AIFMD White Paper(1)

AIFMD AIF WHITE PAPER A collection of sources outlining the AIFMD - includes a chapter from the Private Equity CFO and COO Digest 2013 and articles from Private Equity Manager

Complimentary white paper brought to you by The Private Fund Compliance Forum 2014 www.privateequityinternational.com/pfc14

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The Alternative Investment Fund Managers Directive: Main provisions and implications for private funds By Simon Witney, King & Wood Mallesons SJ Berwin

After several years of debate and discussion, the Alternative Investment Fund Managers Directive1 (AIFMD or ‘the Directive’) became law in July 2011, with a deadline for national transposition of July 22, 2013. The AIFMD is the first pan-European regulation of alternative investment fund managers (AIFM) and in many countries the first time such managers have been regulated at all. The regulation is far reaching and its impact will be huge; many AIFM will have significantly increased capital requirements, will need to employ the services of a depositary, will have more extensive reporting and disclosure requirements, may have to amend their remuneration practices and will have to draw up extensive internal operating procedures. Some managers will have to change their internal organisational structure and others will need to change their legal structures to accommodate the new rules. The changes do not just affect AIFM based in Europe, but will also have an impact on any AIFM which markets its funds to investors in the EU. All in all, the AIFMD amounts to a significant change for the industry and, because the rules are being published and clarified by European and national regulators right up to the implementation date, there is relatively little time to adjust. This chapter summarises the main changes as they will affect venture capital and private equity fund managers. It is not comprehensive and a number of the matters covered are themselves still to be confirmed or clarified by the regulators.

Timetable for implementation and authorisation

The AIFMD itself does not have direct effect in EU member states and therefore needs to be transposed into national law by July 22, 2013 (see Figure 9.1) for a more detailed timetable for implementation and authorisation). The European Commission’s implementing rules,2 which are an important part of the body of law introduced by the Directive, have been made as a Regulation and are therefore directly effective requiring no further national legislation. Relevant national regulators 3 will also need to update their rulebooks and set out procedures for national authorisation and ongoing supervision. The AIFMD includes a one-year transitional period and the effect of this is expected to be, at least in most member states, that authorisation under the Directive (or compliance 1. Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers. 2. Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU. 3. In the UK, the “competent authority” is the Financial Conduct Authority (FCA), one of the successors to the Financial Services Authority.

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The Private Equity CFO & COO Digest 2013

with its provisions) will not be required until July 22, 2014. 4 However, the benefit of the Directive is that it offers a pan-EU marketing passport for authorised AIFMs (see also sections ‘Onshore and offshore structures’ and ‘Marketing’ below) and this passport will not be available to AIFM until they are authorised under the Directive. In addition, in some member states, it may be hard to market a fund at all without an AIFMD passport and therefore there may be an advantage to getting authorised before July 2014 if an AIFM wishes to market a fund during that year to professional investors in the EU. 5

Figure 9.1 AIFMD timeline AIFM Directive passed

Delegated regulation published

July 2011

December 2012

AIFM Directive Deadline for becomes existing EU effective AIFM to submit authorisation applications

July 2013

July 2014

} Transitional period

Source: EVCA and King & Wood Mallesons SJ Berwin

Onshore and offshore structures

Deadline for Authorisation Deadline for National private ESMA opinion and passport Commission to placement on application for non-EU AIF/ start review of regimes may of passport to AIFM may be AIFMD be terminated non-EU AIFs/ permitted AIFMs

July 2015

Q3/Q4 2015

July 2017

3 years from non-EU passport being available Deadline for ESMA opinion on termination of national private placement regimes

The AIFMD applies to AIFM that manage alternative investment funds (AIF) as defined in the Directive. Different rules apply depending on whether the AIFM has its registered office in the EU, and whether the AIF is an EU AIF. For fully EU structures (where both the AIFM and the AIF are in the EU), the full provisions of the AIFMD apply and AIFM that are within scope will need to be fully authorised under the Directive (and those out of scope will have to register). Where the AIFM is within the EU, but the AIF is outside the EU, slightly different rules apply, but the AIFM (if within scope) will nevertheless have to be authorised and comply with almost all of the rules, even though the marketing passport will not be available immediately for the non-EU fund. However, where the AIFM and the AIF are both outside of the EU, the AIFMD does not apply at all, unless the AIF has been marketed to EU investors after July 22, 2013. Such marketing will still be possible after July 2013 if permitted by individual member states and subject to the rules in those member states. Where the funds are marketed in that way, certain limited aspects of the AIFMD will apply, including the reporting and private equity provisions described below but, at least until 2018, most of the provisions of the AIFMD will not apply to the AIFM.

