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Under AIFMD, an alternative investment fund or “AIF” is:
any collective investment undertaking, including investment compartments thereof, 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 and which does not require authorisation pursuant to the UCITS Directive.
Both open-ended and closed-ended vehicles, as well as listed and un-listed vehicles, can be AIFs for the purposes of AIFMD. The definition captures a broad range of vehicles that would be regarded as “funds”, including all non-UCITS investment funds, wherever established. The definition may also capture arrangements which may not be regarded as funds per se.
Please click here to view a flowchart setting out the steps for analysing whether an undertaking is an AIF. If you are not yet registered for access to the Linklaters’ Knowledge Portal, please email us to request access.
Whilst the basic AIF definition is broad, AIFMD also contains exclusions to provide clarity that it does not apply to the following: (i) holding companies; (ii) institutions for occupational retirement provision (as covered by Directive 2003/41/EC; recast by Directive (EU) 2016/2341); (iii) supranational institutions such as the World Bank and the International Monetary Fund; (iv) national central banks; (v) national, regional and local governments and bodies or other institutions which manage funds supporting social security and pension systems; (vi) employee participation or savings schemes; and (vii) securitisation special purpose entities.
In its guidelines released on 13 August 2013, ESMA sought to define the key elements of the AIFMD definition of an AIF, noting that an entity will only be considered an AIF where all of the elements are present. For this purpose, ESMA considers that various concepts in the AIFMD definition require further guidance. Key elements of the ESMA guidance are as follows:
The term “collective investment undertaking” is not defined either in AIFMD or under European law, and is, per se, a very broad concept. ESMA has specified that one of the characteristics of a collective investment undertaking is that it “pools together capital raised from investors for the purpose of investment with a view to generating a pooled return for those investors”. ESMA notes that for the purpose of determining whether a pooled return is generated, no consideration should be given to whether investors in such undertaking are provided with different returns, such as under a tailored dividend policy.
Unitholders or shareholders of the undertaking as a collective group should have no day-to-day discretion or control over the undertaking. Day-to-day discretion or control is defined in the ESMA guidelines as “a form of direct and on-going power of decision – whether exercised or not – over operational matters relating to the daily management of the undertakings’ assets and which extends substantially further than the ordinary exercise of decision or control through voting at shareholder meetings on matters such as mergers or liquidation, the election of shareholder representatives, the appointment of directors or auditors or the approval of annual accounts.” According to the ESMA guidelines, the fact that one or more, but not all, of the unitholders or shareholders are granted day-to-day discretion or control should not be taken to show that the undertaking is not a collective investment undertaking.
ESMA notes that an undertaking with a “general commercial or industrial purpose” should not be considered a collective investment undertaking. A general commercial or industrial purpose is defined as “the purpose of pursuing a business strategy which includes characteristics such as running predominantly (i) a commercial activity, involving the purchase, sale, and/or exchange of goods or commodities and/or the supply of non-financial services; or (ii) an industrial activity, involving the production of goods or construction of properties; or (iii) a combination thereof”.
The ESMA guidelines specify that the criterion of raising capital would be fulfilled if there are direct or indirect steps taken by an undertaking, or a person or entity acting on its behalf, to procure the transfer or commitment of capital by one or more investors to the undertaking for the purpose of investing it in accordance with a defined investment policy.
No consideration should be given to whether such activity takes place once, on several occasions or on an ongoing basis, or whether the transfer or commitment of capital takes the form of subscriptions in cash or in kind.
It is further noted that where a member of a pre-existing group invests alongside investors who are not members of a pre-existing group, the criterion of “raising capital” can still be fulfilled.
Whether an undertaking raises capital from a number of investors should be determined, according to the ESMA guidelines, by looking at the rules or instruments of incorporation of such undertaking, national law, or any other provision or arrangement of binding legal effect. If such provisions do not contain an enforceable obligation that restricts the sale of units/shares to a single investor, then such an undertaking should be considered to be raising capital from a number of investors, regardless of whether the undertaking in fact only has a sole investor. Nominee arrangements, feeder structures and fund of funds should only be considered to represent a number of underlying beneficial owners in cases where they themselves have more than one investor.
ESMA considers that a defined investment policy should be understood as being a “policy about how the pooled capital in the undertaking is to be managed to generate a pooled return for the investors from whom it has been raised”. ESMA sets out the following factors in its guidelines as being indicative of a defined investment policy, noting that the absence of all or any one of them would not conclusively demonstrate that no such policy exists:
Whilst an attempt has been made to harmonise the AIF definition across the EU, the AIF definition may vary from country to country depending on how AIFMD has been implemented in a given jurisdiction and what guidance on the AIF definition may be issued by the relevant regulator. With that in mind, it is possible for an undertaking to be regarded as an AIF in one country but at the same time fall outside the AIF definition in another country.
Broadly speaking the UK has transposed the UK AIF definition directly from AIFMD. However, in addition to the ESMA guidance, the FCA has issued extensive guidance on UK implementation of AIFMD, including commentary on:
This additional guidance is particularly helpful in analysing grey areas and in considering arguments as to why certain undertakings may fall outside of the AIF definition as implemented in the UK. Such grey areas include: carried interest vehicles, acquisition vehicles, joint ventures, co-investment structures and Real Estate Investment Trusts (“REITs”). It is possible to distinguish certain arguments which may be particularly helpful in concluding that a particular structure is not an AIF. Please see below for some examples in this regard. However, it is important to note that each specific fact pattern will need to be analysed on its own merits.
Click here to access the FCA guidance in Part 16.2 (“What types of funds and businesses are caught?”) of its Perimeter Guidance Manual ("PERG"). The FCA also provides guidance in PERG 16.6 (“Exclusions”) (click here) on entities that are excluded from the AIF definition.
For certain purposes, it is important to distinguish between “open-ended” and “closed-ended” AIFs. The European Commission has sought to clarify what is meant by these terms in its regulation on determining types of alternative investment fund managers published on 17 December 2013.
The Commission considers that the distinguishing factor in determining whether an AIFM is managing an open-ended or closed-ended AIF should be that an open-ended AIF is an AIF whose unitholders or shareholders have the right to repurchase or redeem their units or shares out of the assets of the AIF:
The Commission further clarified that the following factors shall not be taken into account for the purpose of determining whether or not an AIF is open-ended:
A closed-ended AIF is therefore any AIF not falling within the open-ended criteria described above.
The Commission further notes that:
AIFMD II introduces the concept of a “loan-originating AIF” and sets out risk management controls relating to such AIFs. Distinction is made between closed-ended and open-ended AIFs for some of those rules. Please see here for more information on the new loan origination provisions. In addition, open-ended AIFs will also be subject to certain new liquidity management rules in AIFMD II. Please see here for more information on those new rules.
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