Months after the July deadline for authorisation, and with the first tranche of reporting for most firms due in the New Year, you’d be forgiven for thinking we’re over the hump when it comes to the Alternative Investment Fund Managers Directive (AIFMD). Unfortunately, nothing could be further from the truth: for many firms the complex minutiae of Annex IV reporting will present the biggest challenge yet.
For a start, the alternatives industry is, by its own admission, unprepared. In a recent survey, more than half the fund managers polled had yet to begin Annex IV preparations, and 92 per cent expressed concern about the deadline. But it isn’t just firms: many unanswered questions remain regarding just how the reporting will work in practice. Hence the spectacle of regulators across the continent scrambling to issue last minute clarifications and guides.
Earlier this month, the European Securities & Markets Authority (ESMA) published its long-awaited update to its AIFMD Q&A. We now know that AIFMs should total the assets of all AIFs under management (whether EU-based or marketed in the EU) when calculating the threshold for Annex IV reporting. But non-EU AIFMs, when calculating the frequency with which they need to report, should only count assets of AIFs that are marketing in the EU, and apply that to all member states.
Interestingly, ESMA has also made it clear that a manager’s reporting obligations to a particular national regulator will continue as long as the AIF has investors from that jurisdiction. This applies regardless of whether the AIF is still being marketed there or not.
At the same time as ESMA, the Financial Conduct Authority (FCA) released further guidance of its own. For example, the FCA has made it clear that EU AIFMs marketing feeder funds in the UK will need to report on master fund investments, whether or not the master fund is invested in the UK. By contrast, non-EU AIFMs in the same position need only report on the feeder fund for now.
Private equity companies will face additional challenges stemming from the fact that AIFMD was primarily designed with hedge funds in mind. For example, funds will need to submit internal rate of return (IRR) and gross internal rate of return (GIRR) figures as calculated on a monthly basis. This data is generally only calculated on a quarterly basis but will now need to be calculated monthly (albeit submitted quarterly). In addition, net asset values (NAVs) must be analysed by geography and this is not completely straightforward (e.g. a US dollar deposit with a European bank is considered a US asset). And finally, most funds will need to submit this data within an onerous 30-day window at what is an already busy year-end period. This will take some getting used to.
The challenge associated with the frequency of reporting is not just a cultural and logistical one. The difficulty is partly that private companies and real assets are inherently harder to value (and more time consuming) than public ones.
Thankfully the good news is that the FCA, for one, has confirmed that it will accept estimates for now. While this is a welcome reprieve for the imminent January deadline, the FCA may change this going forward.
There is also the pressing issue of varying geographical implementations of the Directive. The transmissions process for reports is fragmented and chaotic. Whilst ESMA has released XML V1.2 for reporting, the FCA is still accepting V1.1. Meanwhile the Netherlands regulator has released its own separate version.
Luxembourg’s regulator is pushing for filing to go through a secure channel, which will incur considerable provider costs. Finland and Belgium are currently developing their own reporting systems.
Guidance documents also vary between jurisdictions. In addition to the ESMA and FCA guidance, both the Netherlands and Luxembourg regulators have issued their own documents. This is particularly relevant for non-EU AIFMs looking to market under the National Private Placement Scheme, who will need to file reports with each relevant regulator. These guidance notes are extensive and not an easy read.
So what does this all mean for private equity funds? Firstly, companies need to consider the specifics of how the reporting requirements apply to the distinct business model of private equity. Secondly, private equity firms cannot afford to take a pan-European approach to the Directive. Lastly, it is clear that even at this late hour, AIFMD is still in flux.
As different jurisdictions plan their own implementations, funds that market across Europe will struggle to keep up with the fragmentation of operational processes. For every welcome clarification, there remain uncertainties. The situation will continue to evolve over the next year as the regime beds in. The devil, as always, is in the detail.
Survey: Solvency II will hurt fundraising
More than two-thirds of insurers intend to scale back their alternatives exposure as a result of Solvency II, say a UBS and PwC survey
Insurance companies will invest in fewer alternative asset managers due to Solvency II, according to a survey of institutional investors conducted by UBS Fund Services and ‘Big Four’ audit firm PwC.
Solvency II requires insurers to hold varying levels of capital based on the riskiness of an asset. For private fund holdings, insurers are currently required to set aside €39 for every €100 invested under a default risk model. The funds industry has long feared this will price many insurers out of allocating capital to private funds.
In the survey, 67 percent of European insurance companies said Solvency II will have negative ramifications and 70 percent said they will be less willing to invest in alternative assets.
In order to keep up their commitment levels to alternative asset classes in the face of Solvency II, some insurance companies are looking for more co-investment opportunities, said the survey. Doing this enables the insurer to hold less than the 39 percent risk weighting required for funds, while still maintaining exposure to the asset class.
However, this survey contradicts the findings of previous studies on the impact of Solvency II on private fundraising. According to a May survey from Goldman Sachs Asset Management, 28 percent of 233 global insurers surveyed intend to increase their investment in private equity. Insurers also aim to increase allocations to infrastructure debt (29 percent) and real estate equity (26 percent).
Yet, anecdotally, insurers have been easing off private funds over the past year. Aktia Life Insurance previously said that Solvency II was the sole reason why it will not make any more private equity investments. Another insurer, Groupama, sold Groupama Private Equity to fund of funds ACG Group last year, as part of an effort to sell assets not central to its insurance business.
Solvency II, which was originally scheduled to go live in January 2014, is expected to take effect from January 2016.