AIFM - the Alternative Investment Fund Managers Directive
AIFM - the Alternative
Swedish Presidency compromise proposal
of 25 November 2009
The European Commission proposed an initial draft of a new Directive
introducing a harmonized EU regulatory and supervisory framework for
Alternative Investment Fund Managers (AIFMs) in April 2009. In return for more
regulation, the proposed Directive provides for the introduction of passports
enabling AIFMs to offer their management services and market their Alternative
Investment Funds (AIFs) throughout the EU. Several of the provisions in the
Commission’s draft were highly controversial.
The Swedish Presidency of the Council of the European Union publicly issued a
compromise proposal on 12 November 2009, followed by a revised text on 25
November 2009. The latest compromise proposal addresses many of the areas
of concern for the industry but others still remain. The text will be influential
as a basis for discussion; it should be noted, however, that the text needs to
be agreed by the Council, before also reaching an agreement at European
Commission and European Parliament levels.
On 23 November 2009, the rapporteur of the European Parliament’s Committee
on Economic and Financial Affairs on the AIFM Directive, Jean-Paul Gauzès,
issued its draft report proposing amendments to the text proposed by the
Commission. The proposed amendments will be considered and revised by the
Committee on Economic and Financial Affairs.
The European Commission is the sole institution empowered to draft legislation,
and therefore may come forward with a new draft in the light of the Council’s
proposals, the amendments proposed by the European Parliament, and other
Given the political pressure for greater regulation over the alternative sector,
the Directive, albeit in an amended state, is likely to be approved. Member
States will be required to implement this Directive, which, as currently
drafted would cover non-UCITS funds and their managers. It will mean new
opportunities and challenges for the alternatives sectors.
The Council is more advanced than the European Parliament in its work on
the Directive. This publication provides our views of the Swedish Presidency’s
revised compromise proposal.
The Commission’s proposal followed consultations, studies and work led by the European
Commission on related topics and two resolutions adopted by the European Parliament.
In September 2008, the European Parliament adopted a resolution requesting the European
Commission to submit legislative proposals “on hedge funds and private equity”. The
resolution covered, inter alia, financial stability, capital and universal regulatory coverage,
transparency and conflicts of interest.
On the same day, a second resolution was also adopted “on transparency of institutional
investors” calling for the Commission to examine a number of issues with a view to proposing
appropriate legislative measures. The resolution covered, inter alia, disclosures and conditions
in contract terms, disclosures by shareholders holding more than a certain proportion of
holdings, transparency of voting policies of hedge funds and reinforcing long term investment
against short term excessive risk taking in corporate governance.
The AIFM Directive is designed to address a number of risks identified by the Commission
related to alternative investment funds (AIFs), including systemic risks. The Commission is of
the view that coordinated EU regulatory oversight is a better mechanism to deal the potential
danger of systemic risk that may arise from the activities of AIFs than current fragmented
The key objectives of the proposed AIFM Directive are to:
• Ensure that all AIFM are subject to appropriate authorization requirements
• 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 AIF holding controlling stakes in non-listed 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 systems
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, or
corporate control concerted action in “activist” strategies
Impact on companies • Potential for misalignment of incentives in management of
controlled by portfolio companies, in particular in relation to the use of debt
alternative investment financing
fund managers • Lack of transparency and public scrutiny of companies subject
An undertaking for collective investment in transferable securities, in accordance with the UCITS Directive 3
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
The Directive applies to all AIFM established in the EU which manage AIFs, irrespective of
whether the AIF are established inside or outside the EU and the type or legal structure of the
AIF, and that have more than either:
• €100 million of assets under management, including assets acquired through the use of
• €500 million of unleveraged assets under management with at least a five year lock-up period
for each AIF
Smaller AIFM may opt in – i.e., they are entitled to be treated as AIFM falling under the scope of
AIFM are legal persons which manage one or more AIF. This includes both external managers and
self-managed (internally managed) AIF. Managing AIF means providing investment management
services (portfolio management and risk management) to one or more AIF. AIFM may also
engage in the activities of administration and marketing as well as activities related to the
underlying assets of the AIF, such as performing services necessary to meet the fiduciary duties
of the AIFM, facilities management, real estate administration activity, corporate, financial and
investment strategy advice.
