Since the publication of our last newsletter in March 2021, the European Securities and Markets Authority (“ESMA”) has updated its Questions and Answers on Application of the UCITS Directive (the “UCITS Q&A”) and its Questions and Answers on Application of the AIFMD (the “AIFMD Q&A”) (together the “Q&As”), on 30 March and 28 May. The purpose of both updates was to provide clarification on the ESMA Guidelines on performance fees in UCITS and certain type of AIFs (the “Guidelines”) which are effective since 5 February 2021.The Guidelines provide common supervisory rules in the field of performance fees and apply to both UCITS and certain types of AIFs. Despite several amendments made to the draft text of the Guidelines following feedback received during a public consultation in the Summer of 2019, the text of the Guidelines still leaves room for uncertainties. By adding a new dedicated section to each of the Q&As, ESMA has now provided clarification on the scope of the Guidelines, whether a performance fee can be paid during the Reference Period (see below), the timeline for the application of first the Reference Period and whether the Reference Period can be reset in case of UCITS mergers.
Scope of the Guidelines for AIFs/AIFMs
The Guidelines provide that they apply to AIF managers (“AIFMs”) which manage alternative investment funds (“AIFs”) whose shares are marketed to retail investors except for AIFs which are:
- closed-ended;
- open-ended AIFs that are EuVECAs and other type of venture capital AIFs, EUSEFs, or implement a private equity or real estate strategy.
ESMA has now clarified that the Guidelines are applicable to European Long Term Investment Funds (“ELTIFs”) that do not meet the above conditions.
As to which AIFMs fall into the scope of the Guidelines, it has now been confirmed that they do not apply to registered AIFMs referred to in article 3(2) of the AIFMD (so-called below threshold or de minimis AIFMs).
Payment of a performance fee during the Reference Period
The Reference Period is the time horizon over which the performance of a fund is measured and in case of underperformance, the time horizon over which losses shall be recouped before a performance fee can be paid. The Guidelines set such duration to at least 5 years or if the fund has a life duration of less than 5 years, to the life duration of the fund.
The Q&As provide that managers do not have to wait for the end of the Reference Period to receive a performance fee which can be paid if all the conditions provided under the Guidelines and the fund offering documentation are met. National regulators remain free to apply stricter rules and to require that the performance fee can only be paid after the end of the Reference Period. Should they do so they must ensure that this requirement does not jeopardize the rules on cross border distribution.
The Q&As also clarify when the Reference Period can be reset, ie the underperformances are cancelled and brought back to 0, when the performance fee is calculated on the basis of a benchmark model and concrete and illustrative examples have been inserted in the Q&As. The examples show that the reset can take place after the end of the Reference Period calculated as of the last time a performance fee was paid (N) (eg: for a Reference Period of 5 years, at N+5).
Timeline for the application of the first Reference Period
Funds which were already compliant with the Guidelines regime before the application date of the Guidelines should look at the last years of the duration of their Reference Period to calculate their performance fee (eg: for a Reference Period of 5 years and a fund existing for more than 5 years: 5 years prior to 2021 for a fund existing since shorter than its Reference Period: since the inception of the fund).
For funds not compliant with the Guidelines at the time they became applicable, the Reference Period should start at the beginning of the financial year when they will comply for the first time.
Reset of the Reference Period in case of UCITS mergers
ESMA also clarified that a reset of the Reference Period should not be authorised in case of mergers between UCITS in case the receiving fund is a newly established fund with no performance fee and the merger does not substantially change the investment policy of the merged UCITS.
All EU and EEA regulators have now notified ESMA of their compliance or intention to comply with the Guidelines with the exception of a very limited situation for Sweden.
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