AIFMD SummaryStudy Notes
Brief Overview• The Alternative Investment Fund ManagersDirective (AIFMD) arose from a G-20 summit in2008 that discussed t...
Products of AIFMD• AIFMD is comparable to the United States’Dodd Frank Act, but focuses on alternativeinvestment funds (AI...
Products of AIFMD• Managers that qualify for the licensingrequirements are:– Markets an AIF in or into the EU• AIFs can be...
Products of AIFMD• Exemptions include:– Joint ventures– Pension funds– Family offices– Holding companies– Securitization s...
Products of AIFMD• Closed-ended funds may be exempt if:– They do not perform any more investments after July 22, 2013– The...
Products of AIFMD• Administration and transparency help disclosehow compliance and accountability will beenforced• Those w...
Depository Requirements• New depository requirements obligate third partyproviders domiciled in the EU to administer capit...
Acceptable Institutions andRequirements• AIFs in the EU register with the managersMember State• Non-EU AIFs can register w...
Acceptable Institutions andRequirements• Depositories will have many responsibilitiesand will be liable for funds being ad...
Acceptable Institutions andRequirements• Depositories should consider the risk beforedeciding to control any amount of hol...
Acceptable Institutions andRequirements• AIFs take on the liability if they choose to usea prime broker• It may be more af...
Conflicts of Interest InvolvingDepositories• AIFMs who manage more than one AIF arerequired to have a separate depository ...
Downside for Depositories• There is much to be gained in operating as adepository, but potential risk as well thatshould b...
Downside for Depositories• AIFMs will be required to clearly communicatebetween depositories and prime brokers foroperatio...
Reporting and Transparency• AIFMD requires licensed managers to producea annual report and holdings report• Valuations for...
Reporting and TransparencyOverview• Annual Report– Remuneration Disclosures• Disclosures to Investors– Percentage of Asset...
Annual Report• Annual reports consist of:– Investment holdings– Financials– Changes in holdings and value of the fund– His...
Annual Report• Annual reports should be delivered toregulators within six months of the endingfiscal year, and available t...
Annual Report• Remuneration Disclosures– Details involving the disclosure of compensationwill vary depending upon the size...
Annual Report• Remuneration Disclosures– Requirements of the disclosures are listed inAIFMD– The compensation amount that ...
Disclosures to InvestorsAnnual reports to investors are a requiredminimum of AIFs• Percentage of Assets Subject to Special...
Disclosures to Investors• Percentage of Assets Subject to SpecialArrangements and Managing Liquidity of anAIF– Notificatio...
Disclosures to Investors• Risk Profile, Risk Management, and Leverage– Risk profile should be made available in offeringdo...
Reporting to Regulators• Reporting requirements found in AIFMD weredeveloped to control the flow of risk in AIFs– These re...
Reporting to Regulators• Frequency, Content and Format– Special AIFs, like private equity funds that areunlevered must onl...
Reporting to Regulators• Frequency, Content and Format– The report that is filed consists of over 41questions and has many...
Reporting to Regulators• Substantial Leverage– Authorities are responsible for amounts ofleverage AIFs use, and can limit ...
Regulations on RemunerationOverview• Remuneration on Delegators• Remuneration Committee• Timing and Intertwining of Remune...
Remuneration on Delegators• AIFMD encompasses delegators beneath theAIFM who were associated with responsibilitiesof assis...
Remuneration Committee• AIFs are required to develop a RemunerationCommittee (RemCo) if it meets requirementsof:– Specific...
Remuneration Committee• AIFs may be able to circumvent thesecompensation provisions completely if:– A RemCo is started– 50...
Timing and Intertwining ofRemuneration Provisions• AIFMs managing AIFs before the initiation dateare allowed one year to c...
Risk ManagementNew policies that are brought on by risk managementclauses develop assessments for risk, risk management,an...
Permanent and Segregated RiskManagement Divisions• Segregated risk management independent of theAIFM is now mandatory to r...
Permanent and Segregated RiskManagement Divisions• Employees on the segregated riskmanagement team will be compensated for...
Risk Management Policies• The policies involved with risk management are criticalto the implementation of risk management ...
Risk Management Policies• More intricate AIFs may bring on Risk Officersto communicate with upper levelmanagement
Measuring and Management of Riskand Risk Limits• Scenario and stress tests may be performed tomonitor potential risks• Whe...
Measuring and Management of Riskand Risk Limits• Risk management provisions may affect thestrategy of the fund and influen...