Externally appointed AIFM may also provide the additional service of management of portfolios
of investments with mandates given by investors on a discretionary, client-by-client basis,
including portfolios owned by pension funds and institutions for occupational retirement
provision, and other additional services including reception and transmission of orders in relation
to financial instruments, underwriting and/or placing of financial instruments on behalf of the AIF
it manages, investment advice, safekeeping and administration in relation to units of collective
investment undertakings and foreign exchange services where these are connected to the
provision of investment services. However, if also authorized as management companies under
the UCITS1 Directive, externally appointed AIFM are limited in the additional services permitted to
management of portfolios of investments, investment advice and safekeeping and administration
in relation to units of UCIs.
The following are excluded from the scope of the Directive:
• AIFM which manage AIF exclusively for group entities (their parents, subsidiaries and other
subsidiaries which are not themselves AIF)
• Pension funds (institutions for occupational retirement provision), and their managers which
do not manage AIF established in the EU
• Bodies or institutions which manage funds supporting social security and pension systems
• Employee participation schemes
• Certain supranational, international and national organizations, institutions and bodies
• Securitization special purpose entities
Authorized AIFM may only manage AIF established in third countries if the legislation of the
third country is in line with international standards (such as the IOSCO principles on hedge
fund oversight) and if the competent authorities of the home Member State of the AIFM and
the supervisory authorities of the third country where the AIF is established have appropriate
An AIF is any collective investment undertaking “which raises capital from a number of investors
with a view to investing it in accordance with a defined investment policy for the benefit of
those investors”, other than a UCITS. Thus, the Directive will have a very broad scope, covering,
for example, hedge funds, real estate funds, private equity vehicles, real estate investment
trusts (REITS), exchange traded funds (ETFs) and listed funds; it is noted, however, that holding
companies are excluded in so far as they hold shares in subsidiaries and aim to carry out a
business strategy through the subsidiaries.
The Directive will also impose requirements on service providers to AIFs, as outlined in the
An undertaking for collective investment in transferable securities, in accordance with the UCITS Directive
AIFM marketing passport
EU AIFM may market shares or units of the AIFs which they manage and which are established
in the EU to professional investors in their home Member State and in other EU Member
In both cases, a notification procedure must be followed. The AIFM communicates required
information to its home Member State authority. In the case of:
• Marketing in AIFM’s home Member State: The AIFM’s home Member State competent
authorities have up to ten working days after receipt of the complete notification to inform the
AIFM that it may begin marketing the AIF
• Marketing in another Member State: The AIFM’s home Member State authorities transmit this
information, together with an attestation that the AIFM concerned is authorized to manage
AIF with that particular investment strategy, to the other Member State authority within ten
working days after receipt of the complete notification. The AIFM receives a notification of
transmission from its home Member State authority permitting it to start the marketing of AIF
in the host Member State.
Marketing refers to the direct or indirect offering or placement, at the initiative of the AIFM, of
shares or units in an AIF to or with investors domiciled in the EU; this includes all unsolicited
communication presenting information on the AIF. Therefore, marketing covers active
marketing under current private placement regimes.
The definition of “professional investor” is an investor which is considered to be a professional
client, or may be treated as such on request, within the meaning of MiFID2.
Member States may continue to allow AIFM to market AIF established in third countries to
professional investors on their territory subject to national law.
A feeder AIF3 can only invest in a master AIF which is established in a Member State and
managed by an authorized AIFM; however, Member States may permit the marketing of the
non-compliant feeder funds to professional investors on their territory.
Member States may also permit the marketing of all or certain types of AIF managed by
AIFM to retail investors on their territory; they would be expected to make a case-by-case
assessment of each specific AIF beforehand.
