The European Union’s Alternative Investment Fund Managers Directive (AIFMD), an initiative to regulate the alternative investment industry across the continent, is still causing confusion despite coming into force over a year ago, according to agri-focused US fund managers, placement agents and fund formation lawyers.
“AIFMD has certainly made it more difficult for US fund managers to access European investors,” Sean Byrne, a fund formation lawyer at Morrison & Foerster, based in San Francisco, told Agri Investor.
And this confusion has pushed some US fund managers to give up on plans to visit European markets, according to industry experts that did not want to be named.
Before marketing a fund to European investors, fund managers must now register with that nation’s government. While this seems like a relatively simple request, the complexities of the regulation have created an atmosphere of misunderstanding in the agri fund management world.
One area of particular confusion is the harmonisation of regulation across the EU’s various member states; an intention of the directive, this harmonisation has yet to be realised, according to experts.
Before AIFMD, each individual EU country had its own rules governing what a registration should entail, but the directive aimed to standardise those requirements and also eventually make it possible for an entity registered in one EU jurisdiction to use that single registration as a passport to do business in other EU countries.
“It is intended that, after a transitional period of two years, a harmonised passport regime become applicable to non-EU AIFMs performing management and/or marketing activities within the Union,” according to the text of the directive, issued in 2011.
More than two years later, individual EU countries have not yet begun to recognise registrations completed in other countries.
As a result, many US fund managers still need to register with multiple EU member states in order to market their products to them, according to experts.
And with a still very fragmented agri investment market in the region, this is a particularly onerous task, according to the Europe-based marketer of one agri fund.
Differing rules of registration across the EU adds to the confusion as each EU country passed their own version of AIFMD into law, according to experts. This created subtle differences such as the timing of a registration or in the definition of marketing activities.
In the UK, ‘marketing’ typically means that a fund has sent potential investors documentation such as a private placement memo relating to the fund. But other countries have a much higher standard – any action a fund takes that could attract an investor counts as marketing. Some EU countries, like the UK, have also created National Private Placement Regimes to provide a way to market funds in that state without registering with the state.
Eventually, if EU officials and lawmakers ever get around to creating the “harmonized passport regime,” that harmonized regime is intended to totally replace the national regimes, according to the directive.
EU officials still intend to make “passporting” work, but with other priorities demanding the attention of EU lawmakers and officials, it’s unclear when this will happen.
So for now, fund managers either have to curtail their marketing activities or pay to register in a broad range of jurisdictions. And this can be costly, particularly for start-up agri funds.
The price of registration can vary, depending on the EU country and how much of the required information the fund manager has already gathered. Experts estimate that the likely cost is anywhere between $10,000 and $100,000. Some countries like Luxembourg have made the requirements of registration less onerous – and less expensive – although the cost of local expertise could be higher, argued a placement agent.
There is one area of relief – if a fund management firm has already registered one entity in the jurisdiction it could be cheaper because some of the information is likely to overlap.
“Subsidiary entities are much cheaper to register,” said Bernd Meissner, managing partner for Kronstein Alternative Investment Advisors, the placement agent, based in Munich, Germany.
Still, in many cases, the uncertainty of investment is not worth the certainty of registration costs.
Reporting by Bendix Anderson