4. It is not yet clear how this will operate in all EU member states. In the UK, rms which are able to take advantage of the transitional provisions are likely to have to apply for authorisation by July 22, 2014, and will also need to be compliant with the AIFMD requirements by that date at the latest, although they may not actually be authorised until after July 22, 20 14. 5. The Directive applies across the European Economic Area, which includes the member states of the EU together with Norway, Liechtenstein and Iceland. References to the EU in this chapter should be taken as references to the EEA.

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The Alternative Investment Fund Managers Directive: Main provisions and implications for private funds

The Directive envisages that, from 2015, non-EU AIFM (called ‘third-country’ AIFM in the Directive), will be able to access the marketing passport by complying with the AIFMD in full or they will be able to continue to market their funds in individual member states subject to the rules applied by that member state. Some jurisdictions (such as the Channel Islands) are expected to have AIFMD-compliant regimes in place to enable AIFM to take advantage of the passport. After 2018, the Directive envisages that the opportunity to market AIFs to investors in the EU will be restricted to AIFs managed by AIFM that are able to access the passport and member states will no longer be permitted to allow third-country AIFM to market AIFs unless they are AIFMD compliant. However, it is not certain that these provisions will become effective because they are subject to review and implementation would require further EU legislation. In the meantime, there may be some advantages to AIFM being outside of the EU, particularly if they do not wish to market their funds widely to EU investors or if they only intend to market them in countries which will permit the fund to be marketed without undue restrictions. Those fund managers will not be subject to the full rigours of the AIFMD.

Scope and grandfathering provisions

The AIFMD principally regulates AIFM, even though to some extent it also regulates the AIF which those regulated AIFM are managing. The starting point for any analysis is, therefore, whether a particular vehicle is an AIF for Directive purposes and, if so, which entity is its AIFM. AIFs are defined by the Directive6 and there are some exclusions; for example, employee savings schemes, holding companies and joint ventures may not be AIFs which are covered by the AIFMD. The Directive requires that every AIF should have one AIFM (although AIFs can be self-managed, in which case the AIF and the AIFM will be the same person). In order to exclude smaller AIFM from the Directive’s provisions, there are two thresholds based on assets under management (AUM) to determine whether an AIFM needs to be authorised under the Directive. The basic threshold provides that a manager which has AUM in excess of €100 million must apply for authorisation. However, if the manager only manages funds which are not leveraged (as defined in the Directive) and which do not offer redemption rights to investors for at least five years, the threshold increases to €500 million. It is expected that most private equity and venture capital fund managers will benefit from this higher threshold, although they will need to determine whether they manage any AIFs which are ‘leveraged’ in Directive terms. AUM are calculated as the value of the assets held by AIFs managed by an AIFM “including all assets acquired through the use of leverage”, converting derivatives into their equivalent position in the underlying assets. There may be a requirement to aggregate AUM across groups. Undrawn commitments are not counted in the AUM. That means that when it is first closed a fund may have no assets under management for these purposes. However, AUM have to be monitored on an ongoing basis, so authorisation may be required once the relevant threshold is reached. 6. Article 4.1(a): ‘AIFs’ means collective investment undertakings, including investment compartments thereof, which: (i) raise capital from a number of investors, with a view to i nvesting it in accordance with a dened investment policy for the benet of those investors; and (ii) do not require authorisation pursuant to Article 5 of Directive 2009/65/EC [the UCITS Directive]. This denition will be supplemented by Guidelines from ESMA, which have not been nalised at the time of writing, and national regulators.

