Why MiFID can be a serious impediment to AIFMs raising... Until recently, when the Alternative Investment Fund Managers Directive “AIFMD”

Why MiFID can be a serious impediment to AIFMs raising funds?
Until recently, when the Alternative Investment Fund Managers Directive “AIFMD”
entered into force (July 22, 2013), Alternative Investment Funds “AIFs” such as Real
Estate funds, Private Equity/Venture Capital funds and Hard Asset funds (i.e. cars,
horses, jewels, watches and wine) could raise money from well-informed investors.
Under AIFMD, this possibility no longer exists because the Directive makes a strict
and explicit link to the Markets in Financial Instruments Directive “MiFID”.
Alternative Investment Fund Managers “AIFMs” can only market AIFs to
“professional investors” as defined under MiFID. This means that an AIFM marketing
funds, carrying out a strategy listed above can no longer approach High Net
Worth Individuals “HNWIs”, regardless if AIFMD is optional or compulsory.
Indeed, MiFID sees the world of investors in black and white: professional investors
on one hand (i.e. financial institutions such as investment firms, banks, insurance
companies, pension funds) and retail investors on the other hand, i.e. people who
lack the knowledge and experience, necessary to understand any sort of
investment except if these investments are packaged as retail and provided by
those same professional investors. This leads to particularly absurd situations.
For example: a billionaire in cash who has built a fortune in real estate or in
technology would not be allowed to invest directly in a real estate fund,
respectively in a PE/VC tech fund (except under EU VECA), because according to
MiFID, for such an investor to benefit from the exception to the above described
rule, the investor would need to fulfill at least two, out of the following three criteria:
The investor has carried out transactions, in significant size, on the relevant
market at an average frequency of 10 per quarter over the previous four quarters,
The size of the investor’s financial instrument portfolio, defined as including
cash deposits and financial instruments exceeds EUR 500 000,
The investor works or has worked in the financial sector for at least one year
in a professional position, which requires knowledge of the transactions or services
LPEA Luxembourg Private Equity & Venture Capital Association
8, rue Albert Borschette
L-1246 Luxembourg - Tel : +352 40 78 78 483 - Fax : +352 40 78 04 751 – www.lpea.lu
Of course, our HNWI above will not be able to demonstrate that he / she meets
criterion #1 because no Private Equity firm on the planet, even among the largest,
does an average of 10 transactions per quarter; this is thus even less likely for an
investor in the same type of fund. The second criterion is clearly the easiest to meet
and does not require any comment except that it is not consistent with the very
notion of professional investor. The last criterion will also prove impossible to meet
for our HNWI even though he / she probably understands more about the reality of
real estate/private equity transactions than most financial sector professionals.
As a result, access to a whole asset class is now closed to a group of people who
for centuries has financed infrastructure, innovation and business activity in
general: entrepreneurs. Needless to say, Brussels has once again been heavily
handed. After inventing new rules, restricting credit lending to SMEs to a point
where SME lending has come to a complete halt in Europe, it has now put in place
a further set of rules that ensures these same SMEs will find it even more difficult to
secure equity financing. It is disappointing that Brussels has ignored the fact that
SMEs form the backbone of Europe’s economy: account for 87 million jobs (67% of
total), generate over 60% of EU GDP (EUR 7.8 trillion in 2012) and need financing to
maintain and further innovation. In a period of great challenges, the likely impact
of such seemingly painless legal provisions on the EU SMEs and innovation
landscape is at best terrifying.
Clearly, the current definition of professional investors and relevant criteria are not
appropriate for investors in PE/VC funds. As stated by EVCA in its 2011 position
paper on MiFID, “the procedural requirements of Annex II of MiFID and the general
obligation to ensure qualitatively that the relevant person has appropriate
expertise to be capable of assessing the risks involved and making his own
investment decision provide the necessary investor protections without adding
requirements for frequency of dealing or excluding expertise in the relevant asset
On the basis of the draft of MiFID 2 currently in circulation, which contains not the
slightest change in this respect, it seems the EU Parliament has not yet fully gauged
the severity of its actions. It is up to PE / VC professionals, trade organizations and
related parties to continue the education process and to “never, never, never
give up”, as Winston Churchill might say.
Jérôme Wittamer, LPEA Executive Committee Member
LPEA Luxembourg Private Equity & Venture Capital Association
8, rue Albert Borschette
L-1246 Luxembourg - Tel : +352 40 78 78 483 - Fax : +352 40 78 04 751 – www.lpea.lu