The European Parliament recently approved the proposed Directive amending Directive 2011/61/EU, known as AIFMD (Alternative Investment Fund Managers Directive). It contains a number of new features, the most important of which is the inclusion of a specific system for the managers of alternative investment funds (AIFs) to generate loans, known as debt AIFs.
To this end, the proposed Directive adds definitions in the AIFMD related to lending and requires lending AIFs to be closed-ended. However, they could be open-ended provided they demonstrate that the liquidity risk management system is compatible with their investment strategy and redemption policy. Furthermore, new restrictions on leverage are introduced and institutions must ensure that they assess credit risk and are responsible for the management and monitoring of portfolios.
For the participants of the 29th FundsPeople Legal Debate, the big unresolved issue is taxation. Paula de Biase, Financial Services Regulation and Funds partner at Baker McKenzie, commented that 'in other European countries it is possible to set up debt AIFs with a tax system similar to that applicable to other types of alternative investment funds or Collective Investment Institutions (CIIs)'. She noted that 'the market has an appetite for this type of transactions, which often have to use securitisation fund structures, when sometimes they would prefer to participate directly in originating the debt'. She believes that 'it is important that we take advantage of the transposition into national legislation of these changes in the AIFMD to open up the debate on the issue and create the foundations for promoting its use'.
Elisa Ricón, CEO of Inverco, admits that the financial regulation is improving, but believes that 'the tax component needs to be included for debt AIFs to take off in Spain'. She recalls the ELTIFs, for which 'it was decided that they should be subject to general corporate taxation; and now that with ELTIF 2.0 we have seen the introduction of changes to its financial system in order to increase its attractiveness, it is essential that its taxation be resolved', she pointed out.
With regard to its transposition in Spain, experts invite us to wait and see how it is reflected in the regulation. 'The Spanish regulator has to decide where and how to include it, as there are two rules, the law on CIIs and the law on closed-ended entities. This will lead to one type of taxation or another', stated Ricón. Moreover, 'depending on which law they are included in, some funds would be subject to registration and others to approval', added Pilar Lluesma, head of the Financial Regulation Department and Counsel at Ashurst.
Bárbara González, Counsel at Linklaters, believes that 'they should be included in both, because although it is true that in principle they will be closed-ended funds, the rule foresees that, if certain requirements related to effective liquidity management are met, these debt AIFs can be open-ended. I can't see how they are going to transpose the Directive other than in a way that reflects both'.
One of the new aspects related to debt funds introduced by the Directive, which the expert highlighted, is 'the possibility for this product to engage in origination activities in jurisdictions where, at present, only banks can do so (as is the case, among others, in France)'. This will allow non-bank institutions to lend in any country. In any case, she urged that we should wait 'to see how the Directive is transposed, which, for example, establishes that in the case of consumer loans, Member States may impose restrictions, which may mean that the passport will not work in certain contexts'.
'In addition, the changes to the AIFMD will also allow fund managers to engage in additional activities, such as credit and benchmark administration, and the possibility of providing certain unregulated services to third parties that they already provide to their funds under management', added De Biase.
Meanwhile, José Carlos Sánchez-Vizcaíno, Director of Depositary Supervision at Cecabank, stressed the importance of including debt funds in this legislative initiative: 'It is very positive because it connects with the objectives of the Capital Market Union, which are to facilitate and promote new financing channels for the fabric of the real economy in Europe'. The expert also pointed out two other new developments: 'On the one hand, measures are included to mitigate risks to financial stability and, on the other hand, to ensure an adequate level of investor protection'.
Depositary
The AIFMD also includes the possibility of appointing a depositary that is based in a jurisdiction other than the home Member State of the AIF under very limited terms. 'The possibility for Member States to empower National Competent Authorities (NCAs) to allow designation is enabled', noted Sánchez-Vizcaíno. In his view, this does not mean that there will be an automatic roll-out of the number of vehicles making use of this possibility. 'A quantitative threshold of €50 billion has to be met in the AIF market; additionally, fund managers will have to make a reasoned request to the NCAs and prove that there is indeed a lack of depositary services specifically suited to the particular strategy; and ultimately, the NCA will have to assess on a case-by-case basis,' he stressed.
Lluesma reflected on the depositary's supervisory role, which in her opinion 'is not going to be easy to implement if they are in different jurisdictions'. A point on which Ricón and González also agreed, explaining that 'this measure should not be confused with the depositary's passport. Its goal is not to discriminate against smaller markets that do not have a developed depositary market'.
UCITS Directive
The Directive approved by the European Parliament also amends Directive 2009/65/EC (UCITS Directive); and has some aspects in common with AIFMD. For example, the consolidation of liquidity management tools. 'The CNMV's Technical Guide 1/2022 already provided Spanish fund managers with mechanisms to manage liquidity. But it is good to see a level playing field being created at the European Union level. There are no major developments when compared with what had already been implemented in Spain, and that is a good reason to be pleased', said Sánchez-Vizcaíno.
For Ricón, this harmonisation is the most important issue: 'Spain started from a better initial situation than other countries. We had liquidity management tools included in our regulation, and others such as swing pricing whose use was encouraged in previous years. The positive aspect about their inclusion in the Directive is not so much the tools themselves, but the fact that it will harmonise the way they are applied in Europe: what each tool means and where it is applied; and that's probably where we can gain flexibility'.
In this regard, González highlighted 'the tool for harmonising management at the initiative of third parties, which can be good for preventing arbitrage and players from moving to other jurisdictions where it is easier to set up these structures'.
