[ESMA 34-43-392 UCITS Q&A, Section 11, 1a] & [ESMA 34-32-352 AIFMD Q&A, Section 15, 1]

No. The Guidelines on performance fees[1] do not prevent to pay performance fees during the performance reference period of 5 years and/or in the first years of a fund's existence, in case the fund has not existed for 5 years.

By way of example, if on the crystallisation date of the fund (e.g. at the end of the second year of existence of the fund), the fund has overperformed the reference indicator and there is a positive accrual of performance fees those can be paid. In this case, the accrual will be crystallised in the payment of the performance fees to the management company.

On the contrary, if on the crystallisation date of the fund (e.g. at the end of the third year of existence of the fund) the fund has underperformed the reference indicator and as a consequence there are no accrued performance fees, this underperformance is brought forward for the purpose of the calculation of performance fees the following year. In this way, compensation of negative performances is ensured over the years during a reference period of 5 years.

Example:

• Crystallisation date: end of the second year of existence of the fund
  • Performance of the fund: 10%
  • Performance of the reference indicator: 5%
  • Overperformance: 5%
  • Performance fees can be paid to the management company
• Crystallisation date: end of the second year of existence of the fund
  • Performance of the fund: 10%
  • Performance of the reference indicator: 10%
  • Overperformance: 0%
  • No crystallisation of performance fees
• Crystallisation date: end of the third year of existence of the fund
  • Performance of the fund: 5%
  • Performance of the reference indicator: 10%
  • Underperformance: -5% (this underperformance should be taken into account in the subsequent calculation of performance fees)
  • Not only performance fees cannot be paid but the underperformance of -5% should be brought forward to the following year and clawed back before any performance fee can be paid (see below)
• Crystallisation date: end of the fourth year of existence of the fund
  • Performance of the fund: 8%
  • Performance of the reference indicator: 5%
  • Overperformance: 3%
  • Underperformance from year 3: -5%
  • Global net performance: -2%
  • Not only performance fees cannot be paid but the underperformance of -2% should be brought forward to the following year and clawed back before any performance fee can be paid

This should not prevent NCAs to require funds to apply stricter rules (e.g. to crystallise fees only after 5 years or to apply reference periods longer than 5 years), bearing in mind that any specific provision applying at national level in addition to the provisions set out in the guidelines should not jeopardise the rules regarding funds’ cross border distribution[2] and the split of competences between the home and host competent authority[3] to this regard.