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: 1. 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, 2. The size of the investor’s financial instrument portfolio, defined as including cash deposits and financial instruments exceeds EUR 500 000, 3. 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 envisaged. 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 sector”. 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