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There are some grandfathering provisions which allow certain AIFs to be excluded from the calculation of an AIFM’s AUM and also, it is expected, from the requirements of the Directive even if the AIFM of those grandfathered AIFs has to become authorised. These are: z

If an AIF is closed ended and makes no additional investments after July 22, 2013, then it will be wholly outside the scope of the AIFMD. However, AIFMs of AIFs whose investment period has terminated but which can make follow-on investments will need to think carefully about whether this provision applies to them.

z

If a closed-end AIF had its final closing by July 21, 2011 and will terminate in accordance with its constitution by July 22, 2016, it will be outside the scope of most of the provisions, although the reporting and private equity provisions will still apply to its AI FM.

AIFMs that are outside the scope of the AIFMD may nevertheless choose to opt into the Directive and comply fully with its provisions. Funds which want the marketing passport may do that. In any event, there may be national rules for sub-threshold managers to comply with and in some member states these may be similar to the rules that apply to firms that are within scope.

Leverage

Given the reference to leverage in the thresholds referred to above, it will be critical for many firms to identify whether they are in fact ‘unleveraged’ as defined by the Directive. Here the wording of the Directive itself and the delegated regulation creates some uncertainty. The leverage of an AIF is expressed as the ratio between its ‘exposure’ (which is the absolute value of all positions held by the AIF, including the value of any derivative positions) and its net asset value (NAV). It is clear from the delegated regulation that leverage which is embedded in an underlying company owned by the AIF is not fund level leverage for this purpose, so long as neither the AIF nor its AIFM has to bear losses beyond the amount of its investment. However, the operation of the rules so far as other types of fund borrowings are concerned are less clear and funds will need to work through their own arrangements to identify whether they are leveraged in Directive terms.

Capital requirements

For most (but not all) affected private equity fund managers across Europe, the Directive will mean increased capital requirements. The capital requirement applies at the level of the AIFM. External fund managers are required to maintain minimum capital of the greater of €125,000 plus liquid assets equal to 0.02 percent of the amount by which the value of the portfolio exceeds €250 million (subject to a cap of €10 million), or a quarter of annual fixed expenditure. In addition, managers must hold either additional capital of 0.01 percent of asse ts under management (also to be held as liquid assets) or appropriate professional indemnity insurance provided by an 78


appropriately authorised insurance provider in order to cover professional indemnity liability (together with some capital to cov er the excess). There are slightly different requirements for internally managed funds.

Remuneration rules

The AIFMD regulates remuneration practices for authorised AIFM. The Directive itself, as supplemented by guidelines published by the European Securities and Markets Authority (ESMA), 7 makes it clear that an AIFM must have a detailed policy to ensure that its remuneration practices encourage “the alignment of t he risks taken by its staff with those of the AI Fs it manages, the investors of suc h AIFs and the AIFM itself; in particular, the remuneration policy should duly take into consideration the need to align risks in terms of risk management and exposure to risk”. This policy must be determined by the governing body, possibly with the involvement of a remuneration committee and non-executive supervision, and must be reviewed annually. In addition, there are specific rules which have to be applied to the remuneration of ‘identified staff’, which broadly means the governing body, compliance, risk and HR staff, risk takers and others in a similar bracket, and certain delegates. Among other requirements, these state that at least 50 percent of any variable remuneration has to be paid in units of the fund or equivalent, and at least 40 percent (and in some cases 60 percent) of variable remuneration must be deferred for a period which is appropriate to the lifecycle of the fund and must vest no faster than on a pro-rated basis over three to five years. There are a number of other detailed requirements for these identified staff, although the ESMA guidelines do expressly state that some of them (including the two mentioned above) are capable of being disapplied by some AIFMs on the basis that their application would not be proportionate. The Directive and ESMA guidelines make it clear that carried interest constitutes variable remuneration for the purposes of the D irective (although not co-investment). For many firms these remuneration rules are hard to apply to their remuneration structures and practices. Many are owner-managed businesses with no outside shareholders and deferral of remuneration does not sit well with these business models. It will often be hard, or even impossible, to pay remuneration in ‘units of the fund’, especially after the fund has closed to inves tors, and carried interest – which is already a risk-aligned, realisation-based incentive mechanism – is hard to fit into the detailed rules, particularly those related to deferral. ESMA’s guidelines do recognise this difficulty and offer some assistance, principally by recognising that some carried interests can be deemed to satisfy the detailed requirements and by allowing firms to apply the proportionality principle to disapply some of the detailed requirements. Nevertheless, each firm will have to examine its ow n compensation practices carefully in light of these new rules (and the proportionality principles) and must be able to justify its practices to its reg ulator and explain why they are consistent with the rules.