Measuring and Management of Riskand Risk Limits• Provisions in place require AIFs and AIFM to– Implement risk management a...
Measuring and Management of Riskand Risk Limits• Setting Risk Limits and Managing PotentialRisks– Risk limits should be ch...
Liquidity• AIFMs will need to link the liquidity profile andredemption policies to how they structure theirstrategy, once ...
Liquidity• Special tools will be needed to control risk inliquidity• AIFMs be responsible for supervising– Liquidity profi...
Examining and Reviewing the RiskManagement Policy• AIFs must continually supervise its riskmanagement procedures and notif...
Disclosures of Control over Non-listedCompanies• Funds must report in addition to changes inholdings of non-listed compani...
Disclosures of Control over Non-listedCompanies• AIFMs must– Inform employees of the acquisition immediately– Furthermore ...
Restrictions on Asset Stripping• AIFs managed in the EU by EU and non-EU AIFMsare prohibited from– Distributing– Reduction...
Restrictions on Asset Stripping• Responsibilities fall on the AIFM and it isillegal for him to perform or instruct theseac...
Restrictions on Asset Stripping• Exceptions to these restrictions include:– Special purpose real estate funds– SMEs that m...
Tax Consequences• AIFMs may be confronted with doubletaxation that may come with the passportregime• AIFs will primarily b...
Tax Consequences• Investors of the AIF and delegates of the AIFMbring even more complexity when AIFs haveto monitor multip...
AIFMs have to adapt• AIFMs are required to attain an AIFMD licensewhen specific criteria is met• Managers are now accounta...
AIFMs have to adapt• . Managers are only allowed to delegate theirportfolio and risk management roles to theproper regulat...
AIFMs have to adapt• Compensation requirements will reduce theamount of risk a manager is willing to take• Prudential capi...
AIFMs have to adapt• Other guidelines include details about– Annual reports Tracking of assets undermanagement– Due dilige...
AIFMs have to adaptOverview• Impact on Hedge Funds– Risk Management and Compliance– Other Provisions• Impact on Private Eq...
AIFMs have to adaptOverview• Impact on Private Equity Funds– Remuneration– Capital Requirements– Reporting, Control of Non...
AIFMs have to adaptOverview• Impact on Real Estate Funds– Depositories– Remuneration and Conflicts of Interest– Risk Manag...
Impact on Hedge Funds• Risk management and compliance– Numerous larger firms had already employedChief Risk Officers to th...
Impact on Hedge Funds• Risk management and compliance– Not all firms will require a compliance team but itis well advised ...
Impact on Hedge Funds• Other provisions– Depository and reporting requirements will reflectthe same standards upon hedge f...
Impact on Hedge Funds• Other provisions– Contracts will need to be adapted for the entitiesassociated with the operations ...
Impact on Private Equity Funds• Unless the fund is closed-ended and dissolvesbefore July 16, 2016, private equity funds ar...
Impact on Private Equity Funds• AIFs that have multiple EU and non-EU domiciledmanagers, have the opportunity to select ad...
Impact on Private Equity Funds• Risk Management– Risk management teams would be hired on toassist with monitoring potentia...
Impact on Private Equity Funds• Remuneration– Up to 40% of compensation must be received over aspread of 3 to 5 years• Com...
Impact on Private Equity Funds• Capital Requirements– Capital requirements that are set requiremanagers to either hold the...
Impact on Private Equity Funds• Reporting, Control of Non-listed Companies,Delegating of Manager Functions, andTransparenc...
Impact on Private Equity Funds• Reporting, Control of Non-listed Companies,Delegating of Manager Functions, andTransparenc...
Impact on Private Equity Funds• Reporting, Control of Non-listed Companies,Delegating of Manager Functions, andTransparenc...
Impact on Private Equity Funds• Anti-asset Stripping Regulations– Regulations on asset stripping will restrictactivities i...
Impact on Real Estate Funds• Even though real estate funds, also known asREITs, are a type of mutual funds, they are still...
Impact on Real Estate Funds• Depositories– Depositories are a considerably pricy vehicle forREITs and require clear commun...
Impact on Real Estate Funds• Depositories– Performing annual valuations would beconvoluted due to the structuring of opera...
Impact on Real Estate Funds• Remuneration and Conflicts of Interest– Disclosure of compensation in annual reports iscommon...
Impact on Real Estate Funds• Risk Management and Compliance– REITs have previously performed risk managementin the past wi...
