Diagnostics, assessment and advice

www.pwc.lu/aifmd

The AIFMD strategyMaking your AIFMD strategy pay

The Alternative Investment Fund Managers Directive (“AIFMD”) will be transposed in EU Member States’ national legislations by July 2013. Luxembourg will most likely be at the forefront of this transposition. By July 2014, existing alternative investment funds (AIFs) in Luxembourg will have to have a single alternative investment fund manager (AIFM) responsible for their investment and risk management. This AIFM will be required to comply with quite onerous requirements, be it in terms of capital, organisation and conduct of business rules. The scope of their activities, the ability and the way to delegate functions are now clearly defined.

Who will be the future AIFM?According to the AIFMD, the AIFM is the entity that “manages” the AIF. An AIFM must, at least perform, when managing an AIF, the portfolio management and risk management functions, notwithstanding its ability to delegate in part or in whole these functions.

It is first necessary to identify the funds or structures that meet the definition of an AIF, before identifying the AIFM. As a general rule, it is expected that those Luxembourg products which are not UCITS, i.e. the Part II funds, SIFs and SICARs and many unregulated products will most likely be AIFs. While the identification of an AIF may be straightforward under certain circumstances, it can be quite complex and subject to interpretation given the lack of clear definition of an AIF and the various exemptions available.

Depending on the legal form of the AIF (contractual or corporate), the AIFM will, as the case may be, probably be:

• the management company of those AIFs (Chapter 16 or 15 management company, the latter if it also manages non-UCITS), or

• another entity that the AIF appoints as such. Once appointed the AIFM will be responsible for ensuring compliance with the Directive, or

•

• finally, the corporate type AIFs can decide to be “self-managed”, i.e. it will not designate an external AIFM to manage it but rather take care of its management internally

It is indeed left at the discretion of the AIF to decide who it will appoint to act as its AIFM. Thanks to the management passport, this AIFM may be located in any EU country.

The choice will depend on many factors: existing entities in charge of portfolio and or risk management within the organisation wish to avoid a duplication of requirements notably in terms of capital, distribution strategy (in or outside the EU), and also client demands and expectations, etc. There is not one preferred solution; deciding on an optimal target business model will be complex. The identification of ‘in scope’ AIF and determination of its AIFM should be the first and essential step on the road to implementation. Consequences will need to be considered at each step and strategic decisions made by senior management to establish a target business model that is compliant but also efficient and taking into account business priorities.

If, as part to the strategic decision making, restructuring of entities and/or activities cross border is considered, the potential impact as well as the opportunities in respect to taxation

The AIFM will need to adapt or set up accordingly so that it complies with the requirements imposed by the Directive:

• its capitalisation will probably need to change, at a minimum to take into account the new requirement for a coverage of professional indemnity. Depending on the level of AuM additional capital may be significant;

• a sound organisation in terms of human and technical resources as well as independent control functions will need to be put in place;

• new rules on risk and liquidity management, adapted to the type of funds managed, will need to be implemented;

• delegation arrangements will need to be reassessed, some may need to be modified to be compliant;

• onerous transparency and reporting obligations will need to be taken into account. The AIFM may consider outsourcing these transparency requirements;

• an independent valuer will need to be appointed, either internally or externally;

• unregulated AIFs, which to date, did not require a depositary will need to appoint a depositary;

• conduct of business rules, the purpose of which is to avoid conflict of interests, remunerations and inducements which are undue will now apply;

• the directive requires that comprehensive policies and procedures be put in place and documented;

• A number of requirements will necessitate modifications to existing agreements.

Portfolio Manager

Administration Agent

Dep

ositary B

ank

Board of Directors & Conducting Officers

Delegation control

Risk and Liquidity Management

Compliance & Internal

Audit

Portfolio Mgt.

Adminis-tration

MarketingCorp.

secretary

What will the future AIFM need to do?

Here are the various impacts of the directive on the AIFM.

