Hedge Funds Workshop

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1 H

2 Hedge Funds Workshop

3 Boston 7 October 2011 Welcome & introduction Marc Saluzzi Chairman, ALFI

4 Boston 7 October 2011 Presentation slides will be available on the ALFI website under: conferences former events Please take a moment to complete an evaluation form and return to the registration desk at the end of the sessions Enjoy the seminar

5 Boston 7 October 2011 Alternative UCITS & Hedge Funds Moderator: Jérôme Wigny, Elvinger Hoss & Prussen Panelists: Michael Delano, PwC Alain Guérard, JP Morgan William Jones, ManagementPlus(Luxembourg)

6 Large choice of fund structures for implementing alternative strategies Regulation public distribution (retail + institutional investors) EU passport eligible asset classes only high level of regulation public distribution (retail + institutional investors) no EU passport all asset classes medium level regulation qualifying investors only (institutional, professional, well-informed) all asset classes low / medium level regulation UCITS Law of 17 December 2010 UCI Part II Law of 17 December 2010 SIF Law of 13 February 2007 Structuring - flexibility 6

7 Luxembourg Wide range of products Regulation Distribution Expertise of Service Providers 7

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9 Boston 7 October 2011 Alternative Investment Fund Managers Directive Moderator: Michael Hornsby, Ernst & Young Panelists: Hermann Beythan, Linklaters LLP Daniel Engel, Brown Brothers Harriman Marc Feider, Allen & Overy

10 Key objectives of the AIFMD Key objectives Extend appropriate regulation and oversight to all actors and activities that embed systemic risks Improve financial stability Ensure that the Alternative Investment Fund Managers (AIFMs) are subject to a regulatory framework Increase transparency towards regulators and investors, and public accountability for the actions of AIFMs Enhance investor protection Develop the EU internal market in the area of alternative investment, i.e., passports enabling AIFMs to offer their management services and market their AIF throughout the EU What does the AIFMD regulate? Direct regulation of AIFMs Indirect regulation of AIFs Creation of a European market for alternative investments via passports for management and marketing activities

11 Key definitions An Alternative Investment Fund (AIF) is any collective investment undertaking: which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors that does not require authorisation under UCITS An Alternative Investment Funds Manager (AIFM) is any legal person whose regular business is managing one or more AIF Where the AIF is internally managed and does not appoint an external AIFM, the AIF is the AIFM Managing means Portfolio Management and Risk Management may also include Administration

12 AIFMD scope In Scope Out of Scope All EU AIFM, which manage one or more AIF All non-eu AIFM, which manage one or more EU AIF All non-eu AIFM, which market one or more AIF in the European Union Holding Companies EU Pension Funds Supranational institutions National Central Banks Social security and Pension systems Employee participation / saving schemes Securitization special purpose entities AIFM managing only group investments AIFM with AUM of less than 100M (leveraged ) or 500M (unleveraged)

13 The AIFMD implementation timeline Since December 2010 (issuance of CESR/ESMA call for evidence), we have entered the Level 2 process. The European Commission may also review the application and scope of the AIFMD four years after implementation. Third countries marketing: EU national private placement regimes (PPR) continue, subject to some additional conditions Third countries marketing : EU passport or national PPR subject to conditions Third countries marketing : EU passport AIFMD Entry into force Transpo sition period ends EU AIFM to get authoriz ation EU passport for third countries End of EU national private placeme nt regimes 21 July years + 3 years + 4 years + 7 years Mid 12: Adoption of Level 2 measures Nov 11:ESMA advice to the EU Commission

14 EU distribution post AIFMD EU AIFM / EU AIF Distribute under EU Passport (from 2013) EU AIFM / Non-EU AIF Distribute under National Private Placement Regimes (until at least 2018) Distribute under EU Passport (from 2015) Non-EU AIFM / EU AIF Distribute under EU Passport (from 2015) Distribute under National Private Placement Regimes (until at least 2018) Non-EU AIFM / Non-EU AIF Distribute under National Private Placement Regimes (until at least 2018) Distribute under EU Passport (from 2015)

