What is AIFMD?
What is Solvency II?
What is an AIFMD Management Company ("AIFMD Manco")?
What is AIFMD?
The Alternative Investment Fund Managers Directive (AIFMD) is a European Union (EU) directive governing the regulation of alternative investment fund managers (AIFMs) operating in the EU. It was published in the Official Journal of the European Union on 1 July 2011 and came into force on 21 July 2011. Final deadline for implementation and compliance by affected firms was 21 July 2014.
Managing investments for third parties will be a regulated activity in all EU Member States, regardless of the investors, the assets, or - apart from a few exceptions - the structures that are involved. Investment management firms are considered an AIFM if they manage any type of investment fund other than a UCITS fund. UCITS funds are the European version of mutual funds that are eligible for public distribution to retail investors and are governed by laws following the various UCITS directives.
While the AIFMD subjects AIFMs to rules similar in nature to those known to firms managing UCITS funds, such as the need for minimum capital or an adequate risk management policy, it also imposes specific investment restrictions on certain types of asset classes such as securitizations. Previously, many of these restrictions applied only to banks.
What is Solvency II?
The Solvency II Directive (2009/138/EC) is an EU Directive that codifies and harmonises the EU insurance regulation. Solvency II is the new regulatory regime governing the business of European Insurance Companies, reinsurance companies and certain pension funds. It will come into effect on January 1, 2016, and will bring sweeping changes to the way European Insurance Companies conduct their business. One of the key innovations of Solvency II is the introduction of a regulatory capital regime that is based on a quantitative risk framework that is conceptually similar to what is already in existence in the banking industry.
Under this framework, each investment asset held by an Insurance Company for the purposes of meeting future liabilities needs to be, in part, covered by a sufficiently large amount of the company’s own capital in order to account for the risk of said asset potentially losing value.
Solvency II defines this risk as the maximum market value loss of an asset that is, in statistical terms, not expected to incur more frequently than 1 out of 200 times over a one year period (i.e. a 99.5% one year Value at Risk). In its Standard Model, Solvency II classifies a wide range of assets into distinct asset groups (i.e. Equity, Real Estate, etc.) and provides a set of parameters and rules for the calculation of a given asset’s loss potential and thus, its capital charge.
For investments in funds, Solvency II outlines three methods to calculate the capital requirements:
(1) Look-Through approach: This approach is applied if a look-through to all the underlying assets is possible to such an extent that the complete risk calculation can be performed in the same manner and as frequently as if the assets were held directly. In this case, the fund is treated as a disregarded entity for the purposes of this calculation and the capital requirement is calculated on the basis of each of the underlying assets.
(2) Mandate approach: If the Look-through approach cannot be applied, the capital requirement may be calculated on the basis of the target underlying asset allocation, provided, a) such a target allocation is available to the Insurance Company at the level of granularity necessary for calculating the capital requirement, and b) the underlying assets are managed strictly according to this target allocation.
(3): Equity approach: If the Look-through approach cannot be applied, the units or shares in an investment fund will be treated as if they were a Type 2 Equity position.
Solvency II differentiates between Type 1 and Type 2 Equity. A Type 1 Equity is primarily any stock listed on an exchange in an EEA or OECD country. Its base capital charge is set to 39% (± damper). The definition of Type 2 Equity includes any equity not listed in an EEA or OECD regulated market, non-listed (i.e. private) equities and certain other alternative investments. Its base capital charge is 49% (± damper).
What is an AIFMD Management Company (“AIFMD ManCo”)?
ManCo is an abbreviation for Management Company which is the term commonly used in Europe for a regulated, full service asset management firm as opposed to a financial services firm authorized to only perform the limited activities of portfolio management or investment advice. A Management Company may be registered in compliance with AIFMD (“AIFMD ManCo”), with UCITS (“UCITS ManCo”) or both (“Super ManCo”).
The core functions on an AIFMD ManCo are portfolio management and risk management. In addition, it is authorized to market and distribute AIFMD compliant Alternative Investment Funds ("AIF") across all EU memberstates and may perform administration and domicilation services. The AIFMD ManCo has the ability to sub-delegate the day-to-day portfolio management to an external duly authorized investment advisor as long it retains the risk management function and remains responsbile for an independent valuation. In addition, the ManCo may sub-delegate the marketing of it AIFs to a duly authorized investment advisor or third-party placement agent. The AIFMD ManCo will retain the oversight for due diligence, monitoring and control of these involved parties.
In summary, a “Third Party” ManCo is a Management Company whose business is focused on launching funds in partnership with unaffiliated (“third party”) investment management or investment advisory firms delegating the day-to-day portfolio management and marketing function to latter and retaining the risk management function.