Phasing Out the AIFMD National Private Placement Regime?
Since its introduction in 2011, the AIFMD National Private Placement Regime has provided an avenue for European investors to access alternative investment strategies hosted and managed outside of Europe. Whilst this regime is mainly and essentially a local law affair – and has its limitations, both objective and subjective – it has nevertheless added value to the main proposition under the AIFMD to make sure that Europe remains open to capital coming from outside of its borders. Get in touch with us hereto see which of the objective and subjective limitations of the AIFMD National Private Placement Regime apply to the offer of your funds in Europe.
One of the main criticisms of the AIFMD National Private Placement Regime is that it has not been implemented homogeneously across Europe and therefore its effectiveness is questioned. This issue is being looked at as part of the AIFMD review which commenced in 2018; however, given the lack of any alternative provision to allow European asset managers to receive foreign capital allocations, we don’t believe that a phase out of this regime is on the cards anytime soon.
In this article, we take stock of the first ten years of operation of the AIFMD National Private Placement Regime and we look at the future landscape of Europe for foreign managers of alternative investment strategies.
AIFMD National Private Placement Regime Turns 10
In 2021, the AIFMD National Private Placement Regime will have been in operation for ten years. All EU Member States always had, to a varying degree, domestic laws and rules to allow their local investment managers the capability to attract capital allocations from foreign investors. However, the introduction of AIFMD represented an opportunity for EU Member States to look at these rules in a more systematic manner (and overhaul them in some cases). In fact, whilst AIFMD provides some basic criteria and requirements for the national private placement regime, the regime is then governed predominantly at local level by the laws and regulations of the various respective EU Member States. An application by an investment manager to sell their products to investors under this regime in a specific EU Member State, for instance, is submitted and approved directly by the supervisory authority of that EU Member state, sometimes in a local language other than English. Also, different EU Member States are at liberty to introduce additional requirements to the ones introduced by AIFMD and make the exercise more complicated than in other countries. In some EU Member States, for instance, regimes for private placement exists, yet are so burdensome to comply with that in reality it’s like not having one at all.
The actual implementation of the AIFMD National Private Placement Regime in the various EU Member States reflected different local approaches with regards to the protection of the respective internal markets. Some EU Member States simply replicated the general conditions and principles introduced by the AIFMD in their internal laws. Some others, instead, took the opportunity to gold-plate their internal regimes and introduced additional and more stringent requirements. This inhomogeneous implementation has been already highlighted as one of the main inefficiencies in the system and also one of the reasons for the existence of an uneven level playing field in Europe between European and non-European Managers.
The fact that the AIFMD National Private Placement Regime has been implemented so differently across Europe is something that foreign managers should bear in mind when drafting their itinerary in Europe. Some EU Member States will be necessarily out of scope for different reasons and it is of paramount importance to rule out these EU domiciles clearly from the outset, to save time and money. Get in touch with us hereto see which EU Member States are out of scope for your offer under the AIFMD National Private Placement Regime.
AIFMD National Private Placement Regime and AIFM Third Country Passport
The AIFMD National Private Placement Regime has its pros and cons of course, which should be looked at with the understanding that, as of today, this regime represents the only feasible avenue available for European investors to access strategies that are executed and managed outside Europe. Whilst the AIFMD nevertheless provided for a third country AIFM passport, that hasn’t become a reality in the first version of the directive and there were rumors about a proposal to have it removed in the next iteration. More specifically, the destiny of the AIFMD National Private Placement Regime has always been linked to the implementation – or not – of the passport for third country AIFMs, with the phase out of the regime being triggered in principle by the application of the provisions on the passport for third country AIFMs. As the process of the first review of the AIFMD gathers momentum towards the end of 2020, we will have a better view of the intentions of the EU authorities and whether the third country AIFM passport will become a reality, superseding the AIFMD National Private Placement Regime.
The AIFMD Review
The process for review of the AIFMD should have been completed by 2017. However, it was only in 2018 that a first report was issued by KPMG, which was contracted by the EU Commission to start a review of the directive. More recently, in June 2020, another report on the functioning of the AIFMD was issued, this time directly by the EU Commission, to be followed by a white paper before the end of this year, presumably. This report hints again at the issue of effectiveness of the AIFMD National Private Placement Regime and finds that the inhomogeneous application across the EU is one of the cons of the current state of this regime. There seems to be a desire from some EU Member States, to achieve more homogeneity in the application and implementation at local level of the regime. However, we believe that for as long as there is no European regulation on the concept of marketing, further homogenization of this regime will be difficult, if not impossible, to achieve.
Foreign managers willing to approach European investors using their foreign-domiciled funds have now gotten acquainted with the idea that under the AIFMD National Private Placement Regime it is required to have a degree of compliance with AIFMD and that costs are involved. It is common knowledge outside of Europe that before carrying out activities involving approaching investors based in Europe with non-European domiciled funds, the investment manager is required to make this intention known to local EU regulators and comply to a certain extent with the AIFMD, including the disclosures to investors, the annual and ongoing reporting directly with local authorities, and the appointment of so called ‘depositary lite’ entities in certain EU domiciles.
It remains of paramount importance for foreign managers to plan accurately – and ahead of time – their marketing endeavors under the AIFMD National Private Placement Regime because in some EU Member States the related process can take months whilst in others it is nearly instantaneous. Get in touch with us hereif you want to receive indications of the main EU domiciles where to start offering your non-EU funds under the AIFMD National Private Placement Regime.