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The AIFMD, which aims eventually to require authorisation for any hedge, private equity or real estate fund manager – and indeed the managers of most other funds – wanting to manage or market its product within the European Union has recently taken another major step forward. The transitional period allowed for EU managers of AIFs to apply for authorisation finally expired on the 22nd July 2014.

However, this does not mean that all EU Member States have fully implemented the AIFMD, even though they should all have done so a full year earlier. There are still a number of stragglers, such as Spain, where relevant legislation or regulation is only in draft form, though even in those countries the AIFMD Delegated Regulation should be directly effective.

Nor does it mean that all EU AIFMs have been authorised under the AIFMD. The requirement was only that AIFMs who had been actively managing funds prior to 22 July 2013 should file an authorisation application within one year of that date. Regulators still then have the normal time to consider and decide whether to approve the application. Meanwhile, AIFMs who benefited from the transitional provisions can continue their fund management activities, even though new entrants to the market had to obtain authorisation under the AIFMD before starting business.

In the United Kingdom, despite the efforts made by the Financial Conduct Authority to persuade firms to submit their AIFM authorisation applications earlier, many applications were filed just before the deadline. On 4 August 2014 the FCA said it had received 1,130 AIFM applications, of which 706 had been approved and a further 86 were “ready for imminent approval”. The FCA went on to say that the remaining applications are being processed in line with the deadlines laid out in the Directive.

The AIFMD allows regulators three months from the date of receipt of a complete application to consider it and permits them to extend that period by up to another three months. It is therefore possible that some of those remaining 338 applications filed with the FCA by existing AIFMs – even assuming they are all complete – might not be determined until 22 January 2015. Until their applications are decided, those firms effectively have an extended transitional period.

Firms awaiting authorisation

Firms which acted as AIFMs before 22 July 2013 and applied for authorisation of their AIFM activities before 22 July 2014 are in an odd limbo situation. According to the AIFMD, those who are subject to the Directive are obliged to “take all necessary steps to comply with national law stemming from the AIFMD”, which is intended to mean they should comply in full with all of the AIFMD obligations, including regulatory capital, putting in place a depositary for the AIFs they manage and segregating risk management and valuation functions from portfolio management, to name a few.

In some cases it is not easy to comply with those obligations prior to actual authorisation, particularly where approvals from or other interaction with the regulator is required. However, the firms must do all they can to comply.

They do not, in return for these obligations, receive the dubious benefit of the “passport” permitting them to market EU funds which they manage in other EU Member States. That is only available once they become fully authorised AIFMs under the AIFMD. Instead they must, like non-EU AIFMs, conduct a jurisdiction-by-jurisdiction review of how far marketing is permitted and what requirements individual States impose. In principle, they should not be treated worse in any EU Member State when marketing their funds than non-EU AIFMs. However, that will not necessarily be much comfort.

Authorised firms

Firms which have successfully been authorised continue to wrestle with the practical requirements for compliance. Reporting under the AIFMD is proving particularly complex in some cases.

Generally, firms are likely to find that once their regulator gets over the initial hurdle of authorising existing AIFMs, it increases the level of attention it gives to authorised firms and the obligations applying to them. For some firms this may result in increased regulatory burdens if, when they turn their attention to particular topics such as valuation or risk management, the regulators disagree with interpretations individual firms have made.

A more immediate concern and irritation is the way in which the marketing “passport” is being applied in a number of EU Member States. It may be a passport permitting cross-border marketing, but some countries think they can still require those crossing the border to line up for security checking, remove their shoes, pass through a scanner and pay for a visa. More specifically several EU Member States seek to charge a fee for inward passported marketing.

France goes further and also requires the appointment of a centralising correspondent in France to fulfil various functions, similar to those required under the UCITS Directive. Where, as is normally the case, interests in the AIF concerned are not held at Euroclear France it is possible for the correspondent’s responsibilities to be cut back to information provision obligations. Even so the AMF expects the correspondent appointed to be a French depositary or French branch of an EU depositary. A complaint has been made to the EU Commission about these  requirements which appear to be contrary to the spirit of the AIFMD.