Marketing and Passports in the EU• Two exceptions marketing in the EU are thepursuit of retail investors, and investors wh...
Marketing and Passports in the EU• EU Marketing Passports– Special marketing passports will be made accessible toAIFMs who...
Marketing and Passports in the EU• EU Marketing Passports– Applications for AIFMs in Member states will beprocessed within...
Marketing and Passports in the EU• Private Placement Regimes– EU AIFMs who market non-EU AIFs, and non-EUAIFMs who market ...
Marketing and Passports in the EU• Private Placement Regimes– Compliance and reporting for the transparency of thefund mus...
Marketing and Passports in the EU• Private Placement Regimes– Non-EU AIFMs and AIFs may not reside withindomiciles that ar...
Impact on Investment Strategies• AIFMD does not specifically outlaw certaininvestments strategies, the safeguards whichhav...
Conclusion• There are many safeguards that have been setin place for this directive• Risk management, reporting, and depos...
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A Summary of AIFMD and How it Affects Hedge Funds

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This presentation serves as study notes for the e-learning material titled: "South African Hedge funds and international developments"

These notes focus on AIFMD and its Impact on the Hedge Fund Industry.

http://www.hedgefund-sa.co.za/aifmd

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A Summary of AIFMD and How it Affects Hedge Funds

  1. 1. AIFMD SummaryStudy Notes
  2. 2. Brief Overview• The Alternative Investment Fund ManagersDirective (AIFMD) arose from a G-20 summit in2008 that discussed the stability of the financialindustry• Composed by the European Commission in 2010,and set into motion July 21, 2011• Countries in the European Union who will beimpacted by AIFMD have been given two years toprepare for its start date on July 22, 2013
  3. 3. Products of AIFMD• AIFMD is comparable to the United States’Dodd Frank Act, but focuses on alternativeinvestment funds (AIFs)• Managers are required to be licensed underAIFMD if they fall within specified domiciles• Managers that qualify for the licensingrequirements are:– Managers that manage an AIF in the EU or fromthe EU
  4. 4. Products of AIFMD• Managers that qualify for the licensingrequirements are:– Markets an AIF in or into the EU• AIFs can be open or closed-ended funds• If a fund does not fall under UCITS IV, it isconsidered an AIF
  5. 5. Products of AIFMD• Exemptions include:– Joint ventures– Pension funds– Family offices– Holding companies– Securitization special interest entities– Saving schemes– Employee participation
  6. 6. Products of AIFMD• Closed-ended funds may be exempt if:– They do not perform any more investments after July 22, 2013– The fund closes before July 22, 2016• Topics discussed in AIFMD include:– Changes to banking– Depository requirements– AIFs– How AIFMs need to adapt– Marketing of AIFs– Impacts to offshore funds and some strategies– Deadlines– Tax concerns
  7. 7. Products of AIFMD• Administration and transparency help disclosehow compliance and accountability will beenforced• Those who manage AIFs outside of the EUmay have to make structural changes toaccommodate to AIFMD standards
  8. 8. Depository Requirements• New depository requirements obligate third partyproviders domiciled in the EU to administer capital forAIFs• Third parties that are independent of the AIF will bechosen as the depositories– The depository must be domiciled in the jurisdiction ofeither the AIF or AIFMOverview• Acceptable institutions and requirements• Conflicts of interest involving depositories• Downside for depositories
  9. 9. Acceptable Institutions andRequirements• AIFs in the EU register with the managersMember State• Non-EU AIFs can register with an EU creditinstitution or investment from the AIF’sresidence, or with the managers Member State iflocated within the EU• Non-EU depositories may be used if they followthe strict guidelines set by the EU– This would require the depository to report allholdings for tax purposes, and would be liable to theAIF and AIFM
  10. 10. Acceptable Institutions andRequirements• Depositories will have many responsibilitiesand will be liable for funds being administered– Any losses of capital would be liable to theinstitution with the holdings• Managers are required to confirm that thedepository is adequate for holdings, andholding entities will need to prove they havethe required resources to manage the tasks athand
  11. 11. Acceptable Institutions andRequirements• Depositories should consider the risk beforedeciding to control any amount of holdings– Appropriate fees will need to be chargeddepending on the risk of holding certain AIFsassets• Prime brokers are allowed to act asdepositories if they can prove there is noconflicts that would interfere with operationsas a holding agent
  12. 12. Acceptable Institutions andRequirements• AIFs take on the liability if they choose to usea prime broker• It may be more affordable to implement aprime broke as a holding agent, but ifcircumstances were to change dramatically itmay be wise to choose a third partydepository
