMs (see above) also bene­fit from this change, as special AIFs with a semi-profes­sio­nal inves­tor profile can also be mana­ged under the scope exception.

Howe­ver, it remains to be seen which speci­fic requi­re­ments an inves­tor must fulfill in order to be conside­red a semi-profes­sio­nal inves­tor; diffe­rent concepts are curr­ently still being discus­sed in the legis­la­tive process.

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