Central to the AIFMD is Annex IV reporting. Under Annex IV, alternative investment fund managers (AIFMs) must report relevant information to local regulators for each country they market in. This includes the main instruments traded, investment strategies and geographical and sectoral investment focus, to name a few.
Considering that the AIFMD has been in place for many years, it would be logical to assume that AIFMs have had sufficient time to establish reporting processes and are easily meeting the requirements. In reality, many fund managers continue to find Annex IV reporting challenging. There are a number of reasons for this.
First, the sheer volume of reporting for Annex IV can prove difficult. With 246 questions to answer — multiplied by the number of funds a manager has to report on — the size of the task becomes clear. Organising the data, and collating and preparing the reports, takes considerable time and effort.
Smaller AIFMs typically don’t have large or sophisticated finance operations and are particularly burdened by the requirements. The compliance burdens only become more onerous as managers launch new funds.
Second, the AIFMD — like all regulations — is constantly evolving. The European Securities and Markets Authority (ESMA) regularly revises the Directive. Its Q&As were updated in May 2021, for instance, and there are ESG-related changes now underway.
But AIFMD reporting itself is not the only challenge managers face, as the broader regulatory landscape is constantly shifting. New legislation and requirements have come into play and fund managers must be compliant. For example, the EU’s implementation of the Sustainable Financial Disclosure Regulation (SFDR) in March 2021 has sent AIFMs scrambling to comply. And they must fulfil these obligations on top of their existing transparency reporting under the AIFMD.
Technology also continues to evolve. The UK’s Financial Conduct Authority (FCA), for example, replaced the Gabriel system with the RegData platform in 2021. Regular technological changes typically lead to reporting challenges as managers are forced to adapt and ensure their systems are aligned.
Brexit adds another layer of complexity
If all this wasn’t complicated enough, the UK’s departure from the EU threw an additional spanner in the works. Not only did Brexit change the economic picture across Europe, it has directly affected cross-border fund administration between the UK and the EU.
Cross-border marketing of AIFs — whether by UK AIFMs into the EU or EU AIFMs into the UK — now relies primarily on the use of national private placement regimes (NPPRs). This is particularly challenging for non-EU UK managers who have lost pan-European passporting rights. These managers must now not only register in each location they plan to market, but also manage the different platforms that regulators have in place.
It’s also important to note that it is still early days post-Brexit. Regulators including the FCA may amend their regulations in the months and years ahead. AIFMs operating in the EU or UK — or, indeed, marketing into these regions from outside — must keep up with any changes to reporting requirements to remain compliant.
Navigating the reporting maze
All of the above illustrates the complex, changing nature of EU fund reporting. It’s important to recognise that regulatory reporting does not stand alone in the demands placed on fund managers. Investors are increasingly requesting performance data (often in real-time) in accessible formats which can be sorted and analysed in multiple ways. These demands add to the reporting burdens, and many AIFMs become overstretched as a result.
While managers would rather spend their time launching new funds, deploying capital and achieving favourable returns for their investors, compliance with reporting requirements is not optional. The challenge is how best to manage the required reporting, including Annex IV, in an effective and compliant manner.
For many, the solution is to work with a third-party provider who can not only keep up with the regulatory changes across jurisdictions but also undertake whichever aspects of reporting and management are deemed necessary by the manager.
With AIFMs broadly facing the same set of challenges when operating across borders, Annex IV reporting and AIFMD disclosures are arguably the easiest to outsource because, even with any revisions to regulations, the requirements are well-established and third parties have robust processes in place to manage them.
Ultimately, the role third parties play is dependent on each AIFM. Some may want specific services, while others may want a broad suite of services such as fund administration and depositary services. Some may even want providers to act as an intermediary with their lawyers to understand reporting requirements, including frequency.
In the wake of the Covid-19 pandemic, there has been an uptick in global private equity activity. At the start of the pandemic, AIFMs tended to focus on deal closing and related activities, but may now be moving back to balanced activities that include more fundraising. Managers will be looking to market in Europe and the UK owing to the region’s well-established institutional investor base. This will bring regulatory compliance burdens under both the UK’s FCA and the AIFMD.
For AIFMs operating in this space, being on top of regulatory reporting — including Annex IV and RegData reporting — has never been more critical.
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