  13. 13. Conflicts of Interest InvolvingDepositories• AIFMs who manage more than one AIF arerequired to have a separate depository foreach AIF• Depositories are obligated to a fiduciary duty• If a depository desires, they may also act as aprime broker if there is clear separation fromits depository and brokerage functions
  14. 14. Downside for Depositories• There is much to be gained in operating as adepository, but potential risk as well thatshould be considered• AIFMs will be required to clearly communicatebetween depositories and prime brokers foroperations flow more smoothly– Depositories will need to track all trades thatoccur with the prime broker to know where assetsare located at all times, and later register accountbalances after trading to assure accuracy
  15. 15. Downside for Depositories• AIFMs will be required to clearly communicatebetween depositories and prime brokers foroperations flow more smoothly– Prime brokers view the total amount indepositories as investable for even its own tradingpurposes, depositories are left with all liability– If a prime broker was to fail, depositories have 27days under current AIFMD requirements torestore the whole amount, even if they had nofault
  16. 16. Reporting and Transparency• AIFMD requires licensed managers to producea annual report and holdings report• Valuations for the annual report will beperformed either by third parties, or themanager if there is no conflict of interest• Other requirements for reporting involvingtransparency will assist with previous issuesthat may have been problematic
  17. 17. Reporting and TransparencyOverview• Annual Report– Remuneration Disclosures• Disclosures to Investors– Percentage of Assets Subject to Special Arrangementsand Managing Liquidity of an AIF– Risk Profile, Risk Management, and Leverage• Reporting to Regulators– Frequency, Content and Format– Substantial Leverage
  18. 18. Annual Report• Annual reports consist of:– Investment holdings– Financials– Changes in holdings and value of the fund– Historical performance– Net asset value per share– Fixed and variable remuneration to the managerand employees– Plus details of the carried interest
  19. 19. Annual Report• Annual reports should be delivered toregulators within six months of the endingfiscal year, and available to investors ifrequested• Other changes in reporting will rely upon theGAAPs used and the disclosures that writers ofthe AIFMD deem necessary for propertransparency
  20. 20. Annual Report• Remuneration Disclosures– Details involving the disclosure of compensationwill vary depending upon the size of the AIF– Disclosure of remuneration will not be madepublic, but will be available through disclosures ofan• Annual report• Separate compensation policy• Any other form
  21. 21. Annual Report• Remuneration Disclosures– Requirements of the disclosures are listed inAIFMD– The compensation amount that is disclosed will beitemized in given several ways– Those under the private placement regime are stillrequired to produce a remuneration disclosure
  22. 22. Disclosures to InvestorsAnnual reports to investors are a requiredminimum of AIFs• Percentage of Assets Subject to SpecialArrangements and Managing Liquidity of anAIF– Disclosures of redemption rights on specialarrangements should be made available toinvestors along with details of how the specialarrangements are set up
  23. 23. Disclosures to Investors• Percentage of Assets Subject to SpecialArrangements and Managing Liquidity of anAIF– Notifications should be delivered to investorswhen changes to liquidity or the risk managementof liquidity are made• Risk Profile, Risk Management, and Leverage– Details involving risk management must betransparent prior to investments being made
  24. 24. Disclosures to Investors• Risk Profile, Risk Management, and Leverage– Risk profile should be made available in offeringdocuments and annual reports– If a risk profile is compromised, investors shouldbe notified immediately to develop a solution– Changes made to leverage caps and collateralshould be informed to investors– All levels of leverage that are used or may be usedshould be disclosed to investors
  25. 25. Reporting to Regulators• Reporting requirements found in AIFMD weredeveloped to control the flow of risk in AIFs– These requirements are upon all EU AIFMs who desireto market their AIFs within the EU• Frequency, Content and Format– AIFs who manage between 100 million and 1 billionEuros must disclose reports semiannually, while AIFsthat manage over 1 billion Euros must disclose reportsquarterly• There is a 30 day deadline for both, but is extended to 45days for fund of funds
  26. 26. Reporting to Regulators• Frequency, Content and Format– Special AIFs, like private equity funds that areunlevered must only report on an annual basis withthe same deadlines arranged– AIFMs have many details to include with the reportsand have additional requirements if using leverage ornon-listed companies in their strategies– AIFMs who manage more than one AIF must list all ina single report, as well as each AIF individually
