Yesterday, ESMA has published a discussion paper on key concepts of the AIFMD (the "Discussion Paper") and invited comments to specific questions raised. ESMA will consider comments received by March 23, 2012. P+P is involved in drafting the response paper for the public affairs executives ("PAE") of the European private equity and venture capital industry at the European Venture Capital Association (EVCA) and welcomes any comments you may have.

The purpose of the Discussion Paper is to help ESMA finalising its policy approach. In light of the feedback received, ESMA will develop formal proposals for draft regulatory provisions on certain Articles of the AIFMD, in particular Art. 4 and 5 AIFMD, to be submitted to the European Commission for endorsement by the end of 2012.

It is a very crucial paper as many terms used in the AIFMD which determine the scope are not defined or are ambiguous and leave space for interpretation and legal uncertainty. It is difficult for the industry to prepare for AIFMD if the meaning of such terms remains unclear. We have outlined hereafter the main questions raised and some of the proposals already provided by ESMA.


"AIFM" is defined in Art. 4(1)(b) AIFMD pursuant to which the AIFM means any legal person whose regular business is "managing" one or more AIFs.

1. "Managing" AIF

Whereas Art. 4(1)(w) AIFMD defines "managing AIF" as performing at least portfolio management functions OR risk management functions, Art. 6(5)(d) AIFMD states that, in order to be authorised under AIFMD, AIFMs have to provide portfolio management functions AND risk management functions.

Clarifying this contradiction, ESMA considers that an entity performing either of the two functions is to be considered as managing an AIF and must obtain authorisation.

ESMA states that, in order to be appointed as the AIFM for an AIF, it is not necessary for the AIFM to perform the additional functions set out in Annex I of AIFMD (administration, marketing and activities related to the assets of AIFs). If such functions are not assumed by the AIFM itself they would be considered as having been delegated by the AIFM to a third party (which could mean that the requirements for delegation must be met).

2. Delegation of management functions

AIFMs are able to delegate the portfolio management or the risk management function either in whole or in part pursuant to Art. 20 AIFMD and the relevant Level 2 measures. The entity performing either portfolio or risk management under a delegation arrangement would not be considered the AIFM for such AIF but it must meet the requirements pursuant to Art. 20 AIFMD (i.e. it must be authorised or registered for asset management and be subject to supervision or prior approval must be obtained by the competent authority). This being said, irrespective of such possibility to delegate, Art. 6(5)(d) AIFMD should be interpreted as requiring an AIFM to be capable of providing both portfolio management and risk management functions in order to obtain an AIFM authorisation. This explains also why the AIFM always remains liable towards investors even for functions which have been delegated.

However, ESMA considers that an AIFM may not delegate both functions in whole at the same time. It considers that the delegation of both functions would result in the AIFM becoming, in essence, a letter-box entity; in such case it can no longer be considered to be the manager of the AIF.


1. Vehicles which do not qualify as AIF or AIFM or which are exempt

Holding companies are not considered as AIFMs pursuant to Art. 2(3)(a) AIFMD. The same is true for captive funds (Art. 3(1) AIFMD) and family offices (Recital (7) AIFMD). ESMA is concerned that such exclusions may give rise to abuse and raise questions as to the merits of further elaborating these terms.

2. Proposed criteria to identify an AIF

Pursuant to Art. 4(1)(a) AIFMD, AIFs are defined as collective investment undertakings, including investment compartments thereof, which raise 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.

  1. "Raise capital"

    With respect to the requirement of "raising capital for the purpose of collecting investment" EMSA states that this is an activity which generally could take place in many situations. However, ESMA takes the view that no "raising of capital" should exist if the capital raising activity and the investment activity are primarily undertaken for non-commercial purposes and are not intended to deliver an investment return or profit. According to ESMA it seems that "capital raising" for the purposes of the AIFMD definition must involve some kind of communication by way of business between the entity seeking capital and the potential investor. Such activity might take place once (as is the case for closed ended funds) or on an ongoing basis (as is the case for open ended funds). However, the absence of "raising capital" alone would not be conclusive evidence that an entity is not an AIF (e.g. in case of a transfer of assets from one AIF to another AIF the manager of such other AIF will still be subject to the AIFMD).
  2. "Collective investment"

    With reference to such term ESMA suggests that an AIF should have the purpose of generating a return for its investors through the sale of its investments as opposed to an entity acting for its own account and whose purpose is to manage the underlying assets with a view to generating value during the life of the undertaking. This is an interesting view as it may exclude quite a number of funds (for example funds generating their returns mainly from leasing and renting).
  3. "Number of investors"

    ESMA follows from the reference to "a number of investors" that the AIF's rules or instruments of incorporation cannot contain provisions which restrict the sale of units/shares only to one single investor. Hence, where the AIF's rules or instruments of incorporation do not restrict the sale of units/shares to a single investor, such AIF is considered to be raising capital from a number of investors. This is interesting from a German perspective with respect to Spezialfunds. As long as the Spezialfund can in principle admit several investors, it should then still be an AIF, even if in practice it often only has one single investor.
  4. "Defined investment policy"