7. ESMA Guidelines on sound remuneration policies under the AIFMD, 11 February 2013, ESMA/2013/201

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Depositaries

One of the biggest changes for many AIFM will be the requirement to employ the services of a depositary for AIFs which they manage (probably excluding funds which are grandfathered – see page 77). Although many firms will be able to use the services of a new class of depositary – a ‘private equity depositary’, specifically provided for by the Directive – some will have to use the services of an EU bank, and all will have to deal with the additional costs and administrative procedures that a depositary will entail.

Private equity provisions

A depositary’s duties include taking custody of certain assets, asset verification of other investments, monitoring of cash movements and general oversight of the correct operation of the AIF. The depositary may have liability to investors in the case of losses. Many firms are already in discussions with potential depositaries that will want to undertake full due diligence before agreeing to take a fund on. There is a section in the Directive which applies particular provisions to funds that acquire control of EU portfolio companies. These provisions only apply where the controlled company is not an ‘SME’, which is defined as a company with less than 250 employees and either has a turnover of up to €50 million or a balance sheet total of up to €43 million. 8 There are certain other exclusions. The Directive defines ‘control’ as being more than 50 percent of the votes if the company is unlisted, and uses the Takeover Code threshold for listed companies (which in the UK is 30 percent). If an AIF takes control of an affected EU non-listed company (or does so jointly with another AIF) then it will have some additional disclosure obligations in relation to t hat company, including a requirement to disclose its “intentions with regard to the future business of the … company and the likely repercussions on employment, including any material change in the conditions of employment”. There will also be a requirement to include additional information in the company’s annual report (or the fund’s report) relating to the previous financial year and likely future developments. This information must be made available to employees of the company as well as its board and the fund’s investors and local regulator. There are also other disclosure obligations, including on the acquisition and disposal of stakes in companies. The Directive also includes restrictions on the payment of certain distributions by an affected controlled portfolio company during the firs t two years of ownership by the AIF. Essentially, the restrictions impose a net assets test as well as a distributable profits test on the portfolio company and (rather than change company law) oblige the AIFM to take steps to prevent the company from making the prohibited payments. There is still some uncertainty about the precise application of these rules, which are not well drafted.

Delegation

Any delegation of either portfolio or risk management will have to be to a licensed asset manager or will require regulatory approval. If delegation is to someone outside the 8. Dened in Article 2(1) of the Annex to Commission Recommendation 2003/361/EC of 6 May 2003 concerning the denition of micro, small and medium sized enterprises.

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EU, then the delegate must be in a country with regulatory supervision and co-operation agreements in place, and delegation must not be to such an extent that it renders the AIFM a mere ‘letter-box’. An AIFM will have to justify any delegation and notify its regulator.

Risk management

Valuation

An AIFM is required to have a permanent risk management function which is functionally and hierarchically separate all the way up to the governing body. Risk management staff must be remunerated based on risk management objectives. The AIFM must have a risk management policy which should include procedures for identifying risks, explain how risk is to be managed and measured and allocate responsibilities. It will also have to describe the arrangements that are in place to address conflicts of interest. The firm will also need to establish risk limits and risk management systems. The AIFMD will require AIFM to ensure ‘proper and independent’ valuation of an AIF’s assets, including on a per share or per unit basis. The AIFM will need to have a policy for valuation before buying an asset of a particular type and the policy has to set out the obligations of everyone involved. This valuation function can be internal or external, but if internal then the valuation has to be undertaken by staff who are functionally independent from those involved in portfolio management and the remuneration policy has to mitigate the potential for conflicts of interest. Valuations themselves have to be carried out at least annually, and more frequently where there are redemptions or capital increases and decreases in the fund. The policy and methodology must be reviewed frequently and checks and controls must be in place. There is also a requirement for a review process for valuation of an asset where there is a ‘material risk of inappropriate valuation’.

