A rising number of European investment managers are touting platforms that enable Asia-based private equity firms to market funds and raise capital in Europe while outsourcing compliance under the Alternative Investment Fund Managers Directive (AIFMD).
But Luxembourg-based PE firm Royalton Partners says it is the first to offer a third-party structure that allows non-EU private equity managers to avoid stringent AIFMD remuneration rules. The rules would affect general partners’ carried interests, bonuses and benefits.
After Royalton, which has raised a third fund of $100 million, received an AIFM licence in May, it decided to branch out into third-party solutions, says managing partner Nigel Williams.
The firm’s new service could seem at odds with its nine-strong management team’s experience in managing insurance, solar power and waste-processing companies in Eastern and Central Europe.
And the offering does not seem particularly ground-breaking, say industry sources. Some firms in Luxembourg already offer to fulfill the responsibilities of an authorised AIFM on behalf of non-EU managers.
Yet Williams says Royalton’s co-investment, advisory model differentiates it from the ‘delegation’ model that other firms follow. He argues that Royalton’s approach shields non-EU managers from AIFMD’s reporting obligations and, more importantly, its rules on remuneration, which aim to prevent excessive risk-taking.
“The aim of the AIFM directive is not to restrict bonuses and salaries of managers worldwide, or in Asia; but to restrict [those of] managers in the European private equity space only,” he says.
The directive allows managers, subject to certain conditions, to delegate portfolio management functions to a third party.
This means an Asian manager running a fund under a Cayman Islands limited partnership could engage an EU-based authorised manager to perform risk management functions when marketing the fund in the EU.
However, the third party would still be subject to regulatory requirements, including the rules on remuneration.
By running a parallel fund in Luxembourg that would co-invest with non-EU private equity funds in portfolio companies, non-EU managers could avoid the extra-territorial impact of the EU’s new remuneration rules, Williams says. Advisers are not considered delegates and are therefore not subject to the remuneration rules, he notes.
Royalton would co-invest a percentage of the non-EU manager’s GP commitment as its own capital commitment into the Luxembourg fund. In turn, it would receive a percentage of the carried interest and management fees as agreed with the non-EU manager.
The firm has yet to secure a client for its new service, Williams says, but it is in talks with three to four PE groups that are interested in the solution.
Since July last year, many European states have enshrined AIFMD in domestic law. Starting Tuesday next week, European managers must use a passport to market alternative investment funds within the EU.
Non-EU alternatives managers will not be able to make use of the AIFMD marketing passport until 2015 at the earliest. Hence many Asia PE managers are only just starting to think about the implications of the directive for future fund-raising in Europe.