AIFM management passport
AIFM domiciled in one Member State may manage AIF domiciled in other Member States,
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.
The Markets in Financial Instruments Directive, Directive 2004/39/EC.
An AIF which invests at least 85% of its assets in the shares or units of another AIF.
Any EU AIFM falling within the scope of the Directive or opting in will be required to obtain
authorization and, inter alia, to:
• Comply with capital requirements of:
• AIFM which are appointed as external managers of one or more AIF:
- €125,000 plus an additional amount of 0.02% of assets under management
exceeding €250 million (excluding AIF portfolios that the AIFM is managing under
delegation) up to a maximum of €10 million. This additional amount of capital
may be reduced by up to 50% by guarantees from credit institutions or insurance
undertakings in the EU or subject to equivalent supervision.
- 25% of annual expenditure (if greater than the capital required under the previous
• AIFM which are internally managed AIF: an initial capital of €300,000
Lower requirements apply to AIFM managing non-leveraged AIF, with less than €500
million in assets under management, no redemption rights exercisable with five years of
constitution and which make divestments on a non-frequent basis.
• Have at least two conducting persons of sufficiently good repute and experience in relation
to the investment strategies of the AIF to be managed
• Have suitable shareholders: those shareholders or members of the AIFM with qualifying
holdings should be suitable to ensure sound and prudent management
• Have the head office and registered office in the same Member State
• Comply with conduct of business requirements, including acting in the best interests of the
AIF or the investors of the AIF it manages, and the integrity of the market
• Have remuneration policies and practices which are consistent with sound and effective risk
management and include information in the annual report of the AIF on:
• The total amount of remuneration, split into fixed and variable remuneration, paid by the
AIFM, and number of beneficiaries, and, where relevant, carried interest paid by the AIF
• Aggregate amount of remuneration broken down by senior management and members
of staff whose actions have a material impact on the risk profile of the AIF
• Take reasonable steps to identify conflicts of interest between the AIFM and the AIF
it manages or the investors in the AIF, between one AIF and another and between the
AIF or the investors of the AIF and other clients of the AIFM. Where the organizational
arrangements are not sufficient to ensure that investors’ interest will not be damaged, the
AIFM shall clearly disclose the nature or sources of conflicts of interest.
• Implement separate portfolio management and risk management functions in so far as
this is appropriate in view of the nature, scale and complexity of the AIFM and the AIF it
• Implement adequate risk management systems in order to measure and monitor
appropriately all risks associated with the AIF investment strategy and to which it
is exposed, or can be exposed. Risk management should include an appropriate,
documented and regularly updated due diligence process when investing on behalf of an
AIF. Appropriate stress testing should be applied to ensure that the risks associated with
each investment position and its effect on the AIF’s portfolio is identified, measures and
monitored on an ongoing basis. The AIFM is required to review the risk management system
no less than once a year.
• Implement appropriate liquidity risk management systems and procedures, including
regularly conducting stress tests under normal and exceptional conditions (except for
closed ended, unleveraged AIFs)
• Have adequate human and technical resources
• Establish appropriate and consistent procedures for the proper valuation of the assets of
the AIF, and the calculation of the value of shares or units. The AIFM’s valuation function
must be independent from the portfolio management, where appropriate in view of the
nature, scale and complexity of each AIF it manages. The assets, shares or units must be
valued at least once a year. For open-ended AIFs, the valuation shall be carried out at an
appropriate frequency in view of the underlying assets of the fund and its issuance and
redemption policy. Member States may require valuation to be subject to oversight by a
depositary. The valuer may be external, but this is not required. The AIFM must be in a
position to monitor effectively the activity of an external valuer. Where an external valuer
is not used, the competent authorities of the home Member State may require the AIFM to
have its valuation procedures and/or valuations verified by an external valuer or auditor.