Reporting and disclosures

An AIFM has to make extensive disclosures to its regulator and to prospective investors before they invest, in relation to: z z z

z z z

The fund’s investment policy. The legal implications of the contractual relationship entered into. How the aifm ensures fair treatment of investors (including details of any preferential treatment of particular investors). Fees, charges and expenses. Valuation procedures. Information on the remuneration policy.

It also has to explain the circumstances in which the fund may use leverage and the maximum amount of leverage that can be employed, and give details about service providers and historic information on the fund (where applicable).

Conduct of business and operational requirements

The AIFM will also be required to prepare an annual report for each fund to be made available on request to investors and sent to its regulator. This report will have to include audited financial statements, a narrative report on the fund’s activities, various aggregated remuneration disclosures (including in relation to carried interest) and details of material changes to the initial disclosures set out above. 81


There is also a requirement to report regularly to regulators in a template which includes detailed information on a wide variety of matters relating to the fund. The frequency of that reporting is determined by the size of the AUM. The AIFMD imposes extensive conduct of business and operational requirements, many of which will be familiar to fund managers that are already regulated, but which every firm will have to work through and comply with. These will affect most areas of an AIFM’s business. The Directive also imposes some duties on the AIFM which are owed to investors.

Marketing

As noted earlier in the chapter, the Directive offers a pan-EU marketing passport for AI Fs which are marketed by an authorised AIFM, subject to full compliance with the AIFMD, and firms which are below the thresholds are permitted to opt into the Directive in order to benefit from the passport. The passport only permits marketing to ‘professional investors’, although individual member states may, if they wish, permit AIFMs to market AIFs to retail investors. After an AIFM is authorised under the AIFMD, the marketing process for AIFs will be more heavily regulated. Approval of marketing materials will be required from the regulator before they can be sent to investors and any material changes will also have to be approved before closing can take place. However, different member states may take different views on which materials need to be approved and which are more preliminary in nature and can be sent to investors without approval. It is also worth noting that the AIFMD definition of ‘marketing’ does not include ‘reverse solicitation’ (marketing at the initiative of the investor) although care will be needed if an AIFM wishes to communicate with a prospective investor on that basis.

Conclusion

The costs of compliance with the new Directive will clearly be very high, especially the adjustment costs as firms move into a much more heavily regulated environment. Some of the provisions may bring some benefits to investors, although whether they are significant enough to justify the cost is not clear. What is very clear is that there is limited time for managers to comply with the Directive and all AIFMs across Europe will need to assess whether they are within scope of the AIFMD or whether they wish to opt in to benefit from the passport, and if applicable to start their preparations for compliance in earnest.

Disclaimer This chapter is a summary of some provisions of the AIFMD as at May 2013. It does not purport to be comprehensive, and many aspects of the rules will vary across the EU and are subject to further guidance and interpretation. This chapter is for general information only, and does not constitute legal advice. Specific advice should be taken before acting on the information included in this chapter.

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Simon Witney is a member of King & Wood Mallesons SJ Berwin’s market leading international funds team, advising on a wide range of private equity related matters, including fund structuring. King & Wood Mallesons SJ Berwin is regularly recognised as having Europe’s leading private equity funds team, operating from eight offices in Europe, and from Asia and the Middle East. Simon chairs the BVCA’s Legal and Technical Committee and the EVCA’s Tax, Legal and Regulatory Committee. Simon writes a weekly bulletin for clients commenting on legal and tax developments which affect the European private equity community. He is a regular speaker at conferences and contributes to a variety of publications.

Simon has worked extensively with industry associations in Europe throughout the discussions on the Alternative Investment Fund Managers Directive and is a member of the Public Affairs Executive, which has led the private equity industry’s response to the 83

Published by Private Equity Manager on 03 February 2014

The trouble with outsourcing valuation For smaller firms, complying with AIFMD valuation rules may be tougher than expected By Thomas Duffell