  27. 27. Reporting to Regulators• Frequency, Content and Format– The report that is filed consists of over 41questions and has many details• Substantial Leverage– Regulators plan on limiting leverage that isconsidered substantial• Substantial leverage is considered three times the NAV– Disclosures on AIFs that manage substantial levelsof leverage have an extraneous amount of detailsto report
  28. 28. Reporting to Regulators• Substantial Leverage– Authorities are responsible for amounts ofleverage AIFs use, and can limit the amount ofleverage an individual may use if it can endanger afinancial systems status– AIFMs must notify authorities when changes tothe infrastructure involving leverage is made, andinform regulators on how the change aligns withpolicies that have been made
  29. 29. Regulations on RemunerationOverview• Remuneration on Delegators• Remuneration Committee• Timing and Intertwining of RemunerationProvisions
  30. 30. Remuneration on Delegators• AIFMD encompasses delegators beneath theAIFM who were associated with responsibilitiesof assisting risk and portfolio management• AIFMs must assess whether the delegator(s) areaccountable to the compensation subtext underthe AIFMD, or if they will demand a contractualagreement that excludes them from submittinginformation relating to their remuneration
  31. 31. Remuneration Committee• AIFs are required to develop a RemunerationCommittee (RemCo) if it meets requirementsof:– Specific size– Organization– Nature of operations• AIFs consisting of 1.25 billion Euros or less inassets under management, and employing 50or fewer individuals may be exempt from this
  32. 32. Remuneration Committee• AIFs may be able to circumvent thesecompensation provisions completely if:– A RemCo is started– 50% of remuneration is received as shares in theAIF– Risk management involved with compensation ismaintained
  33. 33. Timing and Intertwining ofRemuneration Provisions• AIFMs managing AIFs before the initiation dateare allowed one year to comply• Those receiving salary and remuneration before2014 may need prior evaluation to thecompliance date• Managers receiving compensation from domicileswith different directives will be evaluated on apro rata substance• Materials required of multiple regulators will beadjusted to fit proper provisions
  34. 34. Risk ManagementNew policies that are brought on by risk managementclauses develop assessments for risk, risk management,and liquidity of investments• Permanent and Segregated Risk Management Divisions• Risk Management Policies• Measuring and Management of Risk and Risk Limits– Setting Risk Limits and Managing Potential Risks• Liquidity• Examining and Reviewing the Risk Management Policy
  35. 35. Permanent and Segregated RiskManagement Divisions• Segregated risk management independent of theAIFM is now mandatory to reduce risk in AIFs• This is troublesome for the structure when riskmanagement was previously integrated withinvestment operations• Audits of the segregated risk management teamwill be performed annually by either a third partyor an inside source if there are no conflicts ofinterest
  36. 36. Permanent and Segregated RiskManagement Divisions• Employees on the segregated riskmanagement team will be compensated forgoals met for managing risk and notperformance of the fund
  37. 37. Risk Management Policies• The policies involved with risk management are criticalto the implementation of risk management in AIFMD• Crucial elements of the policies are:– Distribution of responsibilities in the AIF– Safeguards to segregate risk duties– Constructing a risk profile and monitoring potential risksWays in which to monitor risk and make checkpoints for itto clear– Set risk limits– Description of the kinds of reports– Frequency of reporting for AIFs and the AIFM
  38. 38. Risk Management Policies• More intricate AIFs may bring on Risk Officersto communicate with upper levelmanagement
  39. 39. Measuring and Management of Riskand Risk Limits• Scenario and stress tests may be performed tomonitor potential risks• When placing risk limits, issues to beconsidered include:– Market– Liquidity– Credit– Operational– Counterparty risks
  40. 40. Measuring and Management of Riskand Risk Limits• Risk management provisions may affect thestrategy of the fund and influence changes to– Market risk in volatility– Bilateral transactions that raise risks for thecounterparty– Operational risks influencing performance– Liquidity of investments– Credit investments
  41. 41. Measuring and Management of Riskand Risk Limits• Provisions in place require AIFs and AIFM to– Implement risk management and preventionmethods– Perform pre-tests to analyze accuracy of themeasures taking place– Perform scenario and stress tests frequently toadjust to fluctuations in the market– Design reliable measures for liquidation whenneeded