• Ensure that a depositary is appointed for each AIF it manages (see p.8 )
• Provide disclosures to investors when they invest (and inform them of any subsequent
changes) including, inter alia:
• 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
• A description of the main legal implications of the contractual relationship entered into
• The identity of the AIFM and the AIF’s service providers, a description of their duties and
investors’ rights, as well as a description of any delegated management or depositary
functions and any conflicts of interest which may arise from such delegations
• The fund’s valuation procedures, where applicable, and pricing methodology for valuing
• 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
• Description of fund fees, charges and expenses
• A description of any preferential treatment which an investor obtains or has the right to
• Latest financial reports
• 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
• Where the AIFM manages AIF employing leverage on a systematic basis, periodically
disclose to investors the total amount of leverage employed by the AIF, and the maximum
level of leverage and any right to reuse collateral or any guarantee, where relevant
• Report to regulators:
• Regular aggregated information on the main instruments traded, markets of which
it is a member or where it actively trades, principal exposures and most important
concentrations for each AIF it manages
• On request, inter alia, on:
- Risk profile, results of required stress tests, and risk management tools
- The percentage of the AIF’s assets that are subject to special arrangements arising
from their illiquid nature
- Any new liquidity risk management arrangements
- The use of short selling
• The overall level of leverage employed by each AIF employing leverage on a systematic
basis, and a breakdown between leverage arising from cash and securities and from
embedded financial derivatives, and the extent to which the assets have been reused under
• Notify non-listed companies and their shareholders within ten working days of acquiring
control (more than 50% of the voting rights) in the company. It must provide disclosures to
the company, its shareholders and representatives of employees on the identity of the AIFM
which have reached control and the policy for preventing and managing conflicts of interest
in particular between the AIFM and the non-listed company; this also applies where the
AIFM has acquired a control in agreement with other AIFM. Disclosure in the AIFM’s annual
report is required on the operational and financial developments of the non-listed company,
the number of employees, and significant divestments. The AIFM is also required to provide
the competent authorities and investors of the AIF concerned with information on the debt
supported by the non-listed company, directly before and immediately after the AIFM has
reached control, and 6 and 12 months thereafter. Small and medium-sized companies are
not covered by this requirement.
When delegating functions to a third party, AIFM must provide prior notification to the
competent authorities of their home Member State. The AIFM must select the third party
entity with due care, be able to demonstrate that the third party is qualified and capable of
undertaking the functions in question, and monitor the delegated activity. The persons who
represent the third party must be of sufficiently good repute and experience. Delegation
must not prevent the AIFM from acting, or the AIF being managed, in the best interests of
the investors of the AIF. Third parties may sub-delegate functions. The AIFM’s liability is not
affected by its delegation of functions to third parties. The AIFM cannot delegate its functions
to the extent that it becomes a letter-box entity.
Portfolio management and risk management functions may only be delegated to entities
which are authorized to perform asset management and subject to supervision (or to
other entities following prior authorization of the AIFM’s home Member State competent
authorities); in the case of delegation to a third country entity, cooperation between the
entity’s supervisory authority and the AIFM’s home Member State competent authorities is
The depositary must be either a credit institution having its registered office in the EU or
an investment firm authorized to provide ancillary services under the MiFID Directive, or
a legal person subject to prudential regulation and ongoing supervision which can furnish
sufficient financial and professional guarantees to be able to perform its functions and meet
the corresponding commitments. Where the AIF has no financial instruments which both can
be kept and are subject to trading on an EU or third country regulated market or multilateral
trading facility, the depositary may be a legal person which carries out depositary functions as
part of its professional or business activities, in respect of which it is subject to professional
registration and to provisions or rules of professional conduct, and which can furnish
sufficient financial and professional guarantees to be able to perform its functions and meet
the corresponding commitments. The AIFM cannot itself act as a depositary.