We’re now just six months away from the day when hundreds of GPs will need to be able to show that they have complied with the various requirements of the Alternative Investment Fund Managers Directive (AIFMD), Europe’s grand project to harmonize and strengthen its regulation of private funds across all 28 member states. Most compliance officers will tell you that this is a job riddled with complexity, particularly given all the confusion around depositary rules, delegation rights and the separation of risk management and portfolio management teams. But fewer CCOs seem to think the directive’s requirements on valuation present the same level of challenge. And in some cases, that could be a mistake. On valuation, the directive requires fund managers to do one of two things: either prove that the partners who stand to benefit from generous valuation marks can’t actually control the valuation process, or hire a third-party service provider to oversee said valuation process for them. Large fund managers with plenty of resources are likely to pursue the first of those two options. In fact, most have already assembled independent valuation committees and/ or processes that exclude those optimistic dealmakers who just know their pet companies are worth more than the bare numbers suggest. But smaller fund managers that don’t have the same resources tend not to have the same controls in place. And pursuing the second of those options isn’t exactly simple. Valuation service providers tell us the directive is too ambiguous for them to feel comfortable about taking on the liability that comes with AIFMD-approved valuation work. Under the directive, third-party providers are liable for any losses suffered by the fund manager as a result of their negligence or intentional failure to perform the job. This could potentially prove very costly if a buyer (say) proves that it overpaid for an asset: for instance, a real estate advisory business owned by Big Four accounting firm Deloit te was recently forced to pay a £18 million ($30 million; 12

The trouble with outsourcing valuation

€22 million) court fine after it overvalued a sold asset. Valuation service providers always take on a certain level of liability risk when valuing private equity assets (which are especially hard to price). But pre-AIFMD, at least liability costs were usually capped at a certain multiple of the fee. PostAIFMD, liabilities can be as high as the level of damages arising from a negligently mispriced asset. And many valuation specialists say it’s not worth their while to take the risk. So what options do smaller fund managers have? Not many, is the short answer. ‘Lending’ staff from the deal team to an independent internal valuation function is unlikely to work; market sources reckon that approach is likely to be challenged by regulators. Instead, smaller GPs are being told to ask their outside advisors for guidance on how the firm can restructure internally to meet AIFMD valuation requirements; after all, third-parties should have a good vantage point on how firms of a similar size and makeup are approaching the challenge. Another possibility – at least for those firms who have some wiggle room in the budget – is to hire a full-time back office employee who could chair an independent valuation committee. But either way: with only six months left until AIFMD comes into force, the last thing GPs will want to hear is that meeting the new valuation requirements is likely to take a lot more time than they expected.

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Published by Private Equity Manager on 16 January 2014

Your AIFMD compliance roadmap EVCA research shed light on some of the biggest questions surrounding the at times boggling Alternative Investment Fund Managers Directive By Thomas Duffell

Confused about what it now takes to market a private fund in Europe? You’re not alone. As reported in the December edition of PE Manager, private fund advisors are assessing the EU landscape on a daily basis; and their marketing, IR, legal and compliance teams often encounter uncertainty about what the Alternative Investment Fund Managers Directive (AIFMD) means in different jurisdictions. The directive technically went into effect in July, but many EU states are still in the process of implementing the regulation into national law and/or offered GPs subject to the directive a one year compliance grace period. And until more details around the directive are finalized, many GPs tell us they remain in a “wait-andsee” mode before mapping out a EU fundraising strategy for successor funds. Smaller managers – or those without many European LPs – are particularly likely to fall into this camp. Indeed, some said as much on stage during a recent summit hosted by the British Venture Capital Association. That’s somewhat surprising, given that so many GPs are keen to expand their universe of LPs in this difficult fundraising environment. The sentiment is understandable. The introduction of AIFMD has caused individual EU states to examine their existing private placement regimes, which non-EU managers must continue using until at least 2015 (the time when a marketing passport will be made available to them). As a result, the directive has raised concerns that some EU states will tighten their private placement rules to match certain elements of the AIFMD – or even go beyond it, which is being described as “gold plating” the directive in industry circles. Non-EU fund managers marketing in Europe may be able to bypass the AIFMD by accepting commitments from investors who are actually the ones to initiate contact about a fund opportunity. Some legal experts believe that marketing via this route, known as reverse solicitation, will be common with fund managers outside of the EU. However, the strategy remains untested and not all countries have provided clear guidance on the matter. 14

Your AIFMD compliance roadmap

But that’s not to say some guidance isn’t available. Recently, the European Private Equity and Venture Capital Association (EVCA) tapped into its network of industry experts and utilized its relationships with counterpart trade bodies at the national level to offer the most up to date guidance on all things AIFMD. With that research, some of the industry’s burning AIFMD-related questions are answered below in eight of the most important EU jurisdictions for fundraising:

Germany

What is marketing?

