Transcript of "The proposed EU AIFM Directive September 2009"
The proposed EU
Fund Managers Directive
Impact on real estate funds
The European Commission proposed a new Directive on Alternative
Investment Fund Managers (AIFM) in April 2009. The proposal aims to
introduce a harmonized European regulatory and supervisory framework
for the alternative investment sector. The Commission believes that closer
regulatory engagement and supervision of the activities of managers of
alternative investment funds across Europe is required. The proposed
changes in the AIFM Directive will have a significant impact on the real
estate fund sector – the managers, the funds, their service providers
and investors. In this paper, we briefly outline the proposed regime and
potential issues for the real estate fund sector.
Overview of the Directive
The AIFM Directive is designed to address a number of risks identified by the European
Commission related to alternative investment funds (AIFs). The Commission does not
believe that fragmented national approaches constitute a robust and comprehensive
response to these risks.
The key objectives of the proposed AIFM Directive are to:
• Ensure that all AIFM are subject to appropriate authorization and registration
• Provide a framework for the enhanced monitoring of macroeconomic risks
• Improve risk management and organizational safeguards at the individual AIFM level
• Enhance investor protection
• Improve public accountability for AIFs holding controlling stakes in companies
• Develop a single market for AIFs
Risks identified by the European Commission
Macroprudential • Direct exposure of systemically important banks to the
alternative investment fund sector
• Procyclical impact of herding and risk concentration
Microprudential • Weakness in internal risk management system
Investor protection • Inadequate investor disclosures on investment policy, risk
management and internal processes
• Conflicts of interest and failures in fund governance
Market efficiency and • Impact of dynamic trading and short selling techniques on
integrity market functioning
• Potential for market abuse in connection with certain
techniques, such as short selling
Impact on market for • Lack of transparency when building stakes in companies,
corporate control or concerted action in “activist” strategies
Impact on companies • Potential for misalignment of incentives in management
controlled by of portfolio companies, in particular in relation to the use
alternative investment of debt financing
fund managers • Lack of transparency and public scrutiny of companies
subject to buy-outs
2 The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds
While the main focus of the AIFM Directive is on managers of alternative investment
funds, the Directive will impact:
• EU and non-EU AIFM
• EU and non-EU domiciled AIFs
• Service providers to these funds
In summary, the Directive applies to all AIFM established in the EU that provide
“management services” to AIFs, irrespective of whether they provide the services
directly or by delegation, and that have more than either:
• €100 million of assets under management (including assets acquired through the
use of leverage)
• €500 million of unleveraged assets under management with at least a five-year
lock-up period for each AIF
“Management services” means the activities of managing or administering one or more
AIFs on behalf of one or more investors.
AIFs are any collective investment undertaking other than a UCITS,1 pension funds,
endowments or sovereign wealth funds - for example, hedge funds, private equity and
real estate funds.
The Directive will also impose requirements on other service providers to AIFs, such as
custodians and valuators.
AIFM may market shares or units of their AIFs to professional investors in their home
EU Member State, and in other EU Member States subject to a notification procedure.
Under the notification procedure, the AIFM communicates required information to its
home Member State authority. Once the home Member State authority has transmitted
this information, together with an attestation that the AIFM concerned is authorized, to
the host Member State authority, the AIFM receives a notification permitting it to start
the marketing of AIF in the host Member State. The definition of “professional investor”
is that of MiFID.2
AIFM domiciled in a third country may market the shares or units of their AIFs to
professional investors in the EU providing that certain conditions are met. In particular,
they must be subject to prudential regulation and supervision that is deemed equivalent
to the provisions of the Directive and effectively enforced. These provisions are
deferred for a three-year period, during which third-country AIFs may continue to be
marketed in EU Member States under the current national regimes.
AIFM domiciled in one Member State may also provide management services in relation
to an AIF domiciled in another Member State, either directly or via the establishment
of a branch, provided that the AIFM is authorized to manage that type of AIF. In both
cases, a notification procedure is followed starting with the AIFM communicating
required information to its home Member State authority.
An undertaking for collective investment in transferable securities, in accordance with the UCITS Directive.
The Markets in Financial Instruments Directive, Directive 2004/39/EC.