A more basic problem arises with the provisions of the AIFMD relating to “material changes”. Essentially when an AIFM plans to make a material change to matters covered by either its original authorisation application or its marketing approval application, it must give one month’s notice to its regulator before implementing the change.

These requirements are an entirely intentional part of the AIFMD but have a disproportionate effect for those AIFMs who have traditionally negotiated fund terms with their investors, as is normal for private equity, real estate and infrastructure, though less common for hedge funds. Changes required by investors in the course of those negotiations will, if material, require notification to the AIFM’s regulator and a delay before their implementation. This in turn may require admission of investors to be delayed, made conditional or held in escrow pending completion of the regulatory process.

Marketing of non-EU AIFs or by non-EU AIFM

Some, though not all, EU Member States which implemented the AIFMD on time allowed non-EU AIFMs who had marketed funds in the EEA, or the relevant jurisdiction, prior to that date to  continue marketing during a transitional period. Where national implementing legislation did allow for such transitional marketing arrangements, these should also have expired by 22 July 2014.

As the various EU States have implemented the AIFMD, all have imposed some form of notification or approval process for non-EU AIFM marketing in their territory, in order to enable them to monitor future reporting. Fees frequently apply  and in some countries there is either an outright prohibition of marketing by a non-EU AIFM, or of an non-EU AIF, or additional requirements. These range from full scale local authorisation and AIFMD compliance to lighter but still significant obligations to put in place a depositary, or entities fulfilling depositary functions, or to provide reciprocity statements. In a few countries, including the UK, there is a relatively straightforward notification process and marketing is permitted once the notification has been completed. In most countries, even if described as a “notification”, positive approval is required from the local regulator before marketing can commence.

Generally, therefore, marketing in the EU, even when confined to a “private placement” to professional investors of the kind with which the AIFMD is concerned, has ceased to be “private” in nature and instead requires interaction with the local regulators in each country targeted.

Inevitably this has led to many firms focussing on how far they, or their agents are really “marketing” in the sense given in the Directive. Some firms are taking a relatively aggressive approach to “reverse solicitation” i.e. to the fact that the recitals to the AIFMD expressly permit “own initiative” investment by EU professional investors. This is a dangerous area where very careful records need to be kept.

The regulators can be expected to focus increasingly  on preventing “evasion” of the AIFMD and questioning how far investors are really acting on their own initiative, rather than being solicited by the AIFM or those acting for it. Perhaps more importantly, reliance on “own initiative” investment puts the firm at risk of an investor subsequently alleging that it was the “victim” of illegal marketing contrary to the AIFMD. That in turn would  commonly enable  the investor  to withdraw from the fund and claim compensation for losses – effectively giving them an “upside only” option for their involvement in the fund.

What next?

For practical purposes, the AIFMD has only just moved out of its transitional phase. Some countries have not finalised implementation, some existing AIFM applications may not be determined until the beginning of 2015, and the practical workings of management and marketing under the AIFMD are only just beginning to settle down.

Nevertheless the timetable set out in the AIFMD requires ESMA to deliver a report to the EU Parliament, Council and Commission by 22 July 2015 on the functioning of the management and marketing passport for EU AIFMs, marketing non-EU AIFs and management and marketing by non-EU AIFMs. This is with a view to extending the application of passporting under the AIFMD to the marketing of non-EU AIFs and of authorisation and passporting to non-EU AIFMs who market in the EU or manage EU AIFMs. It is hard to see that there will be sufficient practical experience available for useful recommendations to be made in that timescale.

Tamasin Little is a partner in the financial markets group at King & Wood Mallesons SJ Berwin


Investment Roundtable: Live with Jim Bianco



With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.

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Key themes:

  • Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
  • Identify important intermarket relationships he is watching with respect to Global Equities
  • Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.

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Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election



Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election 1

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.

At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.

The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March.  As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.

These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.

The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term.  A rise in the unemployment rate to 8% or so later this year still looks quite likely.

Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.

Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.

Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.

It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.

All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.

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What Investors are Looking for in the Next Fintech



What Investors are Looking for in the Next Fintech 2

By Shaun Puckrin, Chief Product Officer, Global Processing Services

Are investors getting pickier when it comes to fintech? It’s hard to say for sure, but there are recent developments that point towards a shift in investor interests.