Germany’s securities regulator, BaFin, interprets marketing to be the act of making available fully negotiated fund documents to investors in Germany. EVCA’s research says marketing therefore does not commence before a PPM or LPA is available in almost final form. But once these documents are in final form, marketing would be sending fund documents to the investor; and/or sending the investor the PPM, LPA, presentation or flyer on the fund if the subscription documents are available upon the investor’s request. Is reverse solicitation available?

With regard to professional and semi-professional investors, it will not be considered marketing if the investor (or a third party agent of the investor) approaches the fund manager at its sole initiative. The exact scope of this reverse solicitation concept is still unclear however. Will its private placement regime be ‘gold-plated’?

Germany requires a depositary to carry out the following functions: monitoring of fund cash flows; Safe-keeping of custody assets/verification and record keeping of other assets; Certain general oversight functions (e.g. including oversight of subscriptions and redemptions, valuation, compliance by the fund with local laws and fund terms). Other areas of gold-plating in Germany cover marketing to semi-professional investors. If marketing to semiprofessional investors, the fund and the manager must fully comply with the AIFMD. Semi-professional investors may comprise, amongst others: Directors and certain employees of the manager of the alternative investment fund (AIF); Investors that have a minimum commitment to the fund of €10 million Investors that have a minimum commitment to the fund of €200,000 who confirm they are sufficiently qualified to invest in the fund and are assessed by the fund manager (through a questionnaire) as being so.

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UK

What is marketing?

An offering or placement takes place when a person seeks to raise capital by making an interest in a fund available for purchase by a potential investor, according to the UK securities regulator, the Financial Conduct Authority. This includes situations where the LP is ready to sign up to the fund, and situations where an investor is invited to subscribe to the fund. In the FCA’s opinion, secondary trading is not marketing because it does not involve capital raising in an AIF. Communication in relation to draft documentation (in other words the negotiation of the LPA) is generally not considered marketing, but this should not be a means to avoidance. In a private equity context, marketing usually means circulating the final form PPM plus limited partnership agreement and subscription documents. Is reverse solicitation available?

The FCA has given guidance confirming that if a LP signs a form saying the fund commitment was born out of their own initiative, that meets the definition of reverse solicitation. However, the LP will have to sign this form before the commitment is actually made. Managers should also not be able to rely upon such confirmation if this has been obtained to circumvent the requirements of the directive, the FCA said. Will the private placement regime be ‘gold-plated’?

Yes, the current UK financial promotion regime – which prevents the solicitation of capital during the course of business for unauthorized firms – will remain in force. In theory, this further restricts who a GP can market to. In summary, this means it is only lawful to market a private equity fund by addressing it specifically to a person who falls within an exempt category. But most of private equity’s main sources of capital (banks, insurers, fund of funds managers, large companies, pension funds with gross assets of £10 million or more, and a few other entities) remain out of the regime’s scope.

France

What is marketing?

The French transposition texts are not clear. The industry is still waiting for the French regulator to provide guidance on its interpretation of the AIFMD. But what is clear is that fund managers must notify the Autorité des Marchés Financiers (AMF) before marketing any fund in France. However, details of the required notification (including timing, format and content) are not yet available and the regulator has set no clear timeline. In addition, fund managers must appoint a custodian to undertake cash flow monitoring, custody of assets and verify compliance with certain operations 16


(including for example asset valuations). The fund manager must also inform French regulators the custodian’s identity for overview purposes. Furthermore, the fund manager’s home country, as well as the country the fund is domiciled in, must not be listed as non-cooperative by the Financial Action Task Force. At present, that rules out popular offshore private equity domiciles including: Bermuda and the British Virgin Islands. Is reverse solicitation available?

