The European Securities and Markets Authority (“ESMA”) published its final report on the guidelines on performance fees in UCITS and certain types of AIFs on 3 April 2020 (the “ESMA Guidelines”).
ESMA Guidelines apply to self-managed or to the investment fund managers of UCITS and open-ended AIFs that are market to retail investors in accordance with article 43 of the AIFMD, except for EuVECAs, venture capital AIFs, EuSEFs, private equity AIFs or real estate AIFs.
ESMA Guidelines promote harmonisation on 5 specific areas:
1. Performance fee calculation method
It shall include, at least, the following elements:
a) the reference indicator to measure the relative performance of the fund;
b) the crystallisation frequency and the date where it is credited to the manager;
c) the performance reference period;
d) the performance fee rate;
e) the performance fee methodology defining the method for the calculation of the performance fees; and
f) the computation frequency which should coincide with the calculation frequency of the NAV.
2. Consistency between the performance fee model and the fund’s investment objectives, strategy, and policy
The decision of the performance fee model (i.e. high-water mark, hurdle, index, etc.) should be taken in light of investment policy and be reviewed periodically, considering the performance measures, portfolio composition and in some cases the consistency indicators. The excess performance should be calculated net of all costs.
3. Frequency for the crystallisation of the performance fee
In principle, it should not be more than once a year, except for the high-water mark model or high-on-high model where these cannot be reset during the whole life of the fund and fulcrum fee model and other models which provide a symmetrical fee structure.
4. Negative performance (loss) recovery
A performance fee should only be payable in circumstances where positive performance has been accrued during the performance reference period. Any underperformance or loss previously incurred during the performance reference period should be recovered before a performance fee becomes payable.
Where the fund utilises a HWM model, a performance fee should be payable only where, during the performance reference period, the new HWM exceeds the last HWM. The starting point to be considered in the calculations should be the initial offering price per share.
5. Disclosure of performance fee model
Investors should be adequately informed about the existence of performance fees and about their potential impact on the investment return.
ESMA Guidelines are more prescriptive than the existing IOSCO principles and good practices on fees and expenses for collective investment schemes (“IOSCO principles”).
The ESMA Guidelines will be translated into the official EU languages and the translations will be published on the ESMA website. The publication of the translations will trigger a two-month period during which the national competent authorities must notify ESMA whether they comply or intend to comply with the ESMA Guidelines. At the date of this article, ESMA is still working on the translations and, consequently, the two-month period has not yet been triggered.
The CSSF was already requiring new funds to comply with IOSCO principles. So, it is expected that the CSSF will apply the ESMA Guidelines. Existing funds should have to comply with them by the beginning of the financial year, following 6 months from the application date of the ESMA Guidelines.
For further information contact Natalia Hernandez (Partner).