New Regulation Coming: The Alternative Investment Fund Managers Directive (AIFM)

In the aftermath of the 2008 financial crisis, the EU decided to regulate Alternative investments in order to limit the risk of future crises to the financial system and increase investors protection. In that context, the AIFM (alternative investment fund manager) directives have been given, which have to be incorporated into national legislation by July 22 2013. After the release of the first draft many feared the KG market would not be able to comply with. But the initial draft has been revised, bringing renewed optimism that the KG funds will remain a niche product able to keep providing equity into the aviation sector.

The initial draft, published last year, implied many restrictions, with one of the most severe being the reduction of the maximum leverage to 30%. This would have made most of the transactions very difficult, if not impossible.

The new draft law sets more achievable goals in relation to leverage, assets, minimum participation and risk-diversification requirements. It has put the leverage up to 60%, which would permit many more KG transactions to take place compared with the originally proposed 30%.

Under the new draft, asset restrictions have also been completely lifted, allowing all hard assets. The minimum participation amount for non-risk-diversified funds comprising a single asset only has been lowered from EUR 50,000 (@ USD 65,000) to EUR 20,000.

Risk diversification, which had remained undefined in the previous draft, has been spelled out to comprise at least three hard assets of equal value or one asset (for example, an office building) if its use provides for risk diversification (ie, contains various tenants).

The exact framework of the law to be implemented, however, is still unclear, and discussions continue.

The political environment in Germany plays an important role in finalizing the law. The opposition parties of the Social Democrats (SPD) and the Greens are standing against a number of the earlier legislative efforts, among them the revised draft of the law. The general expectation, however, is that given the current environment, it will be difficult for the SPD to sabotage the law.

The AIFM directive is based on a new EU-wide regulation, which aims to provide more protection to investors. The new draft law will have an impact on the administrative workings of the KG houses, which will require more resources. KG funds or KG houses will have to apply for an AIFM licence and a number of operational requirements for the business, such as minimum capital and transparent reporting. As a result, some of the smaller KG houses are expected to leave the market because it will be too expensive to comply with the additional administration. Well established German KG houses will probably benefit from the new regulations in the long run due to a bigger market share. Inexperienced companies will be hindered from entering the market. That will make the KG market more professional.

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