AIFMD - Key Impact Areas or the AIFM

Authorisation

Specific Provisions

Conduct of Business

Functions and services

AIFM

Passporting rules

Transparency

• Management passport• Marketing passport• Private placement

• Remuneration guidelines• Rules of conduct• Conflict of interest

• Scope• Authorisation requirements• Capital requirements

• Valuation requirements• Risk & liquidity management• Delegation oversight

• Leverage• Major holding and control• Asset stripping

• Annual Report• Reporting to regulators• Disclosure to investors

1

2

3

4

5

6

including transfer pricing will need to be analysed. Indeed, any change in the functional and risk profile of a legal entity will trigger a change in the transfer pricing policy applicable to the impacted entity. The impacts can be minor, but also important. If, for example, functions are transferred from one country to another, this may trigger exit taxation. If due to an amended transfer pricing policy, profits are increased in one country, they will most likely be reduced in another country. Tax authorities may challenge the changed profit allocation.

Getting the profits in the ’right’ place within the multinational organisation can have a significant impact on a group’s effective tax rate. Another key aspect to consider is VAT. While fund management activities are generally VAT exempt, there remain some divergences in the scope of the services covered from one EU country to another. Choosing a location for the AIFM where the rate, scope of the VAT exemption and input VAT recovery position are the most favourable should be one of the factors to consider in the overall decision.

Managers of AIF in Luxembourg, be they Chapter 16 management companies or self-managed SICAVs, are currently responsible for portfolio management and risk management while delegating significantly these functions. Under the AIFMD, the extent of delegated functions will evolve.

The Directive is clear, an AIFM cannot be a letter box entity. At this point in time, it is unclear what level of activity and substance will be required at the level of the AIFM. In a recent discussion paper, ESMA stated that it considers that an AIFM may delegate the two functions (i.e. portfolio management or risk management) either in whole or in part, with the understanding that an AIFM may not delegate both functions in whole at the same time. In its draft Level 2 regulation, the EU commission is going one step further, indicating that an AIFM shall be considered a letter box entity if the totality of the

individually delegated tasks substantially exceeds the tasks remaining with the AIFM.

What ever the outcome and the final level 2 measures, it is clear that current delegation schemes and activities remaining at the level of the AIFM will need to be reassessed and most likely modified.

Another aspect to consider is that the delegation of the portfolio management to the depositary, prohibited under UCITS, goes even a step further in the AIFMD as its prohibition is extended to the sub-depositary. For many financial groups here in Luxembourg, this may create a real issue as the mother company abroad is often the designated portfolio manager for the Luxembourg fund of the group and it acts as a (global) sub-custodian.

The above only illustrate some of the questions surrounding future delegation arrangements.

What about delegation?

AIFMD management companyDelegation control - Stricter than under UCITS

Board of Directors & Conducting Officers

Delegation control

Risk and Liquidity Management

Compliance & Internal

Audit

Portfolio Mgt.

Adminis-tration

MarketingCorp.

secretary AIFMD guidelines

• ‘Objective reason’;• Prior notification, sufficient resources, good

repute and experience;• Delegate must be authorised in case of the

delegation of PM/RM;• Delegation to 3rd countries subject to

conditions;• No delegation of PM/RM to Depositary Bank

or its delegates.

UCITS similarity scale

Similar Different

Key operational issues

• Identification and assesstment of delegates;• Assessment and documentation of ‘objective

reasons’;• Assessment of non-compliant delegations and

delegates;• Anticipation of prohibition of PM/RM

delegation to delegates of the Depositary.

Can a UCITS Management Company be used as future AIFM?As the AIFMD clearly states that an AIF may be managed by a UCITS management Company, provided it extends its scope of activities, the answer is an obvious one. On the face of it, the use of a UCITS ManCo as the AIFM is very appealing in view of the similarities in term of capital requirement, conduct of business rules, resources

and organisation. However, the level of economies of scale will vary, as an AIF is not a harmonised product. Will it make sense to mix all different asset types and hence risks under one company? Can one really leverage significantly on what already exists? These questions will need to be considered early on.