15 AIFMD scope matrix Scenario AIF M Marketing AIF Investors In Scope Date Requirements EU 1 2 EU EU EU YES 2013 Passport Full directive applies EU EU Non EU YES 2013 None Full directive applies 3 EU Non EU Non EU YES 2013 None Full directive applies, except depositary and annual report requirements Cooperation arrangements must be in place 4 EU Non EU EU YES NPPR Possible access to passport Full directive applies, except depositary requirement Cooperation arrangements must be in place The non EU country may not be listed by the FATF Full directive applies Cooperation arrangements must be in place A tax agreement must be signed The non EU country may not be listed by the FATF Source: ALFI

16 AIFMD scope matrix Scenario AIFM AIF Investors In Marketing Date Scope EU Requirements Non EU Non EU Non EU EU Non EU Non EU EU YES YES None NPPR NPPR Possible access to passport Obligation to comply only with transparency and controlling interests provisions Cooperation arrangements must be in place The non EU country may not be listed by the FATF EU EU YES Full directive applies Possible access to passport Full directive applies Appointment of a Member State of Reference and of a legal representative Cooperation arrangements must be in place A tax agreement must be signed The non EU country may not be listed by the FATF Appointment of a Member State of Reference and of a legal representative Cooperation arrangements must be in place A tax agreement must be signed The non EU country may not be listed by the FATF Same requirements as for Scenario 2 above Same requirements as for Scenario 2 above 4 Non EU Non EU Non EU NO None None

17 Key provisions - overview At the level of the AIFM Authorization Capital Conduct of business, incl. remuneration Conflicts of interest Risk management Delegation Marketing provisions At the level of the AIF Liquidity management Valuation Depository Transparency Leverage Controlling interests Marketing provisions

18 Why is it important? Structure of asset management platforms Conduct strategic review Reassess product design Align tax and regulatory substance with efficient operating models Formalization of roles and responsibilities (portfolio and risk & liquidity management etc.) Review advisory and delegation agreements Positioning of alternative products with investors Using the passport Brand recognition Improving investor confidence Challenges for managers Managing the transformation Authorization Ongoing compliance Trigger for mergers and acquisitions within the sector Page 18

19 What should asset managers be doing? Proactively engaging in the Level II consultation Review ESMA s draft guidance over the summer and contribute to consultation Now to December 2011 Reviewing their fund ranges Converting some potential AIFs into UCITS (including newcits ) Ongoing Analyzing their global structure Identifying all (potential) AIFMs and AIFs Categorizing AIFMs and AIFs by type Conduct scenario analyses on (re)structuring options Now to Q Analyze their current state of operations against AIFMD requirements Perform gap analysis and set up remediation plans to be executed in 2012 Now to December 2012 Looking for business opportunities Smaller players may be squeezed; are there opportunities for M&A activity? Ongoing

20 AIFM Directive Luxembourg degree of readiness Lux AIF (UCI/SIF/SICAR) Lux AIFM Prudential supervision Depositary requirement Transparency requirements Delegation Passporting capabilities Support services Highest compatibility standard Highest compatibility and «UCITS ManCo» track record Already standard Already standard Already standard Already standard Luxembourg sets global standard for distribution/placement AIFMD anticipation 20

21 Boston 7 October 2011 Fund set-up & operating models Moderator: Claude Niedner, Arendt & Medernach Panelists: Nathalie Dogniez, KPMG Alain Guérard, JP Morgan Daniel Hart, Gottex Fund Management, New York Raymond Krawczykowski, Deloitte

22 Large choice of fund structures available 22

23 Available legal forms UCITS Law of 17 December 2010 UCI Part II Law of 17 December 2010 SIF Law of 13 February 2007 Self-managed ManCo SICAV / SICAF FCP ManCo Umbrella Umbrella 23

24 Large choice of fund structures for implementing alternative strategies Regulation public distribution (retail + institutional investors) EU passport eligible asset classes only high level of regulation public distribution (retail + institutional investors) no EU passport all asset classes medium level regulation qualifying investors only (institutional, professional, well-informed) all asset classes low / medium level regulation UCITS Law of 17 December 2010 UCI Part II Law of 17 December 2010 SIF Law of 13 February 2007 Structuring - flexibility 24

