Asian asset managers are exploring different methods of raising capital in Europe owing to the challenges of complying with the European Union's looming Alternative Investment Fund Managers Directive.
AIFMD sets requirements for alternative fund houses wishing to market to the 28 EU member states, effective from 2015, but substantial issues remain, argued panellists at AsianInvestor's recent Art of Asset Management forum in Hong Kong.
Many firms have not been keen to sign up to the new rules due to compliance costs and issues around disclosures, such as on remuneration. A BNY Mellon survey in July found that the cost of AIFMD compliance was expected to range from $300,000 to $1 million per institution.
Uncertainties from the implementation of AIFMD present challenges, says Jacqueline Petts, Asia head of legal at US-based private equity firm Silver Lake, one of the panellists.
Some countries have not yet transposed the directive into domestic law, and where it has been transposed, there are uncertainties over interpretation, she notes. “With different and changing regulations in each country, the costs of compliance for marketing a new fund are very tangible.”
At the time that AIFMD was first being debated, there was a sense that offshore managers could continue to rely on the national private placement rules until 2018 and that the status quo would effectively prevail, adds Petts. But it is now clear that the private placement rules will be restricted significantly or even closed off in a number of jurisdictions.
As a result, managers with a strong European investor base may seek to rely on a combination of continuing private placement rules and reverse solicitation, rather than submit to AIFMD passporting, she says.
One proposed structure is that European alternatives managers partner non-EU firms without a presence in Europe to enable them to set up funds and thereby access the AIFMD passporting regime, notes Petts. The European partner would be responsible for the risk management function of the non-EU manager, but the former would delegate portfolio management to the non-EU firm.
Yet such structures may go against the spirit of the rules, warns Graham Turl, BlackRock's general counsel for Asia Pacific, another panellist. “The reality is that we are living in a much more regulated world, and regulators are talking to each other much more than they perhaps used to.
“These sophisticated cute schemes need to be viewed with some degree of caution, because the SFC [Hong Kong's Securities and Futures Commission] can just put a call to the FCA [the UK’s Financial Conduct Authority] or the SEC [the US’ Securities and Exchange Commission], thus increasing the regulatory exposure for managers.”
Still, non-EU hedge fund managers are certainly not rushing to comply with the directive. A Preqin survey in July found that only 22% of the 220 hedge fund managers globally were AIFMD-compliant.
Hong Kong-based Turiya Capital has proscribed marketing to European clients altogether, notes another panellist, Jeff Levy, chief operating officer at the firm. Some findings suggest that the regulations “are inadequate in some ways”, he says.
“Time of course will tell, but if the case remains in two to three years' time and we find that very few have partaken of this regulatory framework, it would suggest that there has been some regulatory arbitrage or that [fund managers] have taken their business elsewhere or that they have simply proscribed marketing in Europe."
Indeed, while the European investor base is significant for some managers in Asia, the US is generally seen as the most important venue for capital-raising, given their increasing appetite for Asian exposure and uncorrelated returns, Levy notes.
“The position of AIFMD and the ensuing confusion that is the present state of affairs suggest that it is simply easier to look elsewhere for capital,” he adds. “Who would have ever thought that it would be easier to market in the US than in Europe? But that is certainly the current state of affairs now.”
“With that being said," notes Levy, "I can assure you there are many clever minds at start-ups all over the world, working on their own interpretation of AIFMD and potential 'workaround' solutions, whatever that means.”