  42. 42. Measuring and Management of Riskand Risk Limits• Setting Risk Limits and Managing PotentialRisks– Risk limits should be checked on a day-to-daybasis by the independent risk management team– AIFMD does not restrict investing decisions, but itdoes have two steps to be taken beforehand:• Ensure the decisions made do not contradict with risklimits set• Construct a fail safe in case anything were to go terriblywrong so that it can be solved poste haste
  43. 43. Liquidity• AIFMs will need to link the liquidity profile andredemption policies to how they structure theirstrategy, once it has been chosen• If they plan on supplementing less liquid assetsinto their portfolios, they will need tocontemplate– Redemption restrictions– Pre-launch– And other characteristics involved
  44. 44. Liquidity• Special tools will be needed to control risk inliquidity• AIFMs be responsible for supervising– Liquidity profiles– Conflicts of interest that may arise with investors– Enlightening potential investors of the redemptionrestrictions that apply in great detail before theyinvest– Initiating stress tests to ensure the liquidity profile– Reporting liquidity policies along with fail safes thathave been set in place
  45. 45. Examining and Reviewing the RiskManagement Policy• AIFs must continually supervise its riskmanagement procedures and notify regulatorsif changes are made• AIFMs should assure that– Compliance is followed– Safeguards are currently inline with riskmanagement functions– Necessary actions are taken when theaccurateness of current policies have changed
  46. 46. Disclosures of Control over Non-listedCompanies• Funds must report in addition to changes inholdings of non-listed companies when theyhave voting rights that surpass or descendbelow 10%, 20%, 30%, 50%, or 75%• If an AIFM acquires a company, he has toinform investors of the purchase and properauthorities in the Member State
  47. 47. Disclosures of Control over Non-listedCompanies• AIFMs must– Inform employees of the acquisition immediately– Furthermore enlighten the board of directors andshareholders of changes to operations of thecompany and outcomes that would effectemployment– and update employees on conditional changes toemployment
  48. 48. Restrictions on Asset Stripping• AIFs managed in the EU by EU and non-EU AIFMsare prohibited from– Distributing– Reductions in assets– Allowing redemption of shares– And acquiring additional shares through one’sseparately managed AIFs during the first two years ofownership under the passport regime• This applies to public and private portfoliocompanies
  49. 49. Restrictions on Asset Stripping• Responsibilities fall on the AIFM and it isillegal for him to perform or instruct theseactions upon others, as he is liable forpreventing these actions from taking place tothe best of his abilities• Exceptions to these restrictions include:– Companies with net turnover of less than EUR 50million– Balance sheet totals under EUR 43 million
  50. 50. Restrictions on Asset Stripping• Exceptions to these restrictions include:– Special purpose real estate funds– SMEs that make portfolio companies with fewerthan 250 employees exempt– And portfolio companies whose registered officeis located outside of the EU• Dividend payments may be affected by this,but AIFMD did not discuss interest paymentson bonds
  51. 51. Tax Consequences• AIFMs may be confronted with doubletaxation that may come with the passportregime• AIFs will primarily be a tax resident of thelocation in which it is domiciled, but if AIFMsare managing from across borders, it canbecome complex and rely upon theauthorities in the jurisdictions that are beingdealt with
  52. 52. Tax Consequences• Investors of the AIF and delegates of the AIFMbring even more complexity when AIFs haveto monitor multiple jurisdiction tax guidelinesand/or maintain tax treaties• A recent change to the taxation of AIFs wasbrought on through the Value Added Tax (VAT)Directive
  53. 53. AIFMs have to adapt• AIFMs are required to attain an AIFMD licensewhen specific criteria is met• Managers are now accountable for– Directing of depository and risk managementrequirements– Accounting and compliance requirements– Compensation requirements– Prudential capital requirements
  54. 54. AIFMs have to adapt• . Managers are only allowed to delegate theirportfolio and risk management roles to theproper regulated entities defined by AIFMD• Depository and risk management will add asafety net in managing the portfolios, andaccounting and compliance regulations willassist with transparency and minimizedeceptive practices
  55. 55. AIFMs have to adapt• Compensation requirements will reduce theamount of risk a manager is willing to take• Prudential capital regulations set a minimumamount of capital that must be on hand at alltimes• Managers who fall under the AIFMD areconfronted with special marketing andpassport regulations
  56. 56. AIFMs have to adapt• Other guidelines include details about– Annual reports Tracking of assets undermanagement– Due diligence– Observing cash flow– Annual audits from disparate third parties Settinglimits on leverage
  57. 57. AIFMs have to adaptOverview• Impact on Hedge Funds– Risk Management and Compliance– Other Provisions• Impact on Private Equity Funds– Depositories– Risk Management
