UCITS/certain types of AIFs: ESMA Guidelines on performance fees

On 5 November 2020, ESMA published Guidelines on performance fees in UCITS and certain types of AIFs ("Guidelines") on its website in all EU official languages.

The Guidelines became applicable on 6 January 2021 and in Luxembourg, by way of its  Circular 20/764, the CSSF confirmed the integration of those Guidelines into its administrative practices and regulatory approach.

The Guidelines apply to UCITS management companies and to AIFMs of AIFs allowed by Member States to market their units to retail investors in their territory in accordance with Article 43 of the AIFM Directive, except for closed-ended AIFs and open-ended AIFs that are EuVECAs¹  (or other types of venture capital AIFs), EuSEFs² , private equity AIFs or real estate AIFs.

The Guidelines provide guidance on (i) the performance fee calculation method, (ii) the assessment of the consistency between the performance fee model and the fund's investment objectives, strategy and policy (particularly when the fund is managed in reference to a benchmark), (iii) the frequency for crystallisation of the performance fee, (iv) recovery in case of negative performance and (v) disclosure of the performance fee model.

Investment Fund Managers (“IFMs”) of any new funds created after the date of application of the Guidelines (i.e. 6 January 2021) with a performance fee, or any funds existing before the date of application that introduce a performance fee for the first time after that date, must comply with the Guidelines immediately in respect of those funds.

IFMs of funds with a performance fee existing before the date of application of the Guidelines, must apply the Guidelines in respect of those funds by the beginning of the financial year following 6 months from the date of application of the Guidelines.

As an example: