Impact of the AIFM Directive
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.
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.
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.