For AIF established in the EU, the depositary must be established in the AIF’s home Member
State. The appointment of the depositary is subject to approval by the home Member State
of the AIF, or, where the AIF is not regulated, the competent authorities of the home Member
State of the AIFM. The roles of the depositary are set out in the following table:
Depositary functions Delegation possible Sub-delegation
Ensuring that subscription and redemption payments No -
are booked correctly on behalf of the AIF in segregated
Safekeeping financial instruments of the AIF:
• Holding in custody all financial instruments which Yes, but must exercise due Yes
can be kept and are subject to trading on an EU skill, care and diligence
or third country regulated market or multilateral in selection, appointment
trading facility, and ensuring that they are registered and periodic review of third
in segregated accounts in the name of the AIF(s). party, and subject to specific
The depositary must furthermore ensure that these conditions
financial instruments cannot be reused without the
prior consent of the AIFM.
• Maintaining records to verify the ownership of financial Yes, but must exercise due Yes
instruments that cannot be kept in custody and are skill, care and diligence
subject to trading on an EU or third country regulated in selection, appointment
market or multilateral trading facility and periodic review of third
Verifying whether the AIF or the AIFM on behalf of the Yes, but must exercise due Yes
AIF has obtained ownership interest in all other assets the skill, care and diligence
AIF invests in, based on internal and external evidence of in selection, appointment
ownership and periodic review of third
The depositary is required, where relevant, to ensure that:
Depositary functions Delegation possible Sub-delegation
The transactions on the shares or units of the AIF are No -
carried out in accordance with the applicable law and the
AIF instruments of incorporation or fund rules
The value of the shares or units is calculated in No -
accordance with the law and the AIF instruments of
incorporation or fund rules
Any consideration involving the AIF’s assets is remitted No -
within the usual time limits
No instruction from the AIFM which conflicts with the No -
law or AIF instruments of incorporation or fund rules is
The AIF’s income is applied in accordance with the No -
applicable national law and the AIF instruments of
incorporation or fund rules
The depositary is liable for any losses as a result of its failure to perform its obligations. In
the case of loss of financial instruments which can be kept and are subject to trading on an
EU or third country regulated market or multilateral trading facility, it must return financial
instruments of the same type or the corresponding amount without undue delay; in the case
of loss of financial instruments held by a sub-custodian, the depositary may discharge itself
of its liability on a contractual basis, if it can prove it fulfilled its obligations. These liability
provisions do not apply in the case of abnormal or unforeseeable circumstances beyond the
control of the depositary or sub-depositary the consequences of which would have been
unavoidable despite all efforts to the contrary or where the depositary is bound by other legal
The depositary provisions are not applicable in the case of AIF not established in the EU,
marketed in the EU or outside the EU, and managed by an EU AIFM.
Timeline for implementation
The AIFM Directive will set out a general framework. Given the ongoing debate on the
Directive, it now seems unlikely that it will be adopted before mid-2010; it should be
transposed within 24 months of its entry into force, which is shortly after publication.
A number of specific 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
Directive to be established by the European Commission.
The following is a possible timeline for the adoption and implementation the AIFM Directive;
we consider it, however, as optimistic:
April 2009 - AIFM with Council,
draft Directive European
published by Parliament and
of the application and
2012 - Directive scope of the Directive?
2 years 1 year
2009 2010 2011 2012 2013 2014
November AIFM Directive AIFM existing before
2009 - New approval by transposition
draft from European Publication of must apply for
Council Parliament and implementing authorization?
Several provisions of the proposed Directive on AIFM are a formalization of current industry
The Presidency’s revised compromise proposal addresses many of the issues of concern in the
Commission’s initial draft. A number of outstanding issues of concern remain, however, and
these tend to be in areas where the proposal goes beyond current industry good practice.
Issues of concern which have been addressed in the Presidency’s draft
• The definition of alternative investment fund: The scope of the Directive is broad; this
avoids discrimination between alternative funds and other vehicles.
• The scope of the alternative investment fund managers covered has been clarified.
The Directive focuses on alternative investment fund managers with collective portfolio
management and risk management functions, and which may also have administration and
marketing functions, and not on activities relating to the underlying assets of the AIF. Self-
managed AIF are, themselves, AIFM. Externally appointed AIFM may also be authorized to
perform other functions such as management of portfolios of investments.
