With 2023 marking ten years since the AIFMD was adopted in Europe, Crestbridge’s pan-European team, including Cheryl Bai (Head of Fund Services – UK), Andrea Lennon (Country Head – Ireland), Tim Ridgway (Director, Funds – Jersey) and Pierfrancesco Rinaldi (Conducting Officer and Director, Business Development – Luxembourg), reflect on the impact of the regulatory initiative, how different European jurisdictions have adapted, and what the future holds…
Q: What’s been the biggest impact of AIFMD on the alternatives landscape over the past ten years?
Cheryl Bai (CB): There’s no doubt the AIFMD has had a significant impact on the alternative funds industry in Europe since its implementation in 2013. In particular, the comprehensive framework introduced by AIFMD for alternative investment managers (AIFMs) has resulted in increased transparency and risk management requirements, which in turn has brought about better investor protection. However, it’s also increased operating costs for Fund Managers due to the additional compliance, reporting and disclosure requirements.
Pierfrancesco Rinaldi (PR): In some cases, we’ve seen that the Directive has meant that non-EU fund managers wishing to approach European LPs have had to make substantial modifications to their operating models, strategies and use of vehicle. We’ve certainly seen managers starting to invest more in technology and personnel to meet their regulatory obligations stemming from AIFMD.
Andrea Lennon (AL): Another of the more significant impacts has been on delegation and use of oursourced providers. The delegated model means that risk management can be retained by the AIFM and investment management can be provided by experts across the globe. The ability of AIFMs to delegate the investment management to qualified experts has enabled the broad adoption of the third party AIFM model.
Q: Has the AIFMD succeeded in its objective to protect investors?
PR: Overall, the evidence is that the AIFMD has succeeded in realising its objectives. By creating an EU market for alternative funds and requiring AIFMs to act with transparency towards investors, our observation is that investors have become comfortable with the regulatory framework created by the AIFMD and that the supervisory environment it has brought about is considered sufficiently robust to preserve the probity and integrity of the European alternatives market.
Q: How has private placement route to market evolved – is it still a popular option through Jersey?
Tim Ridgway (TR): We absolutely see that for certain alternative investment strategies, Jersey remains a popular choice for fund domiciliation within the context of the AIFMD, offering a number of key attractions, including the cost-effective and user-friendly ‘Jersey Private Fund’ product.
Through Jersey, managers can continue to access European capital, taking advantage of National Private Placement Regimes (NPPRs) to market to professional investors in Member States, while complying with certain conditions. In the ten years since AIFMD’s introduction the private placement approach through Jersey has become ‘tried and tested’ – and in fact the flexibility it offers has made it an important means for non-EU managers who don’t need full EU-wide coverage to access EU capital.
Q: How have EU locations like Ireland and Luxembourg adapted to life under AIFMD?
PR: Thanks to Luxembourg being quick to implement the AIFMD, the country has earned a reputation as a major EU alternatives hub, with over €1,600bn in assets under management. The AIFMD is now seen as an integral part of Luxembourg’s overall funds toolbox, attracting approximately 300 ManCos/130 SuperMancos and 260 AIFMs.
AL: Ireland has also embraced AIFMD, with the industry being quick off the mark to roll out enhanced services to support alternative asset managers while also protecting investors. Since the launch of the Qualified Investor Alternative Investment Fund (QIAIF), which replaced the pre-AIFMD QIF (Qualified Investor Fund), Ireland has seen assets in Irish domiciled alternative products grow to over $800 billion.
The complexity of the AIFs managed under AIFMD has helped in further evolving the already well-established Irish fund services industry which has led to an increase in service providers offering oversight and governance services such as third party AIFM and Real Assets Depositary. It’s also created new opportunities for the Irish market, for instance in Risk and Compliance and niche training and development in applied alternatives and valuation processes.
Q: What’s the UK response been like, particularly in light of Brexit?
CB: As the largest European centre for alternative asset management, the UK played a significant role in the introduction of AIFMD by actively participating in negotiations and contributing expertise that led to its creation.
Following Brexit, however, UK AIFMs were no longer automatically entitled to AIFMD passporting rights. They needed to register their funds in each of the relevant EU Member States, in line with NPPR rules, to obtain approval for marketing their funds in that jurisdiction. Although that initially was a cause of some concern, the UK has since implemented its own version of AIFMD, largely aligned with the original AIFMD but tailored to the UK’s specific needs and objectives. This framework aims to maintain a similar level of investor protection and oversight as the original directive.
Q: So what’s next on the horizon in terms of the AIFMD evolution?
PR: What will be interesting now is to see how AIFMD evolves in line with industry trends – in particular the outcome of the latest review, commonly referred to as AIFMD II. Its purpose has been to review some technical aspects of the regulation rather than a reshaping of the legal framework – and a provisional agreement was reached between the Council of the European Union and EU Parliament in July 2023. That now requires formal approval.
AL: One key area is how National Competent Authorities (NCAs) have interpreted and enforced the legislation. This is particularly significant where an AIF distributes across a number of EU jurisdictions, leading to additional reporting requirements in different EU locations.
CB: As far as the UK is concerned, there is undoubtedly appetite to enhance its appeal as centre for funds work – following a government review last year, for example, the Financial Conduct Authority introduced rules for Long-Term Asset Funds (LTAFs) while the government has introduced a new tax regime for Qualifying Asset Holding Companies (QAHCs). All this shows that the UK is keen to establish a robust and fit for purpose environment for the funds industry – and of course, that needs to sit comfortably alongside the evolving European and AIFMD proposition.
TR: Looking forward, the key is going to be collaboration, as the European regulatory landscape continues to evolve. So whether it’s our team in Jersey, the UK, Luxembourg or Ireland, our focus will be on working in a joined-up way and flexibly, to accommodate the structuring preferences of clients based on the profile and jurisdiction of their target investors.