April 2015

The “super AIFM”Efficiently implementing the AIFM Directive

AIFM DirectiveLuxembourg

Alternative investment groups are asking how to implementthe Alternative Investment Fund Managers Directive in a cost- efficient manner for investors, irrespective of their legacy operating model. In many cases,the “super AIFM” platform − as the regulated management entity − will be the optimal solution.

BackgroundThe Alternative Investment Fund Managers (AIFM) Directive requires a single AIFM to be appointed for alternative investment funds (AIFs), or the AIF to designate itself as internally managed.

Alternative investment groups – initiators, sponsors, advisers, general partners and managers of all types of non-UCITS funds have a number of options for the management of their AIF. Their interest is focused on how to implement the Alternative Investment Fund Managers Directive in a cost- efficient manner for investors, irrespective of their legacy operating model.

A wide range of operating modelsThe alternative fund sector is diverse, with a wide range of legacy structures created to respond to investor needs in relation to matters such as the style of corporate governance. In this environment, alternative investment groups are looking for the flexibility to choose which AIFM Directive-compliant operating model best suits their investors and fits their circumstances, and which entity would become the AIFM.

The optimal model will probably be based on one or a combination of the following:• The “super AIFM” model: Creating a single AIFM for an ensemble of fund ranges, or converting

an existing entity, such as a management company, to a “super” AIFM (typically super AIFMs will manage AIFs cross-border )

• The “multiple AIFM” model: Local AIFMs in each AIF domicile, or for specific fund ranges.• The “3rd party AIFM” model: Appointing one or more 3rd party AIFMs (e.g., for smaller• initiators who wish to appoint a professional manager to fulfill the role of AIFM). • The “internally managed AIF” model: designating AIFs as self-managed (e.g., for large, autonomous,

listed REITs)

In most cases, an AIFM will be implemented on top of existing legacy structures. Most groups will be against fundamentally changing legacy arrangements for existing funds, and in particular tax efficient structures.

Enter the “super AIFM”The “super AIFM” model enables groups to implement a governance model with clear separation of tasks between:• AIF Board: This Board would be dedicated to protecting the interests of the AIF and its investors, in

particular in the appointment and oversight of service providers including the depositary and the AIFM. This role may, for example, be played by the Board of an investment company. In many cases, independent Directors would sit on this Board.

• “Super AIFM” platform: This would be the focus of management activities, generally providing the “substance”, and meeting the legal and regulatory requirements.

The “super AIFM” would provide investment management services (i.e., portfolio management, risk and liquidity management), and may also provide distribution and administration services.

The “super AIFM” may:• Perform certain activities itself• Delegate certain activities to specialist service providers

The “super AIFM’s” own governing body would focus on overseeing the activities of the platform, including appointing and overseeing specialist service providers.

The “super AIFM” may implement internal committees adapted to the specificitiesof a fund or sub-fund, for example to bring together in a group the specific expertise necessary in relation to portfolio management.

In addition to the governance considerations, the “super AIFM” offers benefits such as:• Concentrating oversight, human and technical resources, processes and controls in relation to

management activities in a single entity• Benefiting from economies of scale• Avoiding duplication of effort• Reducing costs• Reducing risks• Simplicity of organizational model – easy to understand, and practical to run• Efficient supervision: a single entity which would be a key focus for supervisory authorities and

accountable to them• A single point of contact for investors, service providers, and the supervisory authorities

UCITSCommon fund

EU AIF

InvestmentCompany/SICAR

SOPARFI

Super AIFMPromoter’s own/Third-party

ManagementCompany

Non-EU AIF Non-EU AIF Non-EU AIF

EU AIF EU AIF UCITS

The Luxembourg “super AIFM”Luxembourg is the domicile of choice for many alternative asset management groups, for a number of reasons including:• Reputation of the Luxembourg brand in the investment fund industry• Regulatory environment including accessibility, knowledge and responsiveness of the regulator, as

well as local practice in areas such as outsourcing• Stability of political, economic and social environment, legal environment and taxation regime• Ability to implement efficient tax structuring solutions• Service provider considerations such as their expertise and their ability to meet specific local

distribution market requirements from Luxembourg• Local infrastructure• Location, language and cultural alignment• Group’s existing local presence