• Investors: Extending the scope from professional client as defined under MiFID to include
those which may be treated as such on request enables high net worth individuals
(HNWIs) to access AIFs. This enables HNWIs access to diversified portfolios of investments,
benefiting from professional management of the portfolio and spreading costs with a view
to benefiting from potential yields or capital gains.
• Capital requirements: These are now envisaged to ensure the continuity and the regularity
of the management; they were previously set higher than UCITS management company
requirements, and have now been aligned with them. Furthermore, guarantees and
insurance can be used to cover up to 50% of the additional own capital requirement.
However, it is unclear why the initial capital requirement for internally managed AIF is
• Independent valuation: Independent valuation is no longer required; proportionality is
applied to the independent valuation function requirement; external valuers may also be
used. On the other hand, the opportunity has been missed to clearly refer to international
valuation standards, such as the International Private Equity and Venture Capital Valuation
(IPEVC) guidelines for private equity.
• NAV calculation is not necessarily required at each subscription and redemption.
• The depositary is no longer required to book subscription and redemption payments from
investors itself, but rather to oversee this process.
• Separate portfolio management and risk management functions are only required when
this separation is appropriate in view of the nature, scale and complexity of the AIFM and
the AIF it manages. This may permit niche players and private equity players in particular
to continue with their current business models.
• Side letters: A description of any preferential treatment which an investor obtains, or
has the right to obtain, should be disclosed to investors, but disclosure of the identity of
investors receiving the preferential treatment is no longer required. It remains to be seen
whether the “description” of the preferential treatment will mean details of the content, or
rather a general statement on the existence, framework and limits.
• Control of non-listed companies: The concept of control replaces that of controlling
influence and the threshold is raised from 30% to 50% of the voting rights. Requirements
for disclosure to the non-listed company, its shareholders and employees on acquisition
of control are less onerous. In particular, disclosure of sensitive information on the AIFM’s
strategy with regard to the non-listed company is not required. The information which
has to be disclosed in the AIFM’s annual report is more focused on the long-term and less
• Continuity with currently existing regimes appears to be ensured:
• Member States may allow or continue to allow AIFM to market AIF established in third
countries to professional investors on their territory subject to national law. However,
given the importance of non-EU AIF to EU investors, it would nevertheless seem
appropriate to clarify that this also refers to funds managed by non-EU managers.
• Member States may allow the marketing of all or certain types of AIF managed by AIFM
to retail investors on their territory.
Issues of concern which still need to be addressed
• Cumulative authorization: AIFM are required to obtain authorization in accordance with
the AIFM Directive, even if they are already authorized to manage UCITS. MiFID authorized
investment firms and credit institutions are not required to obtain an authorization as AIFM
in order to provide investment services in respect of AIF.
• Remuneration: While requiring a remuneration policy which does not favor undue risk
taking can only be supported, the disclosure of AIFM management and staff remuneration
breakdowns in the AIFM’s annual report is not relevant in terms of risk management, where
the incentives structure already achieves alignment of interests.
• Conflicts of interest: The requirement to identify conflicts of interest that arise in the
course of managing one or more AIF between one AIF or investor of the AIF and another
client of the AIFM need to be clarified. It is unreasonable to require AIFM to be in a position
to identify conflicts of interest between AIF investors and other clients, especially those
with numerous investors.
• The custodian remains liable, in general, to the AIFM, the AIF and investors for any
losses suffered by them as a result of its failure to perform its obligations, except in
circumstances beyond its control with unavoidable consequences. This imposes a heavy
burden for custodians, which may, as a consequence, raise costs and even exit more
risky, less developed financial markets. It may also entail consolidation in the custodian
space, which may not be to the advantage of the asset management industry, with
reduced choice and increased potential counterparty risk. However, the modification of
the burden of proof requirements for custodians is welcome.
• The duties of the depositary with respect to the application of the AIF’s income need
to be clarified; should this relate to performance fees and carried interest, it would be
inappropriate for AIF.