The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds 3
AIFM will be required, inter alia, to:
• Comply with conduct of business requirements
• Implement adequate organizational and administrative arrangements to identify
conflicts of interest between it and the investors, and between investors, and
implement adequate organizational and administrative arrangements to prevent
conflicts of interest from adversely affecting the interests of the AIF and its investors
• Implement separate portfolio management and risk management functions
• Implement risk management systems in order to measure and monitor appropriately
all risks associated with the AIF, review the risk management systems at least once
a year and adapt them, whenever necessary. Risk management should include
an appropriate, documented and regularly updated due diligence process when
investing on behalf of an AIF.
• Implement appropriate liquidity risk management systems and procedures
• Comply with initial and ongoing capital requirements of:
− €125,000 plus 0.02% of assets under management exceeding €250 million
− 25% of annual expenditure (if greater than the capital required under the previous
• Provide disclosures to investors when they invest (and inform them of any
subsequent changes) including:
− A description of the investment strategy and objectives of the fund
− The eligible assets and techniques, and their associated risks
− The use of leverage and associated risks
− Process to be followed when the investment strategy is modified
− The identity of all service providers
− A description of the AIF’s liquidity risk management, including the redemption
rights both in normal and exceptional circumstances, and how the AIFM ensures a
fair treatment of investors
− The fund’s valuation procedures and pricing models
− Description of fund fees, charges and expenses
− Any favorable agreements with specific clients
• Provide periodic disclosures to investors on:
− The percentage of the AIF’s assets that are subject to special arrangements
arising from their illiquid nature
− Any new arrangements for managing the liquidity of the AIF
− A description of the risk profile and risk management systems employed
• Report to regulators, including:
− Principal markets and instruments traded
− The percentage of the AIF’s assets that are subject to special arrangements
arising from their illiquid nature
− Risk profile and risk management tools
− Liquidity risk management arrangements
− The use of short selling
• Provide further reporting to investors and regulators where one or more AIF
managed by the AIFM employs high levels of leverage on a systematic basis
• Notify unlisted companies and their shareholders when the AIFM acquires 30%
of the voting rights (small and medium-sized companies are not covered by this
requirement). These provisions also apply where the AIFM has concluded an
agreement with one or more other AIFM that would allow the AIF managed by these
AIFM to acquire 30% or more of the voting rights of the issuer or the nonlisted
AIFM will be required to appoint custodians and valuators that are independent from the
When delegating functions, AIFM will require prior authorization from the competent
authorities of the home Member State. Portfolio management and risk management
functions may only be delegated to AIFM authorized to manage the same type of AIF.
4 The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds
The role of the custodian includes:
• Receiving subscription payments and booking them in a segregated account
• Safekeeping of financial instruments of the AIF
• Verifying whether the AIF or the AIFM on behalf of the AIF has obtained ownership of
all other assets the AIF invests in
The custodian will be liable to investors for any losses suffered as a result of its failure
to perform its obligations. This includes any loss of financial instruments unless the
custodian can prove that it could not have avoided the loss. Custodians may delegate
their tasks to other custodians.
The independent valuator must implement appropriate and consistent procedures to
value the assets of the AIF in accordance with existing applicable valuation standards
and rules, and ensure AIF valuation rules are in line with the law, and the fund rules
or instruments of incorporation. It must ensure that the assets, shares and units are
• At least once a year
• Each time shares or units are issued or redeemed
The domicile requirements for EU AIFM are set out as follows:
EU AIF • Custodian: EU credit institution
• Sub-custodian: EU credit institution
• Valuator: in EU or third country, if subject to “equivalent”
• Administrator: EU or third country subject to certain
Non-EU AIF • Custodian: EU credit institution
• Sub-custodian: in AIF domicile with “equivalent” legislation
• Valuator: in EU or third country, if subject to “equivalent”
• Administrator: EU or third country subject to certain
Timeline for implementation
If the AIFM Directive were to be adopted according to plan by the European Parliament
and the Council of the European Union, it would enter into force in 2011.
A number of areas in the Directive must be clarified by the European Commission
before the Directive enters into force; these will be included in a separate implementing
The expected timeline for adoption and implementation for the AIFM Directive is as
Discussions with the
industry and with EU
AIFM draft 2014
2011 Passport to market
Directive enters AIF domiciled outside
into force EU available
2009 2010 2011 2012 2013 2014
AIFM Directive should
be approved by EU
Parliament and EU Council Publication of
by the end of 2009 implementing
The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds 5
The proposed AIFM Directive raises a number of practical
considerations for the real estate fund industry.
