The definition of AIFs under AIFMD
On 13th August 2013, the European Securities and Markets Authority published the ‘Guidelines on Key Concepts of the AIFMD’ (the ESMA guidelines) in order to “ensure common, uniform and consistent application of the concepts that comprise the definition of ‘AIF’ in Article 4(1)(a) (‘the Article’) of the AIFMD by clarifying each of these concepts”. An AIF is defined in the AIFMD (the Directive) as collective investment undertakings, including investment compartment thereof which raise 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.
The elements in the definition of an AIF are ‘collective investment undertaking’, ‘raising capital’, ‘number of investors’ and ‘defined investor policy’, and the ESMA guidelines set out to explain each element in order to ensure clarity. An entity should not be considered as an AIF unless all of these elements are present.
Guidelines on ‘collective investment undertaking’
The following characteristics should show that the undertaking is a collective investment undertaking, if all of them are present in the undertaking;
- The undertaking does not have a general commercial or industrial purpose;
- The undertaking pools together capital raised from its investors for the purpose of investment with a view to generating a pooled return for those investors; and
- The unitholder or the shareholder of the undertaking – as a collective group – have no day to day control. The fact that one or more but not all of the aforementioned unitholders or shareholders are granted day to day control should not be taken to show that the undertaking is not a collective investment undertaking.
Guidelines on ‘raising capital’
The commercial activity of taking direct or indirect steps by an undertaking or person/entity acting on its behalf, usually an AIFM (alternative investment fund manager) , to gain the transfer of capital by investors for the undertaking, is the activity of raising capital as mentioned in the Article of the AIFMD. It should be immaterial whether:
a) The activity takes place only once, on several occasions or on an ongoing basis;
b) The transfer or commitment of capital takes the form of subscriptions in cash or in kind
When capital is invested in a undertaking by a member of a preexisting group, for the investment of whose private wealth the undertaking has been exclusively established, this is not likely to be within the scope of raising capital. The fact that a member of a preexisting group invests along with investors that
are not members of a preexisting group should not mean that ‘raising capital’ element is not fulfilled. Whenever this situation does arise, all the investors should enjoy full rights under AIFMD.
Guidelines on ‘number of investors’
An undertaking which is not prevented by its national law, the rules or instruments of incorporation, or any other provision or arrangement of binding legal effect, from raising capital from more than one investor, this should be regarded as undertaking which raises capital from a number of investors in accordance with the Article of AIFMD. This is also the case even if it has only one investor.
If the undertaking is prevented by law or another provision from raising capital from more than one investor, it should still be regarded as raising capital from a number of investors if the sole investor:
a) Invests capital which it has raised from more than one legal or natural person with a view to invest it for the benefit of those persons, and;
b) Consists of a structure which in total has more than one investor for the purposes of the AIFMD.
Examples of point b is a master/feeder structure where a single feeder fund invests in a master undertaking, fund of funds structures where the fund of funds is the sole investor. Also, an example is where arrangements are made where the sole investor is a nominee acting as an agent for more than one investor and combining their interests for administrative purposes.
Guidelines on ‘defined investment policy’
Those undertakings that have a policy on how the pooled capital is to be managed in order to generate a pooled return for those investors that initially gave the pooled capital, can be considered as undertakings that have a defined investment policy in accordance with the Article of the AIFMD. The factors that would, individually or together, indicate the existence of such a policy follow;
(a) the investment policy is determined and fixed, at the latest by the time that investors’ commitments to the undertaking become binding on them;
(b) the investment policy is set out in a document which becomes part of rules of the undertaking;
(c) the undertaking or the AIFM managing the undertaking has an obligation (however arising) to investors, which is legally enforceable by them, to follow the investment policy, including all changes to it;
(d) the investment policy specifies investment guidelines, with reference to criteria including any or all of the following:
- to invest in certain categories of assets, or conform to restrictions on asset allocation;
- to pursue certain strategies;
- to invest in particular geographical regions;
- to comply to restrictions on leverage;
- to comply to minimum holding periods; or
- to comply to other restrictions designed to enhance risk diversification.
With reference to paragraph D above, ‘investment guidelines’ are any guidelines for management of an undertaking to follow that determine investment criteria other than the criteria set out in the business strategy of the undertaking having a general commercial or industrial purpose.