• Leverage: Leverage is integral part of many alternative investment fund business models.
The main questions relate to the definition of leverage, how the leverage will be calculated
in practice, and the potential restrictions on leverage imposed, rather than on the
disclosure requirements themselves:
• Defining and calculating leverage: Leverage is defined in the Directive as any method by
which the AIFM increases the exposure of the AIF it manages, as part of its investment
strategy, whether through borrowing of cash or securities, or leverage embedded in
derivative positions or by any other means, considered on a netted basis. Different
business models need to be taken into account: while real estate funds will typically
prepare consolidated accounts, and are therefore in a position to calculate leverage
at a consolidated level, private equity funds do not generally consolidate their results,
meaning that potentially most of the leverage remains off-balance sheet.
Fair and consistent rules should be applied across all types of funds, based on existing
standards. The European Commission is required to adopt implementing measures
clarifying the methods of leverage, in which circumstances it will be considered a part
of the investment strategy, how leverage will be calculated, as well as when leverage is
considered to be employed on a systematic basis for reporting purposes. We cautiously
welcome this development if the industry is to be given the opportunity to express its
• Potential restrictions: When deemed necessary to ensure the stability and integrity of
the financial system, Member State competent authorities may impose restrictions on
the level of leverage that an AIFM may employ or other restrictions. They are required
to inform the competent authorities of the home Member State of the AIF and CESR of
actions taken in this respect. Current national regulation in a number of Member States
requires regulatory approval of the proposed level of leverage or limits leverage, mainly
for the purposes of investor protection. For regulated funds, it would appear that there
would be no additional requirements in this sense, assuming that levels of leverage are
set below the current levels. For currently unregulated or lightly regulated funds, this is
a new concept.
• Non-EU AIFM: Assuming that non-EU alternative investment fund managers may be
permitted to continue to sell their products to EU investors under national regimes:
• It nevertheless remains to be seen how long EU Member States will continue to permit
this, following the implementation of an EU passport for marketing AIF.
• Furthermore, adequately regulated non-EU managers will not benefit from a passport
for their funds (at least unless and until the Commission examines this issue in the
framework of its review of the application and scope of the Directive - a review which
is to take account of developments at international level and discussions with third
countries and international organizations), and therefore cannot raise capital across the
EU. Nor will they benefit from a passport for their management services.
• On the other hand, non-EU AIFM are not required to comply with standards equivalent to
those of the Directive to access EU investors via national private placement regimes.
• Non-EU AIF managed by EU AIFM: as the depositary provisions are not applicable in the
case of non-AIF marketed in the EU, and managed by an EU AIFM, this creates an unlevel
playing field for these funds.
• International guidelines: the opportunity has been missed to refer to international
guidelines for alternative investment funds, such as those of the Hedge Fund Standards
Board, the Alternative Investment Management Association (AIMA), the European Private
Equity and Venture Capital Association (EVCA) and the European Association for Investors
in Non-listed Real Estate Vehicles (INREV).
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. The AIFM Directive may thus lead to concentration of AIFM and AIF
in the most attractive domiciles.
Many non-EU AIFM may have incentives to establish themselves in the EU to be able to
passport their products to investors in other EU Member States. The Directive may also drive a
significant migration of funds to onshore domiciles.
Their choice of domicile for AIFM and AIF will depend on factors such as:
• Flexibility of the regulatory environment
• Fiscal environment for investors and fund managers
• Reputation of the financial center
• Accessibility of the authorities
• Expertise and cost competitiveness of locally based service providers
• Ability to outsource both within the domicile and cross-border
• Qualifications and knowledge of workforce (including languages)
These are all areas where Luxembourg scores highly, as demonstrated by the growth in the
alternative sector in Luxembourg in the last five years, which outpaced all other European
countries. Luxembourg is already the world’s leading domicile of traditional funds distributed
We therefore believe that Luxembourg will prove to be an attractive domicile for AIFM, and
well placed to become a leading domicile of EU AIF as well.