The regulation of AIFM will substantially impact those
real estate fund managers who are currently not subject
to any regulatory supervision in Europe at either a
product or manager level. In particular, the private
equity and opportunistic fund managers who are not
associated with larger financial services organizations
and typically use unregulated fund structures, will face
the most substantial burden.
6 The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds
i) The definition of collective investment undertaking
While an AIF is defined in the proposed AIFM Directive as any collective
investment undertaking excluding UCITS, “collective investment undertaking”
is not clearly defined. The preamble of the Directive refers to “collective
investment undertakings which raise capital from a number of investors
with a view to investing it in accordance with a defined investment policy on
the principle of risk-spreading for the benefit of those investors.” However,
in practice, this is very generic. There are different relevant references to
the concept of collective investment (e.g., the UCITS Directive, OECD, UK
Financial Services and Markets Act 2000). Whereas a common feature of such
definitions is that there is pooling of assets, there are often distinctions made
between different legal forms.
It may be difficult to establish which alternative vehicles are covered by the
definition – for example, would a listed and traded investment fund with
fixed capital (which is in substance similar to a public limited company) or a
Luxembourg SICAR (which operates with pooling and variable capital but is
technically not an investment fund) fall under this regulation? In addition, it It is fundamental that the
is unclear which portion of the population of Real Estate Investment Trusts
(REITs) in Europe (which can either be private or listed products, all of which
exact scope of this Directive be
are regulated but do not fall under the UCITS regime, and are often self- clearly defined in relation to
managed) would be covered by the Directive. existing products and also that
the Directive establishes clear
It is interesting to note that a number of managers exclusively managing principles to determine whether
closed-ended real estate funds (which have a duration generally exceeding new products will be in scope.
seven years) could have benefited from the exemption for managers with less
than €500 million under management with at least a five-year lock-up period.
Exemptions for closed-ended
However, the requirement for the assets under management to be unleveraged institutional real estate funds
means that such managers will not be eligible (we discuss the importance of as they exist today should be
establishing consistent rules on how leverage is measured in v) Leverage). considered.
The Directive limits the distribution to professional investors, as defined under
MiFID. Today, High Net Worth Individuals (HNWIs) invest in such products to
access benefits not achievable in privately managed portfolios. These include
potential yields or capital gains, access to diversified portfolios of investments,
benefiting from professional management of the portfolio and spreading costs.
The authors of the Directive
We believe that one of the end results of the proposed Directive should be should seriously consider the
enhancing and protecting the flow of capital into such products in the future. impact on the total amount of
The Directive would, however, be potentially damaging to the sector by capital flowing into the sector as
excluding HNWIs investing internationally in such funds. a result of excluding a significant
Furthermore, excluding HNWIs as eligible investors would significantly limit
number of qualified investors.
their individual options and potentially increase their overall investment risk They should also consider the
by driving them, in the medium term, to listed securities or nondiversified rights of qualified individuals to
personally managed portfolios. access such products.
The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds 7
iii) Management services
It is critical to understand accurately what is meant by management services
in the proposed Directive. In reality, “management services” could cover a
number of different activities within typical real estate fund structures.
Generally management services could fall into four generic types. These are:
• Fund management: This sets the overall strategic direction of the fund. This
is done by management companies or boards of self-managed funds.
• Investment management: This provides advice to fund management
regarding transactions or the execution of specific tactical asset
management programs. This is often subcontracted to investment advisors;
however the final decisions based on the advice provided are taken by fund
• Property management: This provides day-to-day tenant and physical
property management services.
• Administration: This covers a broad range of activities including accounting
at fund or Special Purpose Vehicle (SPV) level, domiciliation, paralegal and
corporate secretarial services and processing transactions in fund shares or
units. In regulated funds, many of these activities are currently performed
by service providers approved and supervised by the regulator.
There are several important open questions requiring further clarification
regarding the scope of management services as defined by the Directive:
• The Directive requires that when portfolio management services are
delegated to a third party, the third party must be authorized to manage
equivalent AIFs. Today, although a significant part of fund management is
regulated, investment management is typically not directly supervised as
the responsibility for such activities ultimately lies with fund management.
