The Act Implementing the AIFM Directive - Norton Rose

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The Act Implementing the AIFM Directive 06 Norton Rose December 2012 Equally, a co-ownership by fractional shares presumably does not fulfil the criterion of a single investor. Accordingly, more than one investor should exist. However, a clear distinction is to be made here. If a co-ownership by fractional shares acts as investor with regard to an undertaking, more than one investor exists. But whether a co-ownership by fractional shares itself may be classified as an AIF is an entirely different issue. This cannot be affirmed, because, rather than being a collective vehicle, the asset manager acts for each individual co-owner directly. 1.2.5 Defined investment policy As another criterion, an investment asset pool is characterised by its compliance with is a defined investment policy. A collective investment vehicle requires that an investment strategy be followed. On page 11 of the Discussion Paper, the criterion “defined investment policy” is interpreted to the effect that the following prerequisites are to be met: • the investment policy is to be fixed, at the latest, by the time an investor makes a binding commitment • the investment policy is incorporated in the constitutional documents • the investment strategy forms part of the contractual relationship between the vehicle and the investor • determination of investment guidelines (asset categories, geographical regions, leverage, holding periods, risk diversification) that determine more precise criteria than the ones followed by an operating company pursuing a business strategy • disclosure of the investment strategy to the investors • disclosure and consent requirements in case of changes to the investment strategy. The Discussion Paper does not specify whether all of the above prerequisites have to be met. Instead, it must be assumed that an overall view is presented here and compliance has to be examined on the facts in individual cases. Another aspect of the criterion “defined investment policy” is the distinction between investment and non-investment strategies. The scope of investment law can only apply if the purpose of the collective vehicle is closely related to an investment purpose. Investment purpose means the purchase and passive holding of assets. An investment policy does not exist, however, if the purpose is aimed at other objectives – in particular, production and services – and if assets are not purchased or only purchased incidentally to serve purposes other than the mere holding. In a mixed profile situation, the focus is relevant. Only if the investment purpose has clear priority may a collective investment vehicle be assumed to exist. The question arising in this connection is the quantification of priority. A collective investment vehicle with an investment strategy may only be assumed to exist if at least 90 per cent of the overall objective focus is on the investment purpose, while non-investment purposes are irrelevant in comparison. For example, a construction project development company, which, in order to add value to project development, also acquires real property, does not qualify as an investment asset pool. The same should apply to film funds, provided the objective of the fund is to create a new film licence rather than to acquire one.
The Act Implementing the AIFM Directive 1.2.6 Benefit to investors According to the legal definition of section 1 sub-section 1 KAGB-E, a major criterion of distinction between an investment asset pool and an operating company is investment to the investors’ benefit. However, this criterion poses considerable difficulties, because operating companies also ultimately intend to create value for their shareholders – as is evident from the well-known and accepted concept of shareholder value. A conclusion may not be drawn from the distribution and reinvestment behaviour either, as this is not necessarily different between funds and operating companies. Both distribution and reinvestment are activities equally common to funds and operating companies. In any case, investor’s benefit will not be held to exist if the vehicle’s performance does not correspond with the investment instrument’s value. This criterion also involves the definition of a unit in an investment asset pool. Although not the subject of discussion here, this definition must also be dealt with as these aspects are closely linked with each other. If the legal relationship with the vehicle does not reflect its performance – i.e. the delta factor significantly deviates from 1 – the vehicle does either not qualify as an investment asset pool or the legal relationship with the vehicle does not qualify as a fund unit: • If an investor receives compensation for its investment which is independent from the vehicle’s performance, the “investment” is a debt instrument. Here, it is irrelevant from the investor’s point of view whether the vehicle qualifies as an investment asset pool or not, as the investor does not hold any shares in it. • If the investor receives a multiple of the vehicle’s performance, it does not qualify as an investment asset pool either; further or alternatively, the instrument does not qualify as a fund unit, but is to be attributed to the gambling and betting sector (and in such a case, enforceability under civil law depends on other factors). 1.2.7 No operationally active enterprise outside the financial sector In light of the vague definition of an investment pool, the legislator acknowledges that the definition could extend to numerous scenarios clearly outside the focus of the AIFM Directive. Therefore, the legislator has introduced a carve-out for operationally active enterprises (operativ tätige Unternehmen) outside the financial sector (Finanzsektor). The basic idea is that a vehicle allocating a relevant percentage of its resources to the production of goods should not be construed as an investment pool. However, apart from this basic proposition, the carve-out is difficult to interpret since there is neither a common understanding of an operationally active enterprise nor a specification for a financial sector. By way of example, if a sponsor establishes a vehicle generating value by the acquisition and refurbishment of a property in order to generate a capital gain upon disposal, such scenario should benefit from the carve-out. Since the vehicle will provide refurbishment services, it should be seen as operationally active. Norton Rose December 2012 07
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The Act Implementing the AIFM Directive - Norton Rose

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