  58. 58. AIFMs have to adaptOverview• Impact on Private Equity Funds– Remuneration– Capital Requirements– Reporting, Control of Non-listed Companies,Delegating of Manager Functions, andTransparency– Anti-asset Stripping Regulations
  59. 59. AIFMs have to adaptOverview• Impact on Real Estate Funds– Depositories– Remuneration and Conflicts of Interest– Risk Management and Compliance• Marketing and Passports in the EU– EU Marketing Passports– Private Placement Regimes
  60. 60. Impact on Hedge Funds• Risk management and compliance– Numerous larger firms had already employedChief Risk Officers to their funds in the recentpast, and now mid to small size firms are followingthe trend– Potential investors who inspect AIFs beforeinvesting examines where risk level is on theoperational pyramid and how intimate the RiskOfficers are with the investment teams work
  61. 61. Impact on Hedge Funds• Risk management and compliance– Not all firms will require a compliance team but itis well advised to stay accountable– Third party compliance teams can be hiredfrequently to perform tasks of valuations thatwould be requisite under AIFMD
  62. 62. Impact on Hedge Funds• Other provisions– Depository and reporting requirements will reflectthe same standards upon hedge funds– Compensation received by the fund manager willbe reported with the annual report in compliancewith AIFMD, as a way of discouraging managersfrom taking excessive risks– Changes to leverage will be executed as well tolessen liabilities
  63. 63. Impact on Hedge Funds• Other provisions– Contracts will need to be adapted for the entitiesassociated with the operations of the AIF, and forthose contemplating co-domiciliation of an AIFwill require “mirror” entities in any dominionoutside of the EU
  64. 64. Impact on Private Equity Funds• Unless the fund is closed-ended and dissolvesbefore July 16, 2016, private equity funds areincluded as an AIF under AIFMD• All AIFs are only permitted a single AIFM whomanages the fund• Administration and marketing functions areavailable to AIFMs that are outside theboundaries of AIFMD
  65. 65. Impact on Private Equity Funds• AIFs that have multiple EU and non-EU domiciledmanagers, have the opportunity to select adesired manager and transport the AIF to themanagers domicile• Depositories– Because investments involved with private equity aremost often illiquid, managers see this as a hassle thatwastes time and money– Adjustments to the AIFMD may be changed in thefuture to adjust for different AIFs and their investmentpositions
  66. 66. Impact on Private Equity Funds• Risk Management– Risk management teams would be hired on toassist with monitoring potential risks involvedwith investments– The risk management section covered by AIFMD isfor the most part, already used by private equityfunds through the due diligence process invaluating prospective investments.
  67. 67. Impact on Private Equity Funds• Remuneration– Up to 40% of compensation must be received over aspread of 3 to 5 years• Compensation that is in holding for the time being could beplaced into the fund temporarily– Lead roles that would be associated with risk involvedin remuneration are– The investment manager– Fundraising managers– Investment management team and board members
  68. 68. Impact on Private Equity Funds• Capital Requirements– Capital requirements that are set requiremanagers to either hold their own assets aside, invery liquid investments or cash, or to possessadequate insurance
  69. 69. Impact on Private Equity Funds• Reporting, Control of Non-listed Companies,Delegating of Manager Functions, andTransparency– The only changes incorporated into reporting thatis not usually performed by private equity funds isthe separation of portfolio management,remuneration policy, and valuations– Outside valuators would use service providers asthird party contributors to access neededinformation from private equity funds
  70. 70. Impact on Private Equity Funds• Reporting, Control of Non-listed Companies,Delegating of Manager Functions, andTransparency– Issues at hand for operations would lean towardsasset stripping for future acquisitions,miscommunication regarding objectives forproduction of the company and the impact onemployment– The delegation of manager functions clause isprimarily not applicable to private equity funds sincethe bulk of the work performed is internal
  71. 71. Impact on Private Equity Funds• Reporting, Control of Non-listed Companies,Delegating of Manager Functions, andTransparency– Transparency is predominantly not an issue– Private equity funds have been known to keeptheir investors current with what holdings arewithin the fund, AIFMD only re-states what hasalready been done in the past– How the report is manifested is the onlysignificant area of improvement for transparency
  72. 72. Impact on Private Equity Funds• Anti-asset Stripping Regulations– Regulations on asset stripping will restrictactivities in structuring that was previouslyperformed in most private equity firms– If there were to be an economic crisis equivalentto 2008, the fund would be unable to implementexit strategies for assets enclosed by theregulation