    The AIF must invest in accordance with its "defined investment policies". ESMA proposes the following criteria which could be taken into account in determining whether or not an entity has a defined investment policy:

    • the final form of the investment policy is fixed, at the latest, by the time that investors' commitments to the entity become binding on them;
    • the investment policy is likely to be set out in a document which becomes part of, or which is incorporated in, or is referenced in, the constitutional documents of the entity;
    • a contractual relationship between the entity and the investor binds the entity to follow the investment policy (as it may be further amended);
    • the investment policy contains a series of investment guidelines. For example, only to:
      • invest in certain categories of asset, or conform to restrictions on asset allocation;
      • pursue certain strategies;
      • invest in particular geographical regions;
      • conform to restrictions on leverage;
      • conform to minimum holding periods; and/or
      • conform to other restrictions designed to provide risk diversification.

      These guidelines may be relatively broad or narrow, but by their nature they determine more precise criteria than the ones followed by an ordinary company which simply has a "business strategy" or in certain cases (depending on the nature of its commercial activities) an "investment strategy".

    • the investment policy is clearly set out and disclosed to investors;
    • any change to the investment policy is disclosed to the investors and in many cases investors provide their consent to such change; in cases where the prior consent of investors is not required in order to change the investment policy and the fund is open-ended, the investors may be offered the opportunity to redeem their holdings within a given period of time free of charge.

  5. Ownership of underlying assets

    ESMA states that investors in AIF's are generally not the registered holders of the underlying assets and do not individually directly own the underlying assets, but rather their ownership of the assets is represented by shares/units in the AIF. In cases of such beneficial ownership, investors usually have a beneficially entitlement to profits or income arising from their investment in the assets held by the AIF.
  6. Control of underlying assets

    Another criterion proposed by ESMA to further define AIFM is that the AIFM or internally managed AIF must have responsibility for the management of the AIFs assets. Investors may not have day to day discretion or control over these assets.

3. Proposed criteria to determine the application of the AIFMD to certain types of AIF (Closed-ended vs. Open-ended)

Some articles of AIFMD differentiate between different types of AIFs. In order to ensure uniform application of such differences the terms marking the differences need to be defined further:

Regarding the question as to whether an AIF is being treated as closed-ended or open-ended ESMA proposes that an open-ended fund is generally considered to be one which provides redemption facilities to investors, while a closed-ended fund does not provide such right. Therefore, ESMA is of the view that open-ended funds are those funds the units/shares of which may be, at the holder's request, repurchased or redeemed without any limitation, directly or indirectly, out of the assets of these undertakings at least annually.


Art. 5(1) AIFMD foresees that each AIF shall only have one single AIFM. ESMA recognizes that depending on the structure there may be more than one legal entity which could be appointed as AIFM to that AIF, for example:

  • the AIFM might be the AIF itself where the legal form permits internal management, which ESMA assumes to be the case for corporate AIFs (and possibly that of a limited partnership!) or
  • another entity acting on behalf of the AIF which is appointed by the AIF as AIFM.

ESMA confirms that only one of these entities can be appointed as AIFM and such one AIFM shall have full responsibility for compliance with the requirements under the AIFMD.

However, as there are no specific provisions in the AIFMD which impose conditions or criteria for the appointment or selection of the AIFM, ESMA takes the view that the AIF is free to appoint any legal person as AIFM for an AIF provided such entity is authorised under the AIFMD.

However, it is important to distinguish between circumstances where a legal entity is performing investment management functions for an AIF under a delegation arrangement and situations where the legal entity is the appointed AIFM for the AIF. In that context, with respect to existing partnerships it will be interesting to see whether partnerships are AIFs which can qualify for internal management or if they can only be externally managed.


Art. 6(2) AIFMD provides that an AIFM may also act as a management company for UCITS provided the AIFM is authorised in accordance with the UCITS Directive for that activity. As a consequence, after the entry into force of the AIFMD, it will be possible for a single entity to hold both a UCITS and AIFMD authorisation.


Art. 6(8) AIFMD states that investment firms authorised under Directive 2004/39/EC ("MiFID") and credit institutions authorised under Directive 2006/48/EC ("Banking Directive") are not required to obtain authorisation under the AIFMD to provide investment services such as individual portfolio management to AIF's. Consequently, ESMA is taking the view that a firm which is authorised under MiFID or the Banking Directive cannot be the appointed AIFM for an AIF nor obtain authorisation under AIFMD. This is an important statement for UK structures, where managers already now are subject to license requirements under MiFID rules.


The questions raised and issues addressed are very important in a fund structuring process and contain key elements for existing fund managers in preparation for AIFMD. Fund sponsors that exceed the relevant thresholds and are subject to the new rules must determine which entity in the group is to be determined as AIFM for these purposes. The discussion paper addresses at least in part these questions. Therefore, your input is of importance. Please address any comments and feedback to Patricia Volhard who is chairing the PAE technical group which is in charge of preparing a response paper.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.