A Luxembourg “super AIFM” may serve a wide range of investment funds:• Luxembourg regulated AIFs (both common funds (FCPs) and investment companies• (SICAVs and SICAFs)) and unregulated products (such as SOPARFIs which are AIFs)• Other EU AIFs (such as Limited Partnerships), benefiting from the passport to manage• AIFs cross-border in the EU• Non-EU AIFs (such as Jersey Property Unit Trusts)• UCITS, if it also benefits from authorization as a UCITS management company

“Just like UCITS”?In the UCITS world, a “single management company” model has already been implemented by many asset management groups, as well as third party management companies; others are considering implementing such a structure. Furthermore, some groups already have a “single management company” for UCITS and non-UCITS (i.e., AIF).

However, the major difference is that the “single management company” has grown up with the fund ranges, and is not being imposed on top of existing legacy fund ranges.

UCITS management companies and AIFM may combine authorization within a single entity and obtain “dual” authorization as UCITS Management Company and AIFM. A dual authorized management entity is authorized to manage both UCITS and AIF, and can use the “management” passport to perform the activities for which it has been authorized in other EU/EEA Member States. It also benefits from “product” passports to market the UCITS products it manages to any investor, and the AIF products it manages to professional investors, in all EU/EEA Member States.

The “super AIFM” – advantages of the operating model in a nutshell:• More efficient, reducing costs and risks• Easy to understand and practical to run• Minimizes the impact on legacy operating models• Permits efficient supervision

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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Contacts

Alain Kinsch+352 42 124 8355 alain.kinsch@lu.ey.com

Michael Ferguson+352 42 124 8714 michael.ferguson@lu.ey.com

Michael Hornsby+352 42 124 8310 michael.hornsby@lu.ey.com

Kai Braun+352 42 124 8800kai.braun@lu.ey.com

Legacy AIF modelsFrom a business perspective, the implementation of a “super AIFM” is an appealing concept, but raises issues in relation to implementation and transitioning legacy structures to the new operating model.

In many cases, AIF structures are complex; they have been customized to the specific context of the group, investors and the investments of the AIF, and are structured in a tax-efficient manner.

Existing Luxembourg AIFs fall into the following categories:• Common funds (FCPs), which are currently required to appoint a Luxembourg resident

management company• Investment companies (SICAVs and SICAFs), which are not subject to a requirement

to appoint a management company; can be self-managed or appoint a management company

• SICARs, limited partnerships, SOPARFIs, and other commercial companies, which are not subject to a requirement to appoint a management company

Many initiators wish to keep existing AIF structures in place, for a number of business reasons, including:• Reducing the one-off cost of implementation• Ongoing efficiency in operating the structure, and risk reduction• Minimize the impact on operating models• Providing continuity and security for investors• Continuity of service provider agreements• Tax considerations

ConclusionThe “super AIFM” model enables groups to implement a governance model with clear separation of tasks between:• AIF Board: focusing on protecting the interests of the AIF and its investors• “Super AIFM” platform: being the focus of management activities, generally providing

the “substance”, and meeting the legal and regulatory requirements

Most European alternative investment managers have received authorization as AIFM in the past months. Their main focus is now on implementing the new AIFM strategy by setting up day-to-day tasks and schedules as well as developing checklists and other governance enablers.

Each group will develop different optimal platform structures depending on their own legacy structures, investor needs, governance and operational considerations. A “super AIFM” model, or variants thereof, would appear to be an optimal solution in many cases. Luxembourg will be a “super AIFM” domicile of choice.