  73. 73. Impact on Real Estate Funds• Even though real estate funds, also known asREITs, are a type of mutual funds, they are stillincorporated with AIFs after German regulatorspushed that they should be embraced underAIFMD• With investors more leery about REITs since thecrash in 2008, they have been less popular andthe regulations that have been implementedrecently do not contribute many positive aspectsto these vehicles
  74. 74. Impact on Real Estate Funds• Depositories– Depositories are a considerably pricy vehicle forREITs and require clear communication betweenthe two for confirmation of where investmentsare located and when– Custodians will have to face sizeable liability andmay have to regulate which investments are toorisky for it to accept
  75. 75. Impact on Real Estate Funds• Depositories– Performing annual valuations would beconvoluted due to the structuring of operationsthrough multiple entities– Many who are working on interpreting AIFMD arestill uncertain of how regulators propose toimplement depository, reporting, and numerousother requirements involved with REITs
  76. 76. Impact on Real Estate Funds• Remuneration and Conflicts of Interest– Disclosure of compensation in annual reports iscommon for REITs, but new provisions will needclarification before they can be initiated– Conflicts of interest have also been covered in thepast; some when involving investors and clientswith various investors under them consider theadditions that come with AIFMD inequitable
  77. 77. Impact on Real Estate Funds• Risk Management and Compliance– REITs have previously performed risk managementin the past without the sanctioned regulationsthat enforced teams to be implemented, but thiscan come across as challenging for some– Latest provisions of the compliance implicationsare considered very arduous compared to thecompliance platforms that had formerly been inplace
  78. 78. Marketing and Passports in the EU• Two exceptions marketing in the EU are thepursuit of retail investors, and investors whointroduce the AIF to others• Member states oversee marketing to retailinvestors, so AIFMs must check with theapplicable jurisdiction to see what restrictionsare in place
  79. 79. Marketing and Passports in the EU• EU Marketing Passports– Special marketing passports will be made accessible toAIFMs who qualify under specific criteria, and allowthem to market in the EU– Specific criteria must be met before an AIFM passportmay be obtained– Passports will be accessible to all EU AIFMs marketingAIFs domiciled within the EU by July 22 of 2013, non-EU AIFMs marketing EU AIFs or non-EU AIFs and EUAIFMs marketing non-EU AIFs July 22 of 2015
  80. 80. Marketing and Passports in the EU• EU Marketing Passports– Applications for AIFMs in Member states will beprocessed within 20 days of submitting andobtaining the application• Processing entities would then notify all EU domiciles inwhich the AIFM intends to market his AIF(s) after theAIFM has received notification of its acceptance
  81. 81. Marketing and Passports in the EU• Private Placement Regimes– EU AIFMs who market non-EU AIFs, and non-EUAIFMs who market EU and non-EU AIFs in the EUwould be allowed to proceed with operations ifcompliant with the national private placementregimes guidelines– AIFMs must conform to the standards of AIFMDthat are installed during 2013, with exceptions tothe depository clauses to be eligible
  82. 82. Marketing and Passports in the EU• Private Placement Regimes– Compliance and reporting for the transparency of thefund must be functioned through a third partyvaluator who is not the AIFM– Authorities, which require reporting, are the countriesin which the AIFM is marketing his or her AIF– Risk management of the AIF(s) will be co-monitoredbetween/ among the regulators of the domicileswithin the EU where they are marketed, theregulators of the non-EU AIFM’s country of residenceand/ or residence of the non-EU AIF
  83. 83. Marketing and Passports in the EU• Private Placement Regimes– Non-EU AIFMs and AIFs may not reside withindomiciles that are in violation of FAFT policies– This national private placement regime would beestablished in July of 2015 through July of 2018along with the passport regime, but may very wellbe removed after 2018 and substituted with thepassport regime altogether
  84. 84. Impact on Investment Strategies• AIFMD does not specifically outlaw certaininvestments strategies, the safeguards whichhave been set with risk management,depositories, disclosure requirements andeverything else will assist in AIFMs cherry-picking their investment choices• A due diligence process is also required ofcurrent and prospective ventures beforemanagers make investment decisions
  85. 85. Conclusion• There are many safeguards that have been setin place for this directive• Risk management, reporting, and depositoryrequirements presented will be inconvenientfor many managing AIFs• The benefits of implementing AIFMD can onlybe known once the time comes for it to betested

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