When does a Real Estate Fund or Joint Venture need to Appoint an FCA Regulated Firm?
Whether a fund is being established between a few individuals or a large number of investors (individual or institutional), the fund is likely to require regulation as a pooled investment and advice will be required.
Such a fund will be generally categorised as either an Alternative Investment Fund (AIF) or a Unregulated Collective Investment Scheme (UCIS).
An AIF raises capital from a number of investors, it pools that capital, invests the capital raised in accordance with a defined investment policy and invests the capital for the benefit of those investors. It is necessary to satisfy all the elements of the definition in order to be an AIF. An AIF may be open-ended or closed-ended (ie have a final end date), may or may not be listed and may be formed under the laws of any EEA State or any non-EEA state.
AIF structures may include:
- Limited Partnerships
- Limited Liability Partnerships
- Unit Trusts
- Private Fund Limited Partnerships
- Limited Companies
These AIFs are governed by the Alternative Investment Fund Managers Directive (AIFMD), a pan-European law, which came into force in July 2013. The Directive aims to enhance supervisory practices, improve investor protection, foster efficiency and cross-border competition and harmonise rules on EEA-wide passport to market the AIFs.
The investors in an AIF will not have day-to-day control over the underlying assets. Decisions on acquisitions, sales and general asset management are made by the general partner, in the case of a limited partnership, or the designated member, in the case of a limited liability partnership, usually based on advice from the property asset manager.
All AIFs require an Alternative Investment Fund Manager (AIFM).
In the case of some limited partnerships, where for example the investors and the directors of the general partner are connected parties, the FCA categorises this as an unregulated collective investment scheme (UCIS) and not an AIF.
Under the requirements of FSMA 2000, a UCIS needs a Regulated Operator rather than an AIFM, providing a lighter touch of regulation.
In what circumstances might a real estate fund/joint venture not need an FCA regulated firm to act as an AIFM or Operator?
There are a few instances where a fund or joint venture may not be defined as either an AIF or an UCIS by the FCA such as some joint ventures, carried interest vehicles, acquisition vehicles, co-investment structures and REITs. This is a complicated area and, as such, each structure must be analysed on its own merits: eg. in the case of a joint venture, all of the parties have day-to-day discretion and control of the fund and there is no external capital being raised as the capital is being provided by the joint venture parties themselves.
What will a regulated FCA firm provide to the fund/joint venture?
To ensure that the fund is managed correctly and in line with its original objectives and investment criteria, the FCA requires a UK FCA authorised and regulated firm to act as a manager or operator. For authorisation to be granted, the FCA must be satisfied that the firm is capable of complying with the applicable regulations, has sufficient capital and assets, and is run by individuals who have sufficient experience and who are of good repute.
The appointment of such a firm will usually provide Operator or AIFM services to the fund, depending on its structure and characteristics. The regulated firm will have regular contact with the General Partner/Asset Manager ensuring that the fund’s activities are compliant. The regulated firm is also there to provide an independent overview giving assurance to investors that their investment is being safeguarded and the regulated firm will have oversight of the risk and portfolio management of the underlying assets.
The regulated firm will generally be an investor’s first point of call in respect of information provided about the fund, financial information and general day to day queries. It is therefore important that the firm appointed as the regulated firm understands and has direct experience/expertise of the fund’s investments.
Marick Capital Ltd is authorised and regulated by the FCA and has the permissions to act as Operator and small authorised AIFM to real estate funds. We are a fully resourced team including FCA, RICS and ICAEW qualified staff. If you have any questions please contact us.
Marick Capital Ltd
T: 020 7297 2405