It is unclear whether the scope of the proposed Directive extends to
investment management in this sense. If it were to be the case, this would
have a significant structural impact on the real estate asset management Clearly the scope of
sector. “management services” needs
• The individual property managers are generally small local entities that to be clarified and needs to take
are often generally not subject to licensing requirements in the EU. It is account of current regimes and
unclear whether the proposed Directive also applies to individual property the organization of the sector.
managers. If investment management,
• Although the proposed Directive refers to administration within the property management and/or
definition of management services, it is unclear whether it is the intention pure administration were being
of the authors to cover pure “administration activities.” In fact, currently
for regulated funds, fund administration services are already carried out
targeted under management
by regulated entities; these activities are not considered as “management services, the impact would be
services.” substantial and disproportionate.
8 The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds
iv) Capital requirements
The Directive imposes minimum capital requirements and an increase in
proportion to the assets under management above €250 million.
The Directive suggests that minimum capital requirements will “ensure
the continuity and the regularity of the management services provided by
the AIFM” – i.e., to ensure there is sufficient capital to cover the ongoing The capital required for AIFM
operations of the manager. should be proportional to the
running expenses rather than
The running expenses of a real estate fund are, however, not necessarily
assets under management. It
proportional to the size of the fund – many are fixed or semi-variable.
should not exceed the capital
However, the Directive also refers to capital requirements to cover professional required for UCITS management
liability, which is a very different concept. It is highly unlikely that capital companies. It is unrealistic to
requirements would cover professional liability; such risks are normally assume that professional liability
mitigated through insurance. exposure can be covered by
minimum capital requirements;
Furthermore, it seems difficult to understand why the capital required for
AIFM targeting professional investors is set at a similar level to that required the Directive should foresee
for UCITS management companies that are concerned with retail investor other means of achieving this
The Directive imposes additional disclosure and reporting requirements on
funds with “high levels of leverage on a systematic basis” defined as where the
combined leverage from all sources exceeds the value of the equity capital of
the AIF in two of the last four quarters. This will impact many real estate funds.
Clearly, the degree of leverage is a significant risk factor that should be taken
One of the issues arising from the European Commission’s definition of
leverage relates to how it is calculated. While real estate funds will typically
prepare consolidated accounts, and are therefore in a position to calculate
leverage at a consolidated level, private equity and hedge funds do not
generally consolidate their results, meaning that potentially a significant
portion of leverage remains off-balance sheet.
The determination of the debt-to-equity-ratio, and hence leverage, is a highly
A key objective of the Directive is
complex technical issue. Accounting standards (e.g., IFRS) establish common
rules for the identification and measurement of equity, debt and hybrid to monitor risk at systemic level,
instruments. This includes a detailed framework covering among other things and therefore it should sharply
off-balance sheet and orphan entities, derivatives and hybrid instruments. A focus on this point. The Directive
key question, therefore, is whether the measurement of leverage should be needs to clarify not only how
aligned with existing accounting rules, or whether the authors had something managers will report on leverage,
additional in mind for the purposes of the Directive.
but more importantly how they
To ensure the stability and integrity of the financial system, the Directive will measure it. Fair and consistent
requires the Commission to adopt measures setting limits to the level of rules should be applied across all
leverage AIFM can employ, taking into account the type of AIF, its strategy types of funds, based on existing
and sources of leverage. Member State authorities may temporarily impose industry standards. An additional
additional limits. Current national regulation in a number of Member States layer of rules redefining leverage
requires regulatory approval of the proposed level of leverage or limits
would create a significant burden
leverage, mainly for the purposes of investor protection. For regulated funds,
it would appear that there would be no additional requirements in this sense, on EU real estate fund managers
assuming that levels of leverage are set below the current levels. Obviously, for and investors with arguably
currently unregulated funds, this is a new concept. minimum added value.
The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds 9
vi) Independent valuation
The vast majority of real estate funds in Europe have an independent
valuation process for property. Independent valuators generally implement
industry valuation standards, such as those of the Royal Institute of Chartered
Surveyors (RICS). In terms of valuing the real estate assets themselves,
we conclude that these long-established valuation practices should not be
impacted, in principle.
Many non-listed real estate funds permit subscriptions and/or redemptions
on a quarterly basis, and some even more frequently, while the independent
valuation of the underlying property assets does not necessarily match the
timing of the issue and redemption cycle. The frequency of the valuation is
adapted to the fund style. There are current, generally accepted industry
guidelines on this subject (e.g., from INREV3 and EPRA4).
However, the proposed AIFM Directive requires that the independent valuator
ensure that the assets, shares and units are valued at least annually and each
time shares or units of the AIF are issued or redeemed.
