
Publication
ESG and Sustainability Insights: Subscribe to our newsletter
Stay in touch with the latest developments by subscribing to our newsletter.
United Kingdom | Publication | September 2023
This article was first published in Edition 135 of the AIMA Journal
Joint ventures (JVs) often establish a corporate vehicle, such as a private limited company (the JV Vehicle), which holds the money received from the parties to advance the JV’s commercial goals. For example, a property JV may bring together a real estate manager with a real estate capital provider to pursue a business venture in building new properties. The money received from the capital provider would usually be put into the JV Vehicle, which is managed in accordance with the underlying JV agreement.
While JVs are not new and are common arrangements set up by firms, there are implications if the structuring of such arrangements falls within scope of regulation. Specifically, JV participants should take care to ensure their arrangements do not amount to the setting up, directly or indirectly, of an alternative investment fund (AIF).
The Alternative Investment Fund Managers (AIFM) Directive (2011/61/ EU) (AIFMD) came into force on 22 July 2014 and is the primary piece of legislation governing the operation and management of an AIF. As the UK was an EU member at the time, it on-shored the AIFMD through the AIFM Regulations 2013 (SI 2013/1773) and the Financial Conduct Authority (FCA) Handbook (UK AIFMD).
Managers of UK AIFs (i.e., funds domiciled in the UK that meet certain criteria, as we will explore below) must comply with the provisions of the UK AIFMD. The UK AIFMD does not generally apply to JVs, but the arrangements must be closely scrutinised to determine whether a JV in fact meets the definition of an AIF. If it does, the JV parties will need to comply with the UK AIFMD. The rules are prescriptive and, where not considered from the initial structuring stage, may result in additional costs and on-going regulatory obligations (such as the need to appoint a depository, periodic reporting requirements and further marketing restrictions in addition to the standard UK financial promotions regime).
This article discusses some of the factors that firms should consider when structuring their JV arrangements to determine whether they fall in-scope of the UK AIFMD.
An AIF is a collective investment undertaking (CIU) 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 is not a UK undertaking for collective investment in transferable securities (UCITS). Four key elements must therefore be satisfied in order for a proposed JV to be an AIF, namely that the JV:
If a JV Vehicle meets the definition above it will be deemed an AIF. It is therefore crucial that JV parties ensure the structuring of such arrangements fall out-of-scope if they are not intended to constitute an AIF. In order to be classified as an AIF, all elements of the definition above must be satisfied.
A collective investment undertaking, or CIU, is one which raises capital from a number of investors with a view to investing that capital in accordance with a defined investment policy for the benefit of those investors (i.e., it satisfies (c) above), and its units can be repurchased or redeemed, directly or indirectly out of its assets (at the holder’s request).
It is important to note that the definition of an AIF refers to a CIU and not a collective investment scheme (CIS). While the two concepts overlap considerably, a CIU may be a body corporate (although not technically required to be) whereas a CIS cannot be a body corporate unless it is an open-ended investment company (OEIC), a limited liability partnership (LLP) or one of certain other types of mutual body. Therefore, where a JV Vehicle is incorporated as a UK company, the JV parties must consider whether it meets the definition of an OEIC and if it does (or if it is an LLP or relevant mutual body), they should also consider the regulatory requirements regarding operating a CIS.
The European Securities and Markets Authority (ESMA) highlights in its ‘Guidelines on key concepts of the AIFMD’ that there are certain characteristics of a vehicle (i.e., the JV Vehicle) that would show the undertaking is indeed a CIU. These characteristics, which are replicated in the FCA’s Perimeter Guidance Manual (PERG), are that:
Some common themes must be considered when structuring a JV to ensure it is not an AIF. The FCA’s PERG provides guidance on this which, even post-Brexit, references and is largely based on ESMA’s Guidelines. According to the guidance in PERG, factors suggesting that a proposed JV will not fall within the definition of an AIF include where:
Care must be taken to ensure the JV parties comply with the relevant regulatory regime. If a JV is found to be an AIF, the parties may be subject to enforcement action as ‘managing an AIF’ is a regulated activity in the UK under article 51ZC, Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544). If the parties are found to be ‘managing an AIF’ without the requisite FCA authorisation, this is a criminal offence which can result in imprisonment of up to two years and the possibility of an unlimited fine. The FCA may also wish to take enforcement action for any failure to comply with UK AIFMD (for example failing to appoint a depository if required, to comply with investor information requirements or to meet the relevant reporting requirements imposed on managers of an AIF).
Publication
Stay in touch with the latest developments by subscribing to our newsletter.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023