What is an AIF? Rev. 2
Almost three years have passed since Permian’s first article on this question. A clarification by the Financial Supervisory Authority of Norway (Finanstilsynet) provided reason for an update.
In a conference in Oslo on November 29, Finanstilsynet offered a clarification to the four-year old question: “what is an alternative investment fund?” It is not so, Finanstilsynet stated, that an entity making only one investment for that reason is not an AIF. They mentioned syndicated stand-alone projects as typical examples.
The clarification is not surprising as the AIFMD definition of an AIF does not contain any criteria related to “invest in what” and “how many”. Neither does AIFMD contain a chapter on qualifying investments – that would be EUVECA.
Finanstilsynet has made it clear, albeit not in writing, that syndicated projects with one investment, much used in both shipping and real estate, may well be AIFs. If so, these managers are subject to much stricter regulation than most of these managers are currently applying to their operation.
Syndicated investment vehicles may still not be AIFs, but for other reasons than only making one investment. ESMA guidelines note three key elements which if all true defines an AIF. On the other hand, meet one of these criteria and the entity is NOT and AIF.
1 – General commercial or industrial purpose – ESMA exemplifies this as involving exchange of goods or commodities, services other than financial services, production and construction. Working to find new investors and capital for your shoe factory does not make it an AIF.
2 – Offer collective return on capital – If the strategy and purpose is not to make money for the collective of owners/investors, then it is not an AIF. Charitable organisations are not AIFs.
3 – Investor control – The only condition relevant for syndicates is probably control. The premise of the AIFMD is that there is an active manager and passive owners. If investors have direct and on-going control over operational matters, ESMA guides that this must be much more extensive than voting in the ordinary AGM, then the entity may not be an AIF. Not all investors must be involved in all decisions, but the investors as a group must have direct influence and use it.
If it is unclear whether an entity is an AIF or not, answering some questions may give a hint as to whether you need to make a closer consideration.
- Do you pay a manager?
- Is the manager in any way compensated in accordance with the success of the venture (success fee, carried interest)?
- Are there many owners?
- Does anyone have wide powers of attorney?
If the answer is yes to two or more of these questions, we would advise you to spend a little more time considering whether your operation is regulated under the AIF-legislation in your country.
To read our article describing the AIF definition in detail, click here (in Norwegian).
Oslo, November 30, 2017, Axel H. Daasvand, mail: firstname.lastname@example.org