Guernsey Finance chief executive Fiona Le Poidevin appeared as part of a roundtable discussion held by Financier Worldwide on the implications of AIFMD for non-EU fund managers. She gave her views on a variety of areas....

FW: In your opinion, what impact is the AIFMD likely to have on the European private equity market, with specific regard to non-EU fund managers operating in the region?

Le Poidevin: AIFMD is likely to increase the compliance burden and therefore push up costs within the European private equity market. However, non-EU fund managers will continue to be able to distribute funds into the EU, both via the National Private Placement (NPP) regimes – which we expect will continue until at least 2018 – and also the single passport for third countries which is expected to be introduced from July 2015. Guernsey is in a very good position because we have signed cooperation agreements with 27 of the EU and EEA member states, including the UK, France and Germany, so that we can continue to market funds to investors in those jurisdictions under their NPP regimes. In addition, we expect to be in a very good position to avail of the passport when it is introduced, as in January this year we introduced an opt-in regime which is fully equivalent to AIFMD.

FW: How would you describe general awareness among fund managers of the requirements imposed by the AIFMD?

Le Poidevin: Until recently, the awareness among fund managers of the requirements imposed by the AIFMD was extremely mixed, with some very much on top of the situation and others much more uncertain. Ironically, I think that this 'wait and see' attitude has been perpetuated by the fact that several jurisdictions, such as the UK, have had a transitory year. However, this is now coming to a close and so managers need to know what they are doing by the end of July. That said, manager attitudes have also been driven by where they stand in the fundraising process and so those with funds that have already closed or are below the minimum threshold to be caught by AIFMD have been less engaged than those who are currently fundraising.

FW: In what ways will the AIFMD impact on the marketing of non-EU AIFs and EU AIFs by non-EU AIFMs? How are these funds likely to respond?

Le Poidevin: In response to AIFMD, Guernsey has introduced a dual regulatory regime for its investment funds: the existing regime remains for those investors and managers not requiring an AIFMD fund, including those using EU NPP regimes and those marketing to non-EU investors; and from 2 January this year Guernsey introduced an opt-in regime which is fully AIFMD compliant. The NPP routes will continue to be available until at least 2018 and most Guernsey funds will opt for that route to distribute funds into Europe due to the lower compliance and therefore cost burden. An AIFMD compliant regime is most likely to be favoured by those who need to actively market funds to European investors, whereas some managers may rely on reverse solicitation. However, each of the EU Member States is interpreting the meaning of reverse solicitation in a different manner and therefore this route to market will need to be considered carefully before pressing ahead.

FW: In your opinion, are non-EU funds prepared to comply with the transparency requirements of the AIFMD, including annual reports, disclosures to investors and reporting to regulators?

Le Poidevin: A major advantage of using the Guernsey route is that some of the requirements are less onerous than those under AIFMD, for example in reporting and remuneration. For non-EU funds with EU managers who are required to comply with the Directive, there is little choice but to comply with such transparency requirements. However, depending on the level of marketing, Guernsey can provide a slightly less onerous offering. For example, Guernsey AIFs, and Guernsey and non-Guernsey AIFs which are managed by Guernsey AIFMs, and marketed within the EEA under the national private placement regimes will only have to comply with certain disclosure and transparency requirements contained in the Directive – eight of the 71 articles of the Directive. Notably, these do not include the remuneration, valuation and depositary provisions. In addition, the AIFMD Rules allow Guernsey AIFMs to decide, based on their individual marketing strategy, whether it is in their best interests to remain outside of Guernsey's AIFMD equivalent regime or whether to opt in, providing flexibility.

FW: What compliance challenges are non-EU fund managers facing? To what extent will they need to change their strategies, functions and internal processes to adapt?

Le Poidevin: One of the main challenges is the requirement to split out the risk management and portfolio management functions. However, it remains to be seen exactly what view will be taken on how these functions should operate in practice because hedge funds and private equity funds, for example, are run very differently. Therefore, there needs to be pragmatism and a sense of proportionality in the application of the requirements otherwise they will prove extremely onerous for managers. Of course, investment houses can choose to have risk management or portfolio management functions carried out within EU-based management entities or they can designate a fund to be self-managed and therefore itself a non-EU AIFM. This has potential advantages in terms of the compliance and cost burden but investment houses will need to have sufficient substance in their AIFM as the management entity for carrying out the risk management and portfolio management functions if the fund is truly considered to be managed outside of the EU.

FW: What can non-EU managers do to ensure they establish AIFMD-efficient fund structures?

Le Poidevin: One important factor is that AIFMs should ensure that they do not fall foul of the letter box entity provisions – that is, sufficient substance is needed to demonstrate that the management entity is established outside the EU and therefore it is also important for investment houses to ensure they have enough substance in the domicile of their fund if they opt for it to be self-managed. Guernsey has an advantage over a number of other third countries in that there is already significant substance to our fund structures. For example, hedge fund managers such as BlueCrest and private equity houses such as Apax, BC Partners and Permira not only have Guernsey domiciled funds but they have offices and staff based in the Island. In addition, there are also a range of fund administrators ranging from major international names such as Northern Trust and State Street to specialist independent private equity administrators. There are also a number of global custodians who will be acting as depositaries in the Island and they are soon to be supplemented by those specialist administrators who are applying to establish Guernsey-based depositaries, in particular to service private equity and real estate funds which have not previously had the requirement for a depositary, but who can also take advantage of a depositary 'light' regime for non-financial assets.

FW: What final advice can you offer to non-EU fund managers on addressing and operating under the provisions of the AIFMD?

Le Poidevin: It is important for managers to realise that the EU is not the only answer and that, in particular, Guernsey offers a dual regulatory regime: an opt-in regime which is AIFMD compliant and, on this basis, provides for the distribution of Guernsey funds into the EU on an equivalent basis, albeit with less onerous reporting and remuneration requirements; and our existing regime which is free from the compliance and cost burden associated with AIFMD and provides access to distribute funds into the EU under NPP regimes and is also very attractive for managers targeting non-EU investors. Indeed, where a manager has both EU and non-EU investors then it is possible and may be considered prudent to establish parallel or feeder funds so that the compliance and cost burden are limited to only those where it is absolutely required under AIFMD. The bottom line is that Guernsey offers optionality and flexibility which allows us to service our clients in the most appropriate manner as fits their specific circumstances.

A complete version of this roundtable article was published by Financier Worldwide, April 2014.

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