AIFMD and Private Equity Requirements
The Alternative Investment Fund Managers Directive (AIFMD) (2011/61/EC) defines an ‘Alternative Investment Fund’ (AIF) to mean collective investment undertakings, including investment companies that raise capital from a number of investors with a view to making investments using a defined investment policy for the benefit of those investors. The AIFMD therefore applies to most private equity funds that are structured as limited partnerships that allow for more than one limited partner. All private equity managers (PEMs) managing AIFs with an aggregate amount of assets under management (AuM) in excess of €500 million will be subject to the significant operational requirements of the AIFMD. From a high level perspective, this will require PEMs to adhere to a wide range of new requirements affecting depositary, regulatory capital, risk management, transparency and reporting, and remuneration functions. Under the AIFMD PEMs are required to appoint an appropriate depositary that in essence assumes strict liability for the assets under custody, and undertakes cash flow monitoring. Regulatory capital requirements for PEMs are €125 million for initial capital, plus an additional amount of ‘own funds’ capital if the value of AuM is greater than €250 million.
The AIFMD risk management requirements may prove to be particularly onerous for PEMs to implement. These include functional and hierarchical separation of risk management and portfolio management functions, and a risk management system that establishes a permanent risk management function and identifies, measures, and monitors all risks relating to AIF investment strategies, and to which each AIF may be exposed. In terms of transparency, for each AIF managed or marketed in the European Union (EU), PEMs must provide investors with an annual report which contains a balance sheet (or a statement of assets and liabilities), an income and expenditure account (per financial year), a report detailing the activities through the financial year, and a disclosure of amount of remuneration (fixed and variable) paid to staff, beneficiaries, and any carried interest paid.
PEMs must also regularly report on the types of investments made (in terms of main instruments traded and markets which are actively traded in), diversification of the portfolio (including principle exposures and important concentrations), AIF market risk profile, AIF investments liquidity profiles, and periodic stress testing (under normal and exceptional circumstances). The new AIFIMD requirements relating to remuneration policies are quite extensive and PEMs will be required to comply with new remuneration principles that are appropriate to the size, internal organisation, and the nature, scope and complexity of the AIF’s activities. These include ensuring that remuneration policies are consistent with, and promote, sound and effective risk management, and do not encourage risk-taking which is inconsistent with AIF risk profiles, rules or instruments of incorporation. The remuneration of senior officers in risk management and compliance functions must be directly overseen by a remuneration committee, and remuneration polices must be in line with the business strategy, objectives, values and interests of the AIFM.
 This definition excludes any collective undertakings that require authorisation under Article 5 of Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS).
 The additional amount of own funds is equal to 0.02% of the amount by which the value of the portfolio of the AIFM exceeds €250 million, but the total amount of initial capital and additional amount must not exceed €10 million.
 This includes the AIFs it manages, or the investors of such AIFs, and must also include measures to avoid conflicts of interest.