Europe's AIFMD – A Brave New World

James Lasry

Hassans

22 July 2013

James Lasry, head of funds at law firm Hassans, and chairman of the Gibraltar Funds and Investments Association, looks at how the European alternative investment industry will adapt to the Alternative Investment Fund Managers Directive – which became law today.

After three years of planning, consultation and review, the Alternative Investment Fund Managers Directive is finally here. One of the most talked about and debated pieces of legislation, AIFMD will be the most radical reshaping of hedge and similar alternative fund marketing in the EU since the UCITS directive changed the landscape for European retail investment funds.

Designed to introduce a common EU approach to the regulatory supervision of alternative funds and their managers, AIFMD promises to bring transparency and stability to the way these funds operate. Many commentators, including leading players in Gibraltar, believe it will have a dramatic impact on the funds landscape.

From the moment the European Parliament voted through a final text of the Directive in November 2010, AIFMD has been met with a mix of confusion and controversy and there is little chance of this going away, at least in the short term. Becoming effective on 22 July, the legislation comes at a particularly acute time, with volatile and low market returns causing investors to increasingly look at investing in alternative assets and funds.

The reaction of fund managers has been mixed. A poll of asset managers by Deloitte in June last year showed that the majority of respondents saw AIFMD as a business threat. Costs and red tape are major causes of concern, particularly for smaller funds. Depository costs came out as the most pressing concern as many managers will need to appoint a depositary with supervisory responsibility for the first time. Uncertainty around private placement regimes has also been a topical theme, particularly when the transitional implementation period ends in July 2014.

For funds that are establishing themselves now, or funds that wish to continue to market in the EU , they will have to consider a European onshore option and, depending on size, AIFM-compliant structures.

This means that they essentially have four choices, those being Luxembourg, Malta, Ireland and Gibraltar. Larger funds will look to absorb costs through economies of scale and appeal to investors looking for additional layers of transparency and regulatory requirements. This may see a shrinking of the market, with less choice and more costs for investors. However smaller funds which either wish to opt in to the AIFM passport or those who expect to cross the €100 million threshold in the short- to mid-term, will also be able to capitalise by moving to jurisdictions such as Gibraltar that offer an EU base combined with lower costs and a quick route to market.

Considering this, we believe the next few years will see a shifting of the tectonic plates. Smaller more nimble centres will continue to attract funds, whilst larger more established fund centres outside of the EU will need to rethink their value proposition.