EU directive places Cayman funds at a competitive disadvantage

The European Alternative Investment Fund Managers Directive puts non-EU managers and their funds at a disadvantage compared to EU-based alternative investment funds by restricting full access to the European market until 2015, according to Benjamin Collette, a partner at Deloitte Luxembourg. 

While non-EU funds in principle have the opportunity to solicit investments through private placements in each individual European country, many countries have restricted the access in such a way that the private placement route is virtually closed, Mr. Collette said at a Cayman Islands Society of Professional Accountants training event at the Westin Grand Cayman Seven Mile Beach Resort & Spa, on Wednesday, 12 June. 

Germany, so far the only country that has transposed the directive into domestic law, has “effectively killed private placement” by demanding that the funds and the fund manager have to be based in the same country, Mr. Collette said. “How many managers do you have here?” he asked.  

The majority of Cayman-based alternative investment funds, such as private equity or hedge funds, are managed from the US, according to the latest available Cayman Islands Monetary Authority Investment Digest. About 23 per cent of Cayman funds are managed from Europe. 

As a result, Mr. Collette said all offshore fund locations see their access to the German market completely closed. And France, Italy and Spain are expected to take the same position. The only countries that still provide flexibility for private placements are the UK, Austria, Belgium and Luxembourg, he noted. 

The directive, which will come into force in July 2014, regulates fund managers, but it impacts alternative investment management activities in the EU, funds domiciled in the EU and non-EU funds that are marketed to European investors.  

From 2015, non-EU funds will be able to access the European market and raise funds from European investors by becoming fully compliant with all requirements of the directive and registering for the EU passport regime. The European Securities and Markets Authority will decide in 2015 about whether to phase out the private placement regime or extend it until 2018. 

To participate in the passport regime funds have to establish a presence in one EU member state, but they do not have to register with and report to regulators in each individual EU country where they have investors. 

However, between 2013 and 2015 the only route to the market for non-EU funds is the private placement as it is used today. “If I was a US manager I would not be too happy that I have to wait two years compared to my European competitors,” Mr. Collette said. 

Reverse solicitation, a process whereby the investor contacts the fund manager, rather than the other way around, is also not an effective option to raise funds from European investors on a wider scale because the fund will have to demonstrate that it did nothing to solicit the investment, he said. “This is not a strategic option.” 

He also warned it would leave the fund open to legal and regulatory challenges later on, saying “it is like giving a freebie to the investor to complain” with the regulator in their home country when something goes wrong. 

Mr. Collette advocated that fund managers should not only take the short-term, but also a medium-term view of the European markets. “The advantage, in terms of access to the market, of being fully compliant with the directive, is so large, it should be considered by all managers.” 

Large funds that have only 2 or 3 per cent of European investors, in turn should not go down the extensive route until they decide to strategically focus on Europe. 

Access to the passport regime requires full compliance with a raft of regulations, including authorisation and reporting requirements to both investors and regulators, as well as remuneration disclosures. To qualify for the passport cooperation, agreements must be in place between regulators in the home country of the fund and the equivalent EU regulators. 

In May, the Cayman Islands Monetary Authority signed memoranda of understanding with the European Securities and Markets Authority to enable such agreements with the respective member states. 

Cayman already complies with the other EU requirements for the marketing of non-EU funds under the directive, given that it is not listed as a non-cooperative jurisdiction by the Financial Action Task Force and has concluded tax information exchange agreements with several European countries. 

Benjamin-Collette

Mr. Collette
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