External appraisals of property cannot be conducted on more than a monthly
basis and are often only done annually for closed-ended funds. Given the
nature of the independent property valuation process, it is impractical to call
for independent valuations each time shares or units of the real estate fund
are issued or redeemed in frequently traded funds. If this is the case, it either
means more frequent valuations resulting in a significant additional expense
burden for investors, or a reduction in investor liquidity due to a reduced
subscription and redemption frequency.
Furthermore, there are significant other assets and liabilities held on the
balance sheets of real estate funds, including among others debt, derivative If the Directive imposes
hedging instruments, equity in joint ventures and associated companies, along additional independent valuation
with working capital balances and cash. The question is, what was in the minds
requirements on real estate funds,
of the authors with respect to the independent valuation of these other assets
and liabilities that form a significant part of the determination of the net asset this would be without precedent
value? for any type of company or fund,
including listed entities, in which
Today, for regulated real estate funds, an independent central administrator the public can trade. Furthermore,
in conjunction with the custodian monitors the valuation of all assets and the authors need to take account
liabilities, including the work of an independent property valuator, in the
of the specific nature of the
calculation of the net asset value. Is this the type of arrangement that the
Directive aims to implement? If this is not the case, this may create an asset class and how valuations
operating model without precedent for real estate funds and may have an of immovable property are
adverse impact on investor liquidity and returns. conducted in reality.
European Association for Investors in Non-listed Real Estate Vehicles.
European Public Real Estate Association.
10 The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds
The proposed Directive segregates the custodian’s role for the financial
instruments and other assets. For financial instruments, it imposes a safekeeping
role. For other assets, it requires the custodian to verify “whether the AIF or
the AIFM on behalf of the AIF has obtained ownership of all other assets the AIF
invests in” as well as ensuring that title to assets has been effectively transferred.
The supervisory role of custodian in relation to real estate titles is thus properly
addressed in the proposed Directive.
However, the Directive also raises concerns over the custodian’s liability for
ensuring that legal title has been established. There are divergent standards in
Europe for establishing legal title. Much of the work, prior to, during and after
an acquisition, is currently performed by service providers that are generally not The custodian’s liability should
EU credit institutions (including lawyers). The custodian’s role in acquisitions be limited to ensuring that an
is generally to ensure that due care has been undertaken in the transaction adequate due diligence process
assessment and completion. This includes ensuring that the acquisition has been for property transactions is
discussed and agreed, that all advisable due diligence has been undertaken, that
conducted and an ongoing role
there is no apparent factor that may prohibit the fund from owning the property
and that all documentation is consistent with the transaction as agreed. The of monitoring safekeeping. The
actual safekeeping of documents relating to legal title is generally not performed Directive needs to clarify this role.
by EU credit institutions, but is monitored by the custodian.
The custodian’s role should be
A separate issue is that the custodian is required to book subscription payments
from investors in a segregated account; however, such activities may currently be monitoring rather than booking
performed by other authorized entities. This is monitored, rather than executed, subscription and redemption
by the custodian; it is difficult to see how investors would benefit from the change. payments.
It is in all parties’ best interest that real estate funds implement an adequate risk
management framework, irrespective of regulatory requirements.
In this area, the main thrusts of the proposed AIFM Directive are:
• Risk management systems must be implemented by the AIFM in order to
measure and monitor appropriately all risks associated with each AIF investment
• Separate annual reviews of risk management systems are required
• A documented and regularly updated due diligence process is necessary when
investing on behalf of an AIF
While financial services organizations are used to such requirements, niche players
with no previous experience of complying with such regulatory requirements will be
challenged to formally document their existing risk management procedures and
subject them to independent reviews. In the roll-out of risk management regulation
in the past, there was a significant role for independent auditors in providing
comfort on risk management standards. We are not sure whether this is what is
anticipated under the current proposals regarding annual reviews.
However, investors in AIFs are sophisticated professional investors who are well Clearly, AIFM need to implement
aware of the risks they are taking when investing in a fund. A distinction needs to adequate risk management
be made between standards applied for professional investors and those applied processes and procedures to
for the general public. The level of contractual due diligence undertaken by
professional investors is generally high and therefore the standards applied and
ensure that their fiduciary
levels of comfort required in this area should take this into account. responsibilities towards investors
are being met. Practically, the
Given the nature and practicalities of risk management frameworks, it is difficult provisions of the Directive
to achieve pragmatic regulation in this area. To many commentators, the roll- need to ensure that the level of
out of Sarbanes-Oxley regulation in the US created a disproportionate burden
on companies and resulted in dramatic shifts in capital flows. Also, there are
formalization of risk management
already global standards, such as the COSO5 framework, covering the design and requirements is proportionate to
functioning of risk management models. the effort and expense.
