ESMA updates its Q&A on costs and fees
ESMA published on 8 and 24 May 2024 further responses to questions on the application of performance fees, expanding their Q&A on costs and fees.
The Q&A concern the application of a minimum performance reference period to additional reference indicators and whether the manager of a Fund of Funds (“FoF”) can charge performance fees.
Scope of application
According to the ESMA Guidelines on performance fees in UCITS and certain types of AIFs (the “Guidelines”), the guidelines on performance fees apply to UCITS and certain AIFs.
The AIFs in scope are those which are marketed by their AIFM to retail investors in accordance with Article 43 of the AIFM Directive, except for closed-ended AIFs; and open-ended AIFs that are EuVECAs (or other types of venture capital AIFs), EuSEFs, private equity AIFs or real estate AIFs.
Application of a minimum performance reference period to additional reference indicators
The original question posed to ESMA reads as follows:
Where a manager applies an additional reference indicator to the performance fee model (e.g.: a hurdle rate on top of the High-Water Mark model or the benchmark model), should the minimum performance reference period be applied to the additional reference indicator?
ESMA answered the question by explaining that the minimum performance reference period is applied to the performance fee model in line with paragraphs 40-42 of the Guidelines. It is not necessary for the fund manager to apply the minimum performance reference period to the additional reference indicator as long as:
- the final combination (performance fee model and additional reference indicator) does not result in higher fees for investors compared to the sole use of the performance fee model; and
- the performance fee model (without the additional reference indicator) is consistent with the fund’s investment objectives, strategy and policy.
The organisation and computation of the performance fee shall be disclosed appropriately in the prospectus to the investors in line with paragraph 46 of the Guidelines.
Fund of Funds manager charging performance fees
The original question posed to ESMA reads as follows: Can the manager of Fund of Funds charge performance fees?
ESMA answered the question by explaining that the charging of performance fees must always be in line with paragraph 18 of the Guidelines, namely the manager of a FoF should always be able to demonstrate to the national competent authorities (“NCA”) how the performance fee model of a fund it manages constitutes a reasonable incentive for the manager and is aligned with the investors’ interests.
Furthermore, ESMA elaborates that as a general principle, where the investment policy of a FoF requires the active management of the FoF and the determination of the allocation in the underlying funds has a material impact on the FoF performance, performance fees for the manager of the FoF could be considered as justified.
Lastly, the assessment on how performance fees are justified in light of the investment policy of the FoF should also be reflected in the fund documentation, including the fund rules or instruments of incorporation. The fund documentation may be reviewed on a case-by-case basis by the NCA, where needed.
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