Since its introduction, the AIFMD has provided a lighter regulatory regime for smaller fund managers. Article 3 sets out two thresholds based on assets under management: €100 million as a general limit and €500 million for managers of unleveraged funds in which investors have no redemption rights for at least five years.

The rationale behind this is proportionality. Not every manager is required to comply with the same supervisory framework. A lighter regime was deemed appropriate for smaller managers, provided that supervisory authorities can monitor activities and risks through registration and reporting. This decision is easily explained: full authorisation can place a relatively heavy burden on smaller managers, whilst their individual market impact is generally more limited.

That principle remains relevant. However, the market has changed considerably since 2011. The regulatory framework has also been expanded. AIFMD II introduces, amongst other things, new rules on loan origination, liquidity risk management, reporting and delegation. The thresholds of €100 million and €500 million have remained unchanged. This raises the question of whether these fixed limits are still the best way to ensure proportionality.

Why thresholds of €100 million and €500 million?

At first glance, these amounts appear to be strict risk limits. They are not. It is clear from the legislative history that assets under management have primarily been used as a practical measure of scale and potential market impact. The European legislator sought an objective criterion to determine when granting a full authorisation was proportionate. However, assets under management do not fully measure risk. Leverage, liquidity, repayment rights, concentration, counterparty exposures and operational complexity can be at least as relevant.
 

The current debate centres less on the existence of the regime than on whether it is still properly calibrated.

 
The thresholds are therefore best understood as policy-based demarcations rather than empirically determined risk limits. At the time, they provided guidance on when the full AIFMD regime was deemed proportionate. Precisely because this demarcation is policy-based, periodic reassessment is the obvious course of action. This in no way detracts from the legitimacy of the registration regime. The current debate centres less on the existence of the regime than on whether it is still properly calibrated.

Assets under management are not the same as risk

Assets under management have clear advantages as a regulatory benchmark. They are objective, easy to apply and predictable. A €400 million closed-end private equity fund may have a different risk profile to an infrastructure fund of the same size. Whilst the assets under management are the same, concentration, valuation complexity, liquidity and counterparty risk may differ significantly.

The AIFMD itself recognises this. The higher threshold of €500 million applies only where no leverage is used and investors have no redemption rights for at least five years. The Directive therefore links proportionality not solely to size, but also to certain risk characteristics.
 

Proportionality is not just about how many rules apply. The rights that correspond to them are also relevant.

 
The question is therefore not whether assets under management should be removed as a criterion. However, it is worth considering whether assets under management, supplemented by a few categorical conditions, provide a sufficient basis for the abrupt increase in the intensity of supervision when a threshold is exceeded.

The threshold effect

A manager who remains just below the applicable threshold falls under the registration regime. If the threshold is exceeded, a considerably stricter supervisory framework applies. However, the risk profile does not change abruptly the moment the threshold is crossed. Compliance costs, on the other hand, may well do so. Consider additional governance requirements, risk management, reporting and staffing capacity. Limited growth can therefore lead to a relatively large increase in compliance costs: the threshold effect.

The European Commission has now explicitly raised this as a policy issue. In its consultation on the reform of the EU framework for venture capital and growth capital, it asked, amongst other things, about the functioning of the AIFMD thresholds, threshold effects and possible alternatives. The issue of proportionality is thus back on the European agenda. The Commission has not yet made a decision on this matter. However, it is clear that the discussion is no longer solely about the level of the thresholds, but also about the design of proportionality within the regime.

Fewer rules, but also fewer rights

A manager operating below the applicable threshold has fewer supervisory obligations, but is also not entitled to the AIFMD passport for cross-border activities. For a small manager operating exclusively at national level, this may make little difference. For a growing manager, however, it can be a significant constraint. This fits into the broader European debate. The Commission is focusing the current reform, in part, on removing the barriers that small and medium-sized fund managers face when scaling up and operating cross-border within the single market.

Proportionality is therefore not just about the number of rules that apply. The rights that correspond to these rules are also relevant. A regulatory regime may be light, yet still have a stifling effect if it makes cross-border expansion difficult.

Raise thresholds or switch to a different system?

In the United Kingdom, the FCA has now published a more concrete reform proposal. This does not opt for a single new threshold, but rather for a more gradual supervisory framework. The most onerous obligations would then apply only to the largest managers. Perhaps the question is therefore not only where the thresholds should lie, but also whether fixed thresholds are still the right way to ensure proportionality.

A future-proof European regime could be designed along these lines: periodic reassessment of thresholds, a more gradual build-up of obligations, and greater focus on the manager’s actual risk profile. This also includes the question of whether smaller managers should, subject to certain conditions, be granted broader access to the European market.

The discussion should therefore not be about less supervision, but about better-calibrated supervision. A mature European fund market benefits from rules that address risky behaviour, but do not unnecessarily hinder scalable and professionally organised managers. Only then can supervision remain effective and the single market function more effectively.
 

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