From Carey Olsen

Location – Cayman Islands | Guernsey | Jersey

Member states of the European Union (“EU”) were due to implement The Alternative Investment Fund Managers Directive 2011/61/EU (the “AIFMD”) by 22 July 2013. The AIFMD granted a transitional period of twelve months to allow EU alternative investment fund managers (“AIFMs”) to apply for authorisation to act as AIFMs under the AIFMD. In implementing the AIFMD, certain EU Member States extended this grace period for compliance with the AIFMD to non-EU AIFMs. Accordingly, the transitional periods provided for by the AIFMD expired on 21 July 2014. This briefing note reviews how non-EU AIFMs and EU AIFMs of offshore AIFs in the jurisdictions of Guernsey, Jersey and the Cayman Islands (“Offshore AIFs”) are dealing with the requirements of the AIFMD in developing and implementing their EU marketing strategies of the alternative investment funds (“AIFs”) for which they are responsible.

Routes to Market Selected by Non-EU AIFMs

We are seeing many non-EU AIFMs, with significant assets under management in respect of new Offshore AIFs, elect to market those AIFs under the national private placement regime particular to the relevant EU Member State where marketing is proposed. Some AIFMs however are taking the decision not to register under the national private placement regime of the Member State where their investors are based, and this can be for various reasons: e.g. the AIFM prefers to rely on reverse solicitation.

Those AIFMs that hold back from marketing into the EU on an active basis, relying instead on the passive route of reverse solicitation, perceive a lack of cohesion across the EU Member States in terms of the registration requirements leading to increased costs. The costs include identifying the requirements of each jurisdiction in order to proceed with marketing. It is also not attractive to many AIFMs that staff remuneration and carried interest mechanisms must be disclosed under the AIFMD, whether the AIFM is EU domiciled or non-EU domiciled.

Experiences so far with certain National Private Placement Regimes

AIFMD Requirements for an Above Threshold Offshore AIFM

The AIFMD has set out a minimum compliance regime for non-EU AIFMs which are above threshold1 and which are seeking to market into the EU. These require that certain disclosures are made to investors, that there is regular reporting to regulators, that an annual report is prepared including certain specific disclosures and that the AIFM complies with certain stake-building notifications and asset stripping restrictions.

Disclosures to investors

Usually the enhanced disclosures required under Article 24 of the AIFMD are very easily incorporated into the offering document and it has become quite usual to do this by way of appendix (for ease of reference by any regulator or investor and to facilitate any required review by any EU counsel as relevant). So, for example, any details of preferential treatment of shareholders by way of side letters will need to be disclosed to investors. So too, the disclosure of leverage used will need to be calculated and disclosed in accordance with the EU Commission’s Delegated Regulation of 19 December 2012 supplementing the AIFMD.

Regular reporting to regulators

A non-EU AIFM to an Offshore AIF will be required to file an Annex IV report regularly with the regulator of any EU Member State where the AIF is being marketed. The form of the report has been specified by ESMA and has been adopted by and large wholesale in each EU Member State.

Where offshore feeder funds are marketed into the EU, in respect of offshore master AIFs, an Annex IV report should only be required in respect of the feeder fund. However, to comply with ESMA’s guidance, each EU Member State is likely to ask for basic information about the underlying master fund concerning its investment strategies, principal exposures and concentrations, risk profile and leverage.

Annual Report of the Offshore AIF

The Offshore AIF’s annual report must be made available to investors based in the EU and filed with the relevant regulator in the EU Member State where marketing is conducted within six months of the AIF’s financial year end. Disclosures to be included in the financial statements include the total remuneration for the financial year, split into fixed and variable remuneration, paid by the AIFM to its staff, as well as the number of beneficiaries and (where relevant) any carried interest paid by the AIF.

Stake Building Notifications and Asset Stripping Restrictions

In the event that an AIF holds investments in companies which have their registered offices in the EU, certain notifications to EU regulators will be required where interests in unlisted target companies exceed or fall below certain thresholds. Where control is acquired by the relevant AIF then certain information might need to be made available, not only to the applicable regulator, but also to the company (whether listed or not) and its shareholders.

Restrictions on certain transactions (commonly known as asset stripping) apply for a period of 24 months following a transaction where any AIF individually or jointly acquires control of a non-listed company.

1 An AIFM is below the €100 million threshold if it manages portfolios of funds whose assets under management, including any assets acquired through the use of leverage do not exceed €100 million. An AIFM will be below the €500 million threshold if it manages portfolios of funds that do not use leverage and are closed-ended and whose AUM do not exceed €500 million.

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