Is the self-managed AIF an alternative to designating a future AIFM?The AIFMD, as UCITS, provides corporate type of AIFs with the possibility to be “self-managed”, e.g. they do not have to name an external AIFM and must comply with all the Directive’s requirements. Conditions relating to capital and own funds of those self-managed AIFs are for example much lower, but in turn their scope of activities is very limited. They can only manage their own assets. For those AIFs which are under the threshold of 100 Mio EUR, which is the amount of AuM allowing

to be exempted from most requirements of the AIFMD, going the self-managed route is probably quite appealing...if you don’t want or need to take advantage of the new marketing passport granted by the AIFMD, which will allow qualifying AIFs to raise publicly capital from professional investors in Europe. Again this will need to be considered upfront when deciding what the target business model should be.

Why PwC Luxembourg?

© 2012 PricewaterhouseCoopers S.à r.l. All rights reserved.

The global PwC network is the largest provider of professional services in audit, tax and advisory. We’re a network of independent firms in 158 countries and employ close to 169,000 people. Tell us what matters to you and find out more by visiting us at www.pwc.com and www.pwc.lu.

PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with more than 2,100 people employed from 57 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach.

Contacts:

Marie-Elisa Roussel, Audit Partner +352 49 48 48 2583 marie-elisa.roussel-alenda@lu.pwc.com

Begga Sigurdardottir, Tax Partner +352 49 48 48 5843 begga.sigurdardottir@lu.pwc.com

Xavier Balthazar, Regulatory Partner +352 49 48 48 2543 xavier.balthazar@lu.pwc.com

Olivier Carré, Regulatory Partner +352 49 48 48 2615 olivier.carre@lu.pwc.com

Michael Daemgen, Regulatory Director +352 49 48 48 2615 michael.daemgen@lu.pwc.com

How we can helpThe AIFMD is a complex piece of legislation. Far from being only the compliance monster many put forward, it reveals real opportunities for those who implement it wisely. It contains many technical requirements, some of which may require significant changes to your current structures and organisation.

Our multi-disciplinary and multi-industry team of professionals in business strategy, operation and structuring, regulatory compliance, tax, remuneration and assurance services can help you: identify and assess the many impacts of the Directive on your organisation and develop an integrated response to the AIFMD. Our team works closely with the PwC European AIFMD working group to make sure that knowledge and best practices are shared on a Pan-European basis.

This AIFMD team of experts can:

• Help you diagnose how and where the Directive will have an impact on your business and products and hereby create a map of your overall structural framework focusing on the products (i.e. in scope, out of scope, location and investor specific issues), on the entities (i.e. their location, who is in, who is out and how different entities may be impacted) and on relationships (i.e. both internal and external). We can assist you in determining who should act as your products’ AIFM and reflect with you which model is most appropriate if you are in a third-party business;

• Once this mapping exercise and determination is done, provide you with an analysis of affected areas and give you recommendations regarding the necessary amendments, in all their dimensions, to comply and fit with your strategy;

• Finally, if required, we can bring the necessary support and advice to assist you further with implementing any enhancements to your organisation.

Integral to this assistance is our deep industry knowledge in Luxembourg and Europe and our expertise in the AIFMD. Our team of experts has followed each step of the Directives development and its related implementation measures and has been engaged in on-going dialogues with key stakeholders, including asset managers, service providers, trade associations and regulators. Take advantage of this knowledge and transform it into benefits.

AIFM PwC inputs

Oversight of Delegated Functions

Risk and Liquidity Management

Compliance & Internal

Audit

Portfolio Mgt.

Fund Accounting /Reporting

Sales

Bus

ines

s U

nits

Wo

rk p

rog

ram

/ A

naly

sis-

Mat

rice

sG

ap-

Ana

lysi

s

1. Standardised AIFMD analysis approach

2. Involvement of local AIFMD & industry experts

3. Benchmarking with general industry trends as to AIFMD strategy

As-Is To-be

Please refer to our “Depositary Bank compliance check - Diagnosing before resolving” flyer for more information (www.pwc.lu/aifmd)