Commitee of Sponsoring Organizations (COSO).
The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds 11
ix) Conflicts of interest
The Directive requires that the AIFM take all reasonable steps to identify
conflicts of interest between themselves and the investors, but also between
investors, and implement adequate organizational and administrative
arrangements to prevent conflicts of interest from adversely affecting the
interests of the AIF and its investors. Where such arrangements are not
sufficient to ensure that the risks of damage to investors’ interests will be
prevented with reasonable confidence, the AIFM is required to disclose the It is unreasonable to require real
nature and sources of conflicts of interest before they invest and develop
estate fund managers to be in a
appropriate policies and procedures.
position to identify all conflicts
While real estate fund managers are used to managing conflicts of interest of interest between investors,
between themselves, the fund and its investors, identifying all conflicts of especially in large open-ended
interest between investors will be practically impossible. Our reading would funds with hundreds of investors.
indicate that this is more an obligation of means rather than results, but The existence of commercially
further clarification would be useful.
negotiated arrangements to align
It is interesting to note that the proposed Directive is silent on common interests should be considered by
techniques used in the industry to align the interests of the managers and regulators and give them some
investors. Currently, players in the sector consider these types of financial comfort.
alignment techniques as critical in balancing different agendas.
x) Side letters
The Directive stipulates that no investor may obtain preferential treatment,
unless this is disclosed in the AIF fund rules or instruments of incorporation;
furthermore, it requires the disclosure to investors of the identity of investors
receiving preferential treatment and a description of the preferential treatment. If there are to be provisions
covering side letters, we suggest
Side letters, such as agreements with individual investors to reimburse fees
or providing for other preferential arrangements outside the legal framework that the Directive should not go
of the fund, are commonplace in real estate funds. There is an intense debate beyond requiring the existence,
within the industry on whether the existence and content of side letters should framework and limits of side
be disclosed. Current INREV guidelines only go as far as calling for the manager letter arrangements be disclosed.
to explain the general approach to disclosure of side letter arrangements to The identity of the investor and
exact content of each individual
The Directive could target general disclosure of the framework and limits side letter should, however,
of such arrangements. It goes further, however, by requiring individual remain confidential to the parties
arrangements be disclosed. This approach raises significant investor involved.
12 The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds
xi) Choice of domicile of AIFM and AIF
By establishing passports both for AIFM and AIF, the proposed AIFM Directive
permits AIFM to choose to establish themselves and their AIF in the domiciles
that offer the most advantageous conditions. Their choices of domiciles will
depend on factors such as:
• Flexibility of the regulatory environment
• Fiscal environment for investors and fund managers
• Reputation of financial center
Although perhaps not
• Accessibility of the authorities intentionally, the AIFM Directive
• Expertise and cost competitiveness of locally based service providers may lead to concentration
• Ability to outsource both within the domicile and cross-border of AIFM and AIF in the most
• Qualifications and knowledge of workforce (including languages) attractive domiciles.
xii) Non-EU AIFM and non-EU AIF
Under the proposed Directive, non-EU AIFM will be able to market their funds
in the EU subject to certain requirements, including equivalent regulation
and supervision. There are no practical principles or processes defined in
the Directive for establishing equivalence. Establishing “equivalence” will be
a challenging task for the European Commission, which struggled with IFRS
equivalence under the Transparency and Prospectus Directives. Furthermore,
there is a three-year delay for the implementation of these measures.
Non-EU real estate fund managers will have significant incentives to establish
themselves in the EU to be able to passport their products to investors in other
EU Member States. More important, as a practical matter, it makes business
sense to have a physical presence close to investors and assets – i.e., in the
EU for an investment strategy primarily focused on European investors and/or
Going forward, as a practical
The shares or units of a non-EU AIF may only be sold to investors in EU matter, and in the light of the
Member States if the Member State has signed tax cooperation agreements proposed Directive, non-EU real
and implemented information exchange on tax matters with the third country
in which the fund is domiciled – again, there is a three-year delay before
estate fund managers will need
implementation. It remains to be seen how many offshore jurisdictions will to establish a base in the EU and
enter into such agreements with EU Member States. No doubt this will drive a domicile their funds in the EU at
significant migration of funds to onshore domiciles. least for the foreseeable future.
