Marketing in Africa–Navigating the AIFMD

25 Feb 2020

Marketing by private equity GPs to investors has become significantly more complex over the last few years, with the tightening up of regulations and the advent of the Alternative Investment FundManagersDirective (“AIFMD”) which governs marketing to European investors. European based Development Finance Institutions (“DFIs”) continue to be a key source of capital for Africa focused fund managers and understanding the impact of the AIFMD on structuring and marketing is therefore of utmost importance

Fortress Europe

The European Parliament has recently adopted new rules on the cross-border distribution of collective investment funds that will amend the AIFMD.  Although the new rules will have limited impact on African and other non-European managers and do not enter force until 2021, the current direction of travel is, if anything, likely to make it harder to market into the EU.   Fully authorised European fund managers benefit from a marketing “passport”, which offers a consistent, streamlined process enabling marketing to European investors.  There is no immediate sign the passport will be extended to third country (i.e. non-European) managers, who must continue to navigate the patchwork of national private placement rules under Article 42 of the AIFMD.

Marketing to European investors by third country fund managers

For many third country fund managers, having a fully authorised European management entity is not an option – the cost of having a place of business in Europe and becoming fully authorised to take advantage of the European passport (which allows marketing to all applicable European jurisdictions) is significant. Larger global emerging markets managers may well consider utilising this option, however smaller managers may opt to market as a Small (sub-threshold) Manager (please see further detail below), or opt to market under Article 42 of the AIFMD.  Article 42 allows third country fund managers to market to European investors based on the National Private Placement (“NPPRs”) in each country in which they wish to market.  If the manager is allowed to market under Article 42, then it must market according to the specific NPPR of that country (which differs from country to country).  This can be an expensive and time consuming process – whereas, for example, the UK requires a notification and allows pre-marketing, other jurisdictions don’t allow pre-marketing and may require a 3 month approval process.   However, in order to ascertain whether a manager can in fact market under Article 42, the article needs to be examined in more detail. It prescribes that:

  1. the manager must comply with certain disclosure and reporting requirements;
  2. the fund must not be established in a country designated as “non-cooperative” by the Financial Action Taskforce; and
  3. MoUs must be in place between the regulator in each EU state where the fund is marketed and the regulators in the countries where fund and the manager are established.

The first requirement above is generally well-known, and there are various providers, including law firms, which can help smaller managers comply (see “The Lightbulb Moment” below).   However, the second two requirements may disproportionately affect African managers.

The FATF precondition

The Financial Action Taskforce (or Groupe d'action financière) is a G7 initiative to develop policies to combat money-laundering.  Botswana, Ethiopia, Ghana and Tunisia are currently considered by the group to “have strategic AML/CFT deficiencies” and accordingly the second requirement of Article 42 is likely to be problematic for funds established in those countries.

MoU precondition

Article 42 states that MoUs must be in place between the regulator in each EU state where the fund is marketed and the regulators in the countries where fund and the manager are established. The European Securities and Markets Authority (“ESMA”) maintains a list of the various agreements in place.  Of course, a fund will often be established in a different jurisdiction from the manager, and it is important to check both those jurisdictions against the relevant target EU country.

The following shows a selection of relevant countries (with “x” indicating the absence of the relevant MoU):

 

Egypt

Morocco

Mauritius

South Africa

Tanzania

AMF (France)

 

 

 

X

 

X

BaFin (Germany)

 

X

X

X

X

X

CMVM (Portugal)

 

X

 

 

 

 

CNMV (Spain)

 

 

 

X

 

 

Consob (Italy)

 

 

 

X

 

X

CNB (Czech Republic)

 

 

 

 

 

X

Finanssivalvonta (Finland)

 

 

X

X

 

X

Finanzmarktaufsicht (Austria)

 

X

X

X

X

X

FSMA (Belgium)

 

X

X

 

 

X

AVP (Slovenia)

 

X

X

X

X

X

CFSSA (Croatia)

 

X

X

X

X

X

 

For example, this means a Mauritius PE fund sponsored by an Egyptian manager could not be marketed in France, Germany, Spain, Italy, Finland, Austria, Slovenia, Croatia, Portugal or Belgium.  The existence of the right MoU certainly cannot be taken for granted and it is fundamental to ensure that this is considered when the jurisdictions of the fund and the manager are being determined.

Small (sub-threshold) Managers

One aspect of AIFMD which has been implemented differently across various states is the “small manager” regime.  AIFMD has an exception in respect of managers managing (directly or indirectly) funds which, in aggregate, have assets not exceeding either €100m or €500m.  The €100m limit will apply in all cases, save where the AIFM manages funds which:

  • are not leveraged; and
  • (in summary) do not allow redemptions for investors within 5 years of their admission.

For these purposes, “leverage” would not include drawdown bridging facilities provided the facility is at all times covered by undrawn commitments (this is on the basis that such borrowings are excluded from the calculation methodology for “leverage” in the AIFMD, though not expressly carved out from the definition of that term).

For marketing into the UK, the small AIFM exemption is helpful, as it would allow an African manager managing African funds below the threshold to register as a “small third country AIFM” and so to escape the alternative of having to market under Article 42 regime which would otherwise apply.   However, EU states have latitude as to whether the regime applies in their country, and many, such as the Netherlands, do not make a distinction for these small managers.  Accordingly this exemption is of limited value as a result of divergent implementation of the AIFMD across Member States (a theme which is common to many of the frustrations which non-European managers experience when marketing into Europe).   

The Lightbulb Moment

Assuming the FATF and co-operation agreement preconditions are both met, non-EU managers will look to ensure compliance with the rest of Article 42.  Unfortunately the notion that ‘only Article 42 applies’, whilst literally true, is not the whole story.  Article 42 has the effect of ‘switching on’ various other parts of AIFMD so that those also become applicable to non-EU managers.  In this context, the following other Articles are relevant:

  • Article 22: The fund’s annual report must contain certain prescribed content. This includes some detail about remuneration paid to staff (including any carried interest). Accordingly it is sometimes controversial with, for instance, US managers but perhaps less so with African managers more used to DFI-imposed transparency requirements;
  • Article 23: Certain prescribed disclosures must be made prior to an investor’s admission. In practice, these disclosures are included as a matter of course in the offering documents of well-advised African managers so this is generally not a difficult ask;
  • Article 24: There are some ongoing reporting obligations. This is similar to the Form PF process, and managers will generally require the assistance of compliance consultants.  Note that a slimmed down version of these reports is also generally required from those “small managers” described above; and
  • Articles 26-30: These are known as the ‘asset-stripping’ provisions and the onerous ones are generally applicable to funds gaining control over EU companies, which is likely not the case for a typical African fund.

Gold-plating

Aside from the points above (including the ‘switch-on’ of certain other parts of AIFMD), Article 42 reminds us that “Member States may impose stricter rules.” 

France, for example, is challenging because of the requirements to appoint a French centralising agent and to comply with the vast majority of AIFMD. In Spain, the local regulator there may reject applications on grounds such as prudential reasons.  Moreover, a Spanish entity must be appointed to intermediate the payment of the marketing application fee (and note that fees vary greatly between EU countries).

The following ‘heatmap’ gives a quick overview as to the relative overall difficulty of marketing.

 

Clearly, African fund managers have to contend with significant divergence across the EU.  We would suggest that, when African managers are considering their choice of legal counsel, cross-border marketing expertise should figure prominently in order to guide your structuring decisions and navigate the marketing landscape. 

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