Sarah Hallam – Director
The term ‘alternative investment fund’ or ‘AIF’ refers to any vehicle established for the purpose of raising capital from a number of different investors with an aim to invest these funds into assets to generate favourable returns.
Similarly, an ‘undertaking for collective investment in transferable securities’ or ‘UCITS’ is similar to an AIF in that it is a collective investment vehicle. A UCITS, however, will invest more specifically into liquid financial assets such as bonds, shares and money market instruments.
In contrast, an AIF will generally be defined as those funds that do not satisfy the criteria for regulation as UCITS. AIF examples include; hedge funds, private equity funds, real estate funds and even (in the slightly more obscure areas of the market), funds formed to invest in rare coins or fine wines.
Despite the diverse range of asset classes into which an alternative investment manager may choose to direct the capital of their investors, one thing remains constant; they must be compliant with the legislation outlined in the Alternative Investment Fund Managers Directive or ‘AIFMD’, which is an EU Directive that was established in order to monitor and regulate the activities of AIFs.
There are two key exemptions which can be applied by an AIFM which mean they fall outside the scope of the AIFMD:
Intra-group exemption
If the investors of the funds managed are only made up of the following, then authorisation is not required;
- The AIFM (Alternative Investment Fund Manager) themselves
- The parent company of the AIFM
- Subsidiaries of the AIFM
- Other subsidiaries sharing a common parent
De minimis exemption
this seeks to exclude smaller AIFMs from the burden of regulation. The criteria for exclusion is that the AIFM’s total assets under management (‘AuM’) must not exceed:
- €100m or;
- €500m if:
- The asset portfolios are not leveraged and;
- Investors had no redemption rights that could be exercised for a period of 5 years from the first investments
If the above exemptions are breached, the AIFM is deemed to be ‘full-scope’ and in addition to a range of other obligations imposed by the FCA (not considered here), the manager will also need to prepare audited financial statements each year to be made available to investors and the FCA.
The guidance outlined in the FCA Handbook – more specifically Chapter 3 – ‘Requirements for alternative investment fund managers’, remains quite light-touch about the contents of the financial statements of an AIF.
Contents of the annual report
The following criteria are set out in the Handbook to define the absolute minimum requirements of accounts prepared for an AIF
- a balance sheet or a statement of assets and liabilities;
- an income and expenditure account for the financial year;
- a report on the activities of the financial year;
- any material changes in the information required to be made available to investors under FUND 3.2.2 R (Prior disclosure of information to investors) during the financial year covered by the report;
- (a) the total amount of remuneration paid by the AIFM to its staff for the financial year, split into fixed and variable remuneration, including, where relevant, any carried interest paid by the AIF; and
- (b) the number of beneficiaries; and
- the aggregate amount of remuneration broken down by senior management and members of staff of the AIFM whose actions have a material impact on the risk profile of the AIF.
However, the minimalist guidance outlined here can be quite misleading given that the same chapter also goes on to say;
The accounting information given in the annual report must be:
(1) prepared in accordance with the accounting standards of the Home State of the AIF (or, for a non-EEA AIF, the accounting standards of the third country where it is established) and with the accounting rules set out in the AIF’s instrument constituting the fund;
Therefore, a manager of a UK AIF should be preparing the financial statements with direct reference to the accounting standards that apply in its jurisdiction, namely FRS 102 for a UK AIF. The requirements of this standard are more onerous in terms of disclosure than the 6 point checklist outlined above.
How can Menzies help?
Audit
Menzies can assist in evaluating whether or not an AIFM itself is required to prepare audited accounts for the individual funds that it manages.
If the criteria for an audit are met, we are well-positioned to provide audit services and will take a proactive approach to assist in meeting statutory reporting obligations in a timely manner.
Accounts preparation
Menzies can assist in preparing FRS 102 and FCA-compliant accounts alongside the audit, leading to an efficient process and peace of mind that the financial statements meet the requirements of the reporting standard.
Corporate finance
Depending on the nature of the AIF, it may be looking to acquire significant stakes in potential target companies. The Menzies corporate finance team has a wealth of experience in providing value-adding advice to both buy-side and sell-side parties in a range of transactions. Examples of the services we can provide are:
- Assessment of targets and pricing
- Negotiating with the vendor
- Due diligence
- Preparation of financial forecasts and financial modelling
- Formal business valuations
- Full business disposal advisory