The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds 13
The European Commission has indicated that it is committed to transparent, evidence-
based policymaking founded on a dual commitment to open consultation and impact
The proposed AIFM Directive was, however, drafted without the usual industry
consultation process; therefore it is no surprise that there are many practical issues,
some of which are raised in this paper, that need to be resolved if the authors’ objectives
are to be met. It has generated much discussion and been the subject of heavy criticism.
AIFs have seen substantial growth in recent years and have now become significant
players in global markets. Thus, overall, we understand the political viewpoint that the
regulation of AIFM is a necessity. In the current political climate, it is almost inevitable
that a new regulatory framework, in one form or another, will become a reality.
Real estate funds are not the primary target of the AIFM Directive. They do not present
many of the types of risks that the AIFM Directive is designed to mitigate or expose.
European real estate funds are generally well regulated and comply with industry
standards, such as those of INREV. Recently, European open-ended real estate funds
were being considered as potential investments for European retail investors.
While most of the proposed Directive was drafted as a one-size-fits-all approach, there
are important distinctions that need to be made between the operations of hedge funds,
real estate funds and private equity to ensure the authors’ intentions are translated into
an appropriate regulatory regime.
From the perspective of real estate funds, we are particularly concerned that:
• The collective investment undertakings covered by this Directive need to be clearly
• HNWIs may no longer be able to invest in these products internationally
• The scope of “management services” needs to be clarified
• Fair and consistent rules should apply to the measurement of leverage, based on
• The scope of the requirement for independent valuation needs to be clarified
• The provisions on risk management should not be overly burdensome on the industry
• The provisions on conflicts of interest need to be practical and proportionate to the
The challenge is to make required result, in particular in relation to potential conflicts of interest between
sure that the new Directive investors
is targeted and effective • While the existence and typical content of side letters should be disclosed, the
on the one hand, and identity of the investors and exact content of each individual side letter should remain
pragmatic, practical to confidential
implement and proportional
to the objectives on the
There is no doubt that the Directive, if implemented, will drive significant structural
other. The specificities of the
change in the real estate asset management sector. It may lead to a concentration of
real estate fund sector need asset managers seeking to optimize their operations - and funds - in certain locations or
to be taken into account if it to the migration of offshore products to European domiciles. It may even force, at least
is to continue to flourish. in the short term, non-EU asset managers to establish regulated operations in Europe.
White Paper on Financial Services Policy (2005-2010).
14 The proposed EU Alternative Investment Fund Managers Directive: Impact on real estate funds
EMEIA Real Estate Leader
Dean Hodcroft +44 20 7951 4870 firstname.lastname@example.org
EMEIA Real Estate Asset Management Leader
Michael Hornsby +352 42 124 8310 email@example.com
EMEIA Real Estate country contacts
Belgium Patrick Rottiers +32 3 270 1233 firstname.lastname@example.org
Channel Islands Geraint Davies +44 1534 288 639 email@example.com
France Bernard Charrue +33 1 4693 72 33 firstname.lastname@example.org
Marie-Henriette Joud +33 1 4693 67 49 email@example.com
Germany Karl Hamberger +49 89 14331 13662 firstname.lastname@example.org
Dietmar Fischer +49 6196 996 24547 email@example.com
Ireland Des Quigley +353 1 2212 550 firstname.lastname@example.org
Italy Stefano Cattaneo +39 027 2212 452 email@example.com
Alberto Romeo +39 027 2212 445 firstname.lastname@example.org
Luxembourg Michael Hornsby +352 42 124 8310 email@example.com
Netherlands Jeroen Preijde +31 8840 71679 firstname.lastname@example.org
Ad Buisman +31 55 5291 428 email@example.com
Central and Southeast Europe Harry Kyrkos +30 210 288 6211 firstname.lastname@example.org
Spain Francisco Fernández Romero +34 91 57 27 303 email@example.com
José Carlos Hernandez Barrasus +34 915 727 291 firstname.lastname@example.org
Switzerland Rolf Bach +41 58 286 3870 email@example.com
UK Dean Hodcroft +44 20 7951 4870 firstname.lastname@example.org
Craig Hughes +44 20 7951 8397 email@example.com
Matt Maltz +44 20 7951 1886 firstname.lastname@example.org
James Stuart +44 20 7951 5349 email@example.com
Rob Otremba +44 20 7951 0607 firstname.lastname@example.org