Firstly, research from Innovate Finance shows that investment in UK fintech dropped by 39% in the first half of 2020, compared to the same period in 2019. In H1 2020, $1.8bn of venture capital was invested in 167 startups compared to H1 2019, when $3bn was invested in 263 startups.

However, it’s worth mentioning that the $1.8bn UK fintech investment earlier this year was still a 22% increase over the second half of 2019, when funding totalled $1.5bn. Therefore, all signs suggest that investors will make significant increases in capital investments during the rest of the year.

Secondly, it appears that the current investor appetite is for more mature, later-stage fintechs: more than half of the $1.8bn went to just five companies: Revolut,, Starling Bank, Onfido and Thought Machine. Perhaps it is the ongoing economic uncertainty surrounding the COVID-19 crisis that is prompting inventors towards perceived “safer bets”, but what we do know for a fact is that early-stage fintechs raised just 8% of the total investments.

Is there a silver lining? The coronavirus crisis has rapidly accelerated the digitisation of financial services, with lockdown restrictions encouraging those previously resistant to engage with digital financial services. The stage is set for fintechs to thrive and deliver offerings that meet shifting consumer demands. To be in with a shot of wooing investors, fintechs will need to demonstrate certain qualities that set them apart from other companies.

So, what are the four things investors are looking for in the next big fintech?

  1. A strong, differentiated proposition

The fintech marketplace is crowded and filled with mature innovators setting a high standard for everyone else. Against this backdrop, “challenging the incumbents” is, unfortunately, no longer a USP.

To really catch the attention of investors, you must be addressing a clear, pressing market need that no one else is tackling. Not just that, your proposition must be easily articulated and backed to the hilt with market research that proves the opportunity is worth pursuing.

Ultimately, investors are going to ask the question: why you? What are you doing that’s unique? What do you have that means you – and only you – can do this? They will also want to know how defendable that proposition is once you’ve built it.  What is your moat? Getting this right means a foot in the door with investors.

  1. A path to profitability or exit

This is an extremely pertinent point, especially given recent news surrounding the financial results for many of the big challenger banks, and how they show the route to profitability for challengers isn’t necessarily straightforward or easy.

In the current environment, an attractive fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business. There are different paths for investors to make their returns, be it a trade sale or IPO, but the fundamentals of securing a successful outcome are usually the same. By being able to demonstrate how you can plot a course to attract and serve your customers for less than you can monetise them will be at the route of any subsequent valuation, no matter how its outcome is achieved.

Whatever the goal, you need a plan to support your ambitions. You need to demonstrate an understanding that building a scalable and sustainable fintech is likely to require significant capital – you must invest in the right people, partners and technology to make money. Developing competitive services, attracting customers and, crucially, monetising your offerings, requires hard work and the ability to adapt to your customer’s needs.

  1. Strong leadership and core team

Ultimately, securing investment is about building relationships and what often tips the scales is having the right people in the room. This is why a great team is crucial.

A great team means many things: Strong leadership with the vision to build something revolutionary. The skills and expertise to turn that vision into reality. The experience to traverse the pitfalls and opportunities you’ll face. And finally, the ambition and determination to make the business successful no matter what.

Building the right team with the right qualities is often what convinces investors that they’re putting their money in the right place.

  1. The right partnerships

Partnering with the right organisations can give you strategic access to the solutions that will help build and scale your offering. Their expertise and experience are often invaluable; many partners have been in the game for years and may have already solved problems you might be encountering for the first time.

From an investor’s perspective, seeing that you’re working with credible partners and proven tech helps build confidence. It shows that you’re a less risky investment, and that you respect their investment and are going to be using their money to build real value.

Fintech investment is not dead

After this recent blip, we expect the amount of investment into fintech to continue to be significant, at least in relation to other industries. But there’s no avoiding the fact that investors will be looking to stress test potential investments much more than before.

By creating a differentiated proposition, planning a clear route to profitability, building a strong team, and finding the right partners, fintechs will be in with a shot of securing the funding they need to make their grand vision a reality.

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