25 What is needed for the set-up? 25

26 What is needed for the set-up? Mandatory Luxembourg service providers: Directors Custodian Central Administration Agent Auditor Optional service providers: Investment Manager Investment Advisor Distributor UCITS UCI Part II SIF Prime Broker Promotor requirement (only UCITS and UCIs) Risk Management (only UCITS and UCIs) Substance requirements (only UCITS) 26

27 In terms of service providers Investors Worldwide Central Administration Custodian Bank Fund Registrar & Transfer Agent Portfolio Management 27

28 The regulatory approval process 28

29 Key documents for the approval of a fund Prospectus KID (for UCITS) Articles of incorporation, if corporate structure Management regulations, if contractual structure Service agreements Information on initiator and directors 29

30 The regulatory approval process W 1 - W 4 W 5 W D W D W 9 - W 11 W 12 W months UCI and UCITS - Identifying and deciding on key structural issues - Drafting key legal documents, amending and settling them with all interested parties Filing of full application with CSSF Confirmation of application registration 1. CSSF comments 2. CSSF comments - CSSF approval & launching date - Start of public offer private placement in Luxem-bourg - For UCITS, start of 2 months notification period For UCITS: start of public offer in other EU countries SIFs - Identifying and deciding on key structural issues - Drafting key legal documents, amending and settling them with all interested parties Inception of SIF + start of private placement in Luxembourg and other countries Submission of application to CSSF CSSF approval Although a SIF may be launched prior to CSSF approval (provided the application for approval with the CSSF is made within the month following the creation), it is usually recommended to submit the term sheet to the CSSF before launch to determine whether the CSSF has any substantial issues. SIF pre-registration launch to be abolished by end 2011 replaced by fast-track approval process tested since mid

31 What will the AIFMD change? 31

32 The current business model of a Luxembourg fund Investors Central administration SICAV (UCITS, UCI, SIF) or ManCo Asset Manager FCP (UCITS, UCI, SIF) Custodian Investors 32

33 The future business model of a Luxembourg fund Investors Administration Central administration centrale SICAV (UCITS, UCI, SIF) AIFM Asset manager Investors Dépositaire Dépositaire Custodian Bank 33

34 Who will be the AIFM? Investors AIFM Investment Manager and / or Investment Advisor SICAV (UCITS, UCI, SIF) Holdco SPV General Partner (SCA) Asset Manager Authorisation requirements Capital requirements Good repute, professional experience of conducting persons Conduct of business rules Remuneration policies Conflicts of interest Risk management 34

35 Who will be the AIFM? Investors Investment Manager and / or Investment Advisor FCP (UCITS, UCI, SIF) Holdco ManCo SPV Asset Manager 35

36 Portfolio and risk management AIF Asset Manager Authorised or registered for asset management Subject to supervision (or prior approval) AIF Asset Manager Idem as above Cooperation agreement 36

37 The EU passport and the passport for third countries 2013: EU Passport AIFM SIF EU Passport Marketing to professional investors Domestic private placement rules no longer applicable AIFMD fully applicable to AIFM and AIF 37

38 The EU passport and the passport for third countries 2015? EU Passport AIFM AIF AIFM AIF 2015 = conditional date: passport subject to favorable report by ESMA No reciprocity Passive marketing / reverse solicitation not prohibited by AIFMD: non-eu AIFM not caught by AIFMD if invested by EU investors, unless active marketing in EU Conditions: EU Passport At the level of the AIFM: AIFM has to comply with AIFMD / in case of non-eu AIFM, additional conditions At the level of the AIF: Cooperation provisions need to be met Non-EU jurisdiction not on FATF blacklist OECD Model Article 26 compliant tax convention information sharing agreement SIF EU Passport 38

39 The EU passport and the passport for third countries Until 2018? Private Placement AIFM AIF domestic private placement Some private placement regimes may be more flexible than passport regime Conditions: Domestic private placement rules apply AIFM complies with AIFMD except provisions on depository Cooperation provisions need to be met Non-EU jurisdiction not on FATF blacklist OECD Model Article 26 compliant tax convention information sharing agreement 39

40 The EU passport and the passport for third countries Until 2018? Private Placement AIFM AIF or SIF? domestic private placement Domestic private placement rules apply Transparency and reporting provisions need to be met Cooperation provisions need to be met Non-EU jurisdiction not on FATF blacklist 40

41 Thank Thank you you Listening to investors 41

42 Buffet lunch