The Alternative Investment Fund Managers Directive (“AIFMD”) came into effect in July 2014 and has brought major changes for the regulation and distribution of funds in Europe. Centaur looks at some predictions from July 2014 and sees how many of them have turned out to be valid. We analyse the biggest hurdles that managers have had to overcome along with opportunities that have arisen.
1. 2014 Prediction: Annex IV Reporting will cause a considerable challenge to AIFMs due to the sheer scale of data required to process.
Outcome: Fund Administrators are relieving much of the data burden for Annex IV Reporting.Complex and accurate Annex IV filings must be submitted on time. As a result, AIFMs are spending a substantial amount of time sorting and collating the relevant data in order to comply with the AIFMD reporting requirements. They are either devoting a large amount of additional resources to this or else are handing much of the work over to their Fund Administrators.
Karen Malone, Founding Partner of Centaur Fund Services said “Centaur’s flexible open architecture allows us to extract data to be provided to Fund Managers directly or to their software and risk vendors. As experts in regulatory services, we assist AIFMs with their reporting needs and are at hand to advise them through Annex IV reporting requirements, along with all other aspects of AIFMD.”
2. 2014 Prediction: Many Fund Administrators will not accept an appointment as External Valuer due to concerns of increased level of liability.
Outcome: Most administrators have refused to be appointed as External Valuer.This trend places many funds in the, surely unintended and certainly undesirable, position where the AIFM is responsible for and must perform the External Valuer role. Unlike most of its Competitors, Centaur is happy to act as External Valuer since it views the service as a core – if not the core – part of an administrator’s job.
Karen states: “We understand that Centaur’s position is in marked contrast to many fund administrators who are refusing to accept being appointed as External Valuer due to concerns about increased levels of liability. We are confident that our robust infrastructure and experience provide managers with the accuracy and transparency needed under AIFMD and feel strongly that the stance taken by many of our competitors is not what investors want.”
3. 2014 Prediction: AIFMD registration will significantly assist fund distribution in Europe.
Outcome: The distribution rules have not been as straightforward as expected and ESMA has not yet reviewed the traditional hedge fund domiciles in Cayman, Bermuda and the U.S.One of the key selling points of compliance with AIFMD is that it enables an AIFM to distribute their funds in Europe, either under the National Private Placement Regime or under European pass-porting rules. However, this has not been as straightforward as expected. Some EU members have “Gold Plated” AIFMD requirements and imposed additional registration processes and fees. These additional layers of regulation requirements are leading some non-EU managers to stay away from Europe. According to Preqin 2015, 42% of non-EU-based managers reported that they have no plans to raise capital from EU-based investors in the near future.
Karen comments: “Some market participants are concerned that the AIFMD may lead to US managers shunning Europe as a direct result of the new regulatory demands. However, on the flip side, AIFMD brings clarity to European regulation and offers US managers a transparent route to market in the European Union.”
4. 2014 Prediction: AIFMD will have a negative impact on the European Hedge Fund Industry.
Outcome: The number of start up hedge funds in Europe has slowed considerably and smaller managers are finding it hard to survive in the new highly regulated environment.Karen concludes: “We are still in the early days of AIFMD and it is not possible to predict the long term outcome. However, there is an understanding that AIFMD is here to stay and that a high level of best practice is a good thing. Many managers feel that both buyers and sellers are benefitting from the increased level of transparency and clarity associated with the directive. However, the costs of compliance are significant and we have seen a marked slow- down in European hedge fund start ups. We anticipate that the barriers to entering the business will remain high for the foreseeable future.”
5. 2014 Prediction: The Role of the Depositary will be complex and costly.
Outcome: The appointment of a Depositary has been far less costly and disruptive than anticipated.One of the many significant provisions contained within the AIFMD regulations is the appointment of a depositary. Most managers have never had to do this before and anticipated high levels of stress and costs associated with this. For most, these worries never materialized. Some administrators, such as Centaur, have launched Depositary-Lite services for Non-European AIFs to assist clients to meet their AIFMD responsibilities.
Louise Boyle, Monitoring and Oversight Manager of Centaur Financial Limited said, “Our depositary services assist our clients with the AIFMD regime and work with them to ensure they meet their depositary requirements in a timely and efficient manner.”
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