23 March 2018
Many were relieved to see that single family offices were one of the groups specifically exempt from the Alternative Fund Managers Directive (‘AIFMD’). The AIFMD is the biggest development in the fund management industry in recent times and all its requirements became directly applicable from July 2014.
Despite the exemption for single-family offices, the AIFMD may still have unexpected specific consequences for single family businesses, or, at least, for family single offices managing the wealth generated by large single family businesses.
The specific exemption does not apply to multi-family offices. Please contact us if you require advice to how the AIFMD affects a multi-family office.
What does the AIFMD do?
The AIFMD makes managers of alternative investment funds (‘AIFMs’), and the funds themselves (‘AIFs’) subject to regulation on a pan-European basis. The main driver behind the AIFMD is the impact on the EU’s financial stability and the EU’s desire to regulate more intensely the larger hedge funds and private equity groups.
Any entity that manages a collective investment scheme (‘CIS’), which is not a UCITS, is likely to be an AIFM managing AIFs for the purpose of the AIFMD. Given the extremely broad definition of AIFs, single family investment vehicles and offices are specifically exempted from the AIFMD in circumstances where ‘the investment [is] in an undertaking by a member of a group of persons connected by a close familial relationship …’
Recital 7 to the AIFMD provides a carve-out which applies to single family offices that do not accept external capital: ‘family office vehicles which invest the private wealth of investors without raising external capital, should not be considered to be AIFs in accordance with this directive.’
In other words, the AIFMD should not affect a single-family office if that office deals exclusively within that single family. However, if a single-family office enters into an investment alongside other investors (where no such family relationship(s) exists) that office could come within the AIFMD’s remit. Even if the family office would not usually consider itself to be a multi-family office. Any such arrangement could be viewed as a CIS and the raising of capital from third party sources within the scope of the AIFMD. If there is a structure that can be construed as a CIS (i.e., pooling of capital with a view to generating a return), it could be considered an AIF and thus within the scope of the AIFMD. This could still capture those single family offices who consider themselves to deal exclusively for ‘family and friend’ investors.
The key areas of regulation under the AIFMD include:
- expanded reporting and disclosure obligations, to both regulators and investors
- various governance and conduct of business standards above and beyond those already imposed by national regulators
- new rules around the use of prime brokers and depositaries/custodians
- a requirement that managers retain regulatory capital explicitly based on assets under management
- new remuneration requirements
What does this mean for single and multi-family offices?
Costs under the AIFMD will increase for single-family and multi-family offices, which must now either ensure that they are AIFMD compliant, or that they do not fall within the scope of the AIFMD. In addition, given that they pass the compliance costs on to the end user, funds in the EU are likely to become more expensive for their investors, which is a key issue for family businesses and those who run family offices who invest in such funds. Family offices need to be certain that their own structures either do fall outside the AIFMD or that they are compliant with AIFMD regulation.
Family offices based outside the EU
One additional group that is exempt from the full repercussions of the AIFMD are AIFMs that market AIFs to EU investors via national private placement regimes. Most of the managers that fall within this category are based outside the EU so this would apply to non-EU family offices seeking to raise capital from EU investors. To do so, a non EU manager must comply with requirements set by national private placement regimes, which may vary. For example, regulations 57, 58 and 59 of the UK Alternative Investment Fund Managers Regulations 2013, requires managers using the national private placement regime in the UK to notify the FCA and demonstrate that the regime by which the AIF is regulated meets international standards.
The workings of the national private placement regimes will be reviewed by the European Securities and Markets Authority (‘ESMA’) in 2015. This may require an EU marketing passport to be issued to non-EU managers as a result of that review. It is expected that all the national private placement regimes will be abolished in the full review of the AIFMD in 2018.
What should family offices do?
- Family offices should review their structures to ensure they definitely do not manage AIFs and are not inadvertently breaching AIFMD requirements
- Where family offices deal with a small amount of external capital, they should consider whether or not the trade-off between having access to that capital and the extra costs of complying with the AIFMD regime continues to make economic sense
- Where family offices are close to the €100 million threshold and manage AIFs that accept external capital, they should consider whether they are prepared to take the risk that thresholds will be breached and whether they are prepared to comply with the full scope of the AIFMD if it is. If not, they may wish to consider redeeming units, or restructuring their operations by closing AIFs to stay beneath this €100 million threshold. Alternatively, family offices could convert AIFs into managed accounts, which do not fall within the scope of the AIFMD
- Where family offices deal with external capital and expect to fall within the small AIFM regime, they should consider whether their current reporting capabilities will enable them to provide the information that will need to be filed annually. Family offices should consider whether they will need additional services from existing third party providers, or whether new providers will be required to enable compliance.