The Alternative Investment Fund Manager (AIFMD) regime

The global financial crisis has triggered dramatic changes in the European financial sector, which, in turn, are having far reaching consequences on how shipowners access finance.

A key change has been the reshaping of the European investment management landscape, via the adoption of the European Directive on Alternative Investment Fund Managers (AIFMD) in 2011. The directive is a response to the potential risks created by the activities of managers of alternative investment funds (AIF). Its objective is to establish common requirements governing the authorisation and supervision of managers of AIF (AIFM), in order to provide a coherent approach to the related risks and their impact on investors and markets in the EU. In order to enact the AIFMD into domestic law, Germany has adopted a new act, the Capital Investment Code (Kapitalanlagegesetzbuch - KAGB).

The AIFMD regime has introduced the new definition of AIF as a 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 (and which does not require authorisation pursuant to Article 5 of the UCITS IV Directive), unless the undertaking carries out an operative business outside the financial sector. The definition has been intentionally drafted broadly in order to capture the variety of fund structures in all Member States.

The impact of the new AIFMD regime on the German ship finance industry is manifold.

The traditional German method of raising (retail) private equity through the famous KG model is currently not a viable option, because of the combination of enduring low shipping rates and the economic and regulatory woes of credit institutions since the financial and shipping crises began in 2008. The KG model was an unregulated finance model. It may be revived but only if it fully adapts to the new AIFMD regime, since the traditional KG retail funds typically qualify as AIF under the new AIFMD regime, and, thus require a regulated AIFM as manager.

As a result of the difficulties facing the KG model, new alternative financing sources have been explored by German shipowners, and institutional private equity has become the predominant alternative financing in Germany’s shipping industry. Whilst the traditional tools for a successful structuring of joint ventures and private equity club deals is well known, the AIFMD regime has added an important regulatory aspect that must be taken into account when establishing such structures.

Even though the AIFMD indicates that the AIFMD should not apply to joint ventures, it must be noted that there does not exist an official definition of the notion of “joint ventures”. The intentionally broad definition of AIF means that joint ventures and club deals cannot be excluded a priori from the AIFMD regime. It depends solely on how they will be structured. Therefore, the EU Commission has stressed that joint ventures are not exempted from the AIFMD regime as such, but that each situation should be assessed on its own merits, in order to determine whether the criteria of the AIF-definition are fulfilled. This case-by-case approach is of even greater importance when assessing private equity “Club Deals”, as they typically involve several investment partners who do not necessarily have the same level of control over the management of the assets held by the company.

Whilst most of the existing joint ventures and club deals between – mainly US – private equity and German ship owners, were established before the KAGB entered into force in July 2013, and thus, did not have to comply with the AIFMD regime while being incorporated, the implementation of the AIFMD regime, or of the KAGB respectively, has reset the rules for the structuring of joint ventures and private equity club deals.

For instance, the raising of capital “from a number of investors” cannot be avoided simply by the fact that only one investor exists; it is sufficient and of relevance only if the law or the by-laws of the undertaking do not prevent raising capital from more than one investor. On the other hand, even if the investor is prevented by law (or by its by-laws) from raising capital from a number of investors, the European Securities and Market Authority (ESMA) takes the view that the undertaking should still be regarded as an undertaking which raises capital from a number of investors, if the sole investor invests capital which it has raised from more than one legal or natural person, with a view to investing it for the benefit of those persons, and consists of an arrangement or structure which in total has more than one investor; examples of such arrangements or structures being (among others) such where the sole investor is a fund of funds or a nominee acting as agent for more than one investor. It is also possible that a joint venture or club deal structure that initially did not qualify as AIF, may turn into an AIF if (for example) capital increase measures are being carried out in order to get further “partners” on board. Moreover, 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.

The aforementioned list is not exhaustive and could be supplemented by a range of further examples. However, the application of the AIFMD regime may not be required depending on how the undertaking is structured.

Carrying out the unregistered or unlicensed business of collective investment management is a violation of the KAGB. The sanctions which may be imposed in case of breach of the KAGB or the AIFMD regime respectively are currently being harmonised at the EU level, by the transposition of the UCITS V-Directive into domestic law. The harmonisation will result in an increased catalogue of sanctions, including but not limited to fines of up to EUR 5 million, 10 per cent of the annual turnover or the double of the economic benefits of the business, and closing the business or removing its managers.

The question of whether or not the AIFMD regime applies to a proposed joint venture or private equity club deal structure should therefore be taken seriously, and the corresponding applicability-test and structuring should be carried out carefully when setting up joint ventures or club deals in the shipping market.