Performance fees - ESMA updates its AIFMD and UCITS Q&As

On 16 July 2021, ESMA published updated

• Q&As on Application of the AIFMD and

• Q&As on the Application of the UCITS Directive

to include additional questions (in essentially identical form) to clarify aspects of its recent Guidelines on performance fees in UCITS and certain types of AIFs (the Guidelines).

In this note, we use the term 'manager' to refer interchangeably to the authorised AIFM (in respect of the AIFMD) or the authorised management company (in the case of UCITS), as applicable.

Application of the Guidelines to funds with multiple portfolio managers.

The first new Q&A looks at the situation where (a) the manager delegates the portfolio management function to different delegated portfolio managers, (b) overall, the fund underperforms during the relevant reference period but (c) some of the delegated portfolio managers overperform.

In this case, ESMA's view is that it would not be acceptable to pay the over performing portfolio managers a performance fee.

Since the Guidelines state that performance fees:

• should only be paid where positive performance has been accrued during the performance reference period and

• could be paid in case the fund has overperformed the reference benchmark but had a negative performance

this applies equally where there has been delegation to different delegated portfolio managers.

As a result, where there has been a global underperformance of the fund, performance fees should not be paid to those delegated portfolio managers who have overperformed.

Crystallisation of performance fees

Where a new fund (AIF or UCITS), compartment or share class has been created in the course of the financial year, ESMA confirms that performance fees cannot crystallise after less than 12 months from the date of creation.

ESMA reminds managers that the Guidelines foresee the crystallisation date being the same for all share classes of a fund that levies a performance fee.