Critical Issues for Private Equity Firms – AIFMD
The EU Alternative Investment Fund Managers Alternative Directive (AIFMD), which came into force on 21 July 2011, aims to create a coordinated regulation framework for distributing alternative funds in the European Union (EU). The AIFMD was launched to regulate Alternative Investment Fund Managers (AIFMs) and the distribution of Alternative Investment Fund (AIF) to protect investors and avoid systematic risk in the EU.
But the question is, what does AIFMD mean to private equity firms?
AIF, a collective investment undertaking, raises capital from several investors as per a defined investment policy. Most private equity firms fall within the scope of AIFMD:-
- EU AIFMs managing AIFs (EU AIFs or non-EU AIFs)
- Non-EU AIFMs marketing their AIFs in the EU
- Non-EU AIFMs managing EU AIFs
Issues For Private Equity Firms
The AIFMD enforces some restrictions and obligations on AIFMs who market a non-EU AIF in the EU or manage an EU AIF, including:-
1. A Single AIFM
The AIFMD requires that only one AIFM is assigned to each AIF. AIFs with multiple managers must undergo restructuring to have a single AIFM who can further delegate management roles to other managers.
2. Restrictions to Conduct Regulated Activities
The AIFMD restricts an AIFM from conducting regulated activities other than those of an AIFM. This can be problematic for any AIFM that performs its fund management via a regulated entity, running unrelated, regulated lines of business (for instance, banks).
3. Notification of Voting rights
An AIFM needs to notify the Financial Conduct Authority (FCA) when the voting rights of AIF in a portfolio company reach, fall below, or exceed 10%, 20%, 30%, 50%, or 75%. The AIFMs need to monitor these thresholds, for instance, concerning capital reorganizations or further share issues.
4. Disclosure Obligations
The AIFMs need to comply with the extensive disclosure requirements of AIFMD. The AIFM of an AIF that acquires control of an unlisted EU company (holds 50% of the voting rights) is under the obligation to use its best efforts and ensure that the unlisted company’s board informs the company’s employees regarding the intentions of future business and the consequent repercussions on employment.
5. Asset-Stripping Post Acquisition of Control
AIFMs will be subject to asset stripping for the first two years following the acquisition of control of an unlisted EU company (either directly or indirectly). Unless an exemption is available, AIFMs must prevent the company form affecting:-
- Share redemptions
- Capital reductions, unless the aim is to offset incurred losses
- Purchases of its own shares, reducing the net assets
- Distributions reducing net assets below the level of subscribed capital and undistributable reserves or surpass distributable profits, as ascertained by the last audited accounts
The Road Ahead
ESMA has transformed the regulation of the investment fund sector with AIFMD reporting for better transparency. However, even well-versed fund managers find transparency reporting, Annex IV reporting, a complex task. All you need is a specialist in regulatory reporting solutions. DataTracks’ robust AIFMD software solution supports all the evolving directives by ESMA and keeps up-to-date with all the changing requirements. With DataTracks’ AIFMD reporting solution, EU and non-EU firms can ensure a smooth and hassle-free filing journey.
So what are you waiting for? Get in touch with a DataTracks expert @+31202253702 or email at firstname.lastname@example.org to ensure error-free filing of Annex IV with ESMA.