Reverse solicitation may be relied upon. However, the French regulator has not provided any guidance on reverse solicitation in relation to the AIFMD. But more generally speaking for the financial sector, the passive marketing exception in French law requires an express request from the investor for a specific fund without any product advertising or solicitation. Will the private placement regime be ‘gold-plated’?

There is some gold-plating. Non-EU fund managers must comply with the French code monétaire et financier (CMF), as well as with French laws and regulations applicable to portfolio management companies. The scope of these provisions is potentially very large. The industry is waiting for a position from the French regulator to further define the scope of these provisions.

Denmark

What is marketing?

According to Danish regulator Finanstilsynet, marketing only occurs once the fund has been established. However, it remains unclear when Danish regulators consider a fund “established”. It’s also worth noting that Finanstilsynet considers marketing to take place even if only one investor is targeted by the fund manager in Denmark. Is reverse solicitation available?

Under the Danish law implementing the directive marketing does not include placement made at the initiative of the investor. The Danish regulator has not given guidance on how it is demonstrated that a placement was made at the initiative of the investor. Will the private placement regime be ‘gold-plated’?

The Danish regulator has introduced a requirement that the fund manager appoints one or more entities to carry out depositary-lite functions – cash monitoring, safekeeping of assets and oversight and asset verification duties. Non-EU managers must also ensure the publication of information and documents that the non-EU fund is required to publish in its home country is also made available to the Danish 17


regulator.

Sweden

What is marketing?

Swedish authorities have taken a broad interpretation of marketing, defining it as both direct and indirect offerings. This includes all sale promoting actions (i.e. advertising, telemarketing, brochures, flyers, e-mails and investor events). However, Swedish regulators have taken the view that marketing is not possible until the fund actually exists. In relation to launching a private equity fund, it is argued that the fund vehicle would meet the definition of a fund at the earliest by first closing. Is reverse solicitation available?

While there are no clear rules as to what would be considered reverse solicitation in Sweden, legal experts highlight a few situations that typically would not constitute marketing: If an investor on its own initiative contacts the fund manager, Or if an investor contacts a GP to find funds In order for the activities to be deemed taken at the investor’s own initiative, neither the fund manager nor any other party (e.g. a placement agent) may make first contact with the Swedish investor. Will the private placement regime be ‘gold-plated’?

Sweden has largely adopted a “copy-out approach”, with no significant gold-plating.

Luxembourg

What is marketing?

Luxembourg’s AIFMD law defines the concept of marketing as any direct or indirect offering at the initiative of the fund manager or on behalf of the fund manager. Is reverse solicitation available?

The concept of reverse solicitation is currently not addressed by the supervisory authority. Formal guidance on the issue is not expected from the Luxembourg securities regulator. Will the private placement regime be ‘gold-plated’?

The Luxembourg rules do not show any signs of gold-plating, according to the EVCA’s research.

Finland

What is marketing?

For an activity to be qualified as marketing in Finland, it must be made at the 18


initiative of the fund manager (or on its behalf) and include the offering of a fund to conclude a binding contract/commitment. Is reverse solicitation available?

Finnish investors can contact a foreign fund manager or placement agent to express their interest to invest in a specific fund and this is not considered as offering fund interests in Finland. However it is not entirely clear how a fund manager could demonstrate to regulators that an investor initiated contact. GPs can also provide generalist information on their firm, but providing investment recommendations or negotiating draft agreements without the prior request of the investor would be considered marketing. Will the private placement regime be ‘gold-plated’?

The Finland regime will not be excessively gold-plated, however, non-EU funds may not be marketed to non-professional investors, a qualification EVCA’s research says is unlikely to effect the private equity industry much.

Austria

What is marketing?

In EVCA’s view, the definition of marketing in Austria generally coincides with the country’s private placement rules that GPs have historically used. Is reverse solicitation available? Austria’s implementation of the AIFMD did not provide for a special regime regarding passive marketing. Will the private placement regime be ‘gold-plated’?

Yes. In order for non-EU fund managers to market in Austria, the fund would have to feature a permanent representative in Austria and provide details regarding depositary, fund strategy and payment of fees. Marketing cannot occur without the approval from the Austrian Financial Market Authority. EVCA’s research can be downloaded in full at: www.evca.eu/publications/EVCA_AIFMD_Marketing.pdf

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