KYC for Alternative Investment Funds: Understanding AIFMs, GPs, LPs and the Compliance Challenges

For alternative investment funds, KYC is rarely as simple as identifying one legal entity. Behind a single fund can sit a network of investors, general partners, regulated managers and banking relationships, each with different responsibilities and documentation requirements.

Understanding these relationships is essential for effective KYC, particularly when funds need to collect information from investors while simultaneously responding to due diligence requests from banks and other counterparties.

What are AIFs and AIFMs?

Alternative Investment Funds (AIF)

An Alternative Investment Fund (AIF) is a collective investment undertaking that raises capital from investors to invest according to a defined investment policy and does not require authorization as a UCITS (Undertakings for Collective Investment in Transferable Securities).

AIFs commonly include private equity, venture capital, real estate, infrastructure, private debt and hedge funds.

Unlike UCITS, which operate under a regulatory framework designed primarily for investment products accessible to retail investors, AIFs frequently serve professional and institutional investors.

However, an AIF is not a specific legal entity type. It describes a regulatory classification.

A fund might be structured as a limited partnership, investment company or another permitted legal arrangement. The structure determines how ownership, management and control are distributed, which directly affects KYC requirements.

Alternative Investment Fund Managers (AIFM) and Why Do They Matter for KYC?

An Alternative Investment Fund Manager (AIFM) is the entity responsible for managing an AIF.

Under the EU Alternative Investment Fund Managers Directive (AIFMD), each AIF within scope must have one designated AIFM, which may be external or, where permitted, the fund itself.

The AIFM is responsible for core investment management functions, including portfolio and risk management. Depending on the applicable framework and arrangements, its responsibilities may also involve regulatory reporting, investor disclosures and AML compliance.

An AIFM may manage several funds simultaneously. This creates an important distinction for KYC: the manager and the individual funds are not necessarily the same legal entity.

A bank onboarding a fund may therefore request information about both the fund and its AIFM, including regulatory authorization, management arrangements, ownership information and relevant AML policies.

For fund managers overseeing multiple investment vehicles, maintaining this information consistently can become a significant administrative challenge.

How Do General Partners and Limited Partners Fit Into a Fund Structure?

Many private equity, venture capital and private debt funds use limited partnership structures.

These generally involve two distinct roles.

Limited Partners (LPs) are the investors who commit capital to the fund. They typically have economic interests but do not manage its day-to-day activities.

General Partners (GPs) are responsible for managing or representing the partnership under its governing arrangements. In externally managed structures, the GP may appoint an AIFM to perform investment management functions.

A simplified structure might look like this:

- The LPs contribute capital and hold economic interests.
- The GP exercises management or governance authority.
- The AIFM manages the fund's investment activities under the relevant agreement.

The distinction matters because ownership and control are not necessarily held by the same parties.

For KYC purposes, identifying the investors alone may not provide a complete picture of who controls the fund.

Why Is Beneficial Ownership Verification Complicated for Investment Funds?

Beneficial ownership is one of the more challenging aspects of fund KYC.

Under EU AML rules, beneficial ownership assessments consider natural persons who ultimately own or control a legal entity. Ownership interests exceeding 25% are an important indicator, but control may also exist through other means.

Investment funds create additional complexity because economic ownership can be distributed across numerous institutional investors, while governance and management responsibilities sit with separate entities.

Consider a fund with 20 institutional investors, none holding more than 25% of the economic interest.

Identifying its beneficial owners may require more than examining investor percentages. The assessment may also involve control rights, the GP, the AIFM and, where appropriate, senior managing officials.

Importantly, there is no universal rule that automatically makes every GP or AIFM director a beneficial owner. The correct assessment depends on the legal structure, applicable legislation and actual ownership or control arrangements.

This is why accurate legal entity mapping is so valuable in fund KYC.

Why Do Funds Need Both KYC Collection and KYC Response Processes?

One of the distinctive challenges of fund compliance is that funds operate on both sides of the KYC process.

First, funds need to collect KYC information from their investors.

During investor onboarding, fund managers or their appointed service providers may need to collect identification documents, corporate registration information, beneficial ownership details, source of funds information and supporting documentation.

This information supports customer due diligence, sanctions screening, risk assessment and ongoing monitoring.

Second, funds must respond to KYC requests from their banks and other counterparties.

When opening bank accounts, establishing custody relationships or accessing financial services, a fund may need to provide its own constituting documents, ownership and control information, GP details, AIFM authorization and other compliance records.

These requests frequently involve information spread across several legal entities.

The result is a two-directional information challenge: funds must efficiently collect information from investors while making their own information available to external institutions.

What Documents Are Commonly Required for Fund KYC?

The precise requirements depend on the fund structure, jurisdiction and risk assessment, but typical requests may include:

- Fund registration documents and the Limited Partnership Agreement (LPA), where applicable.
- GP incorporation documents, directors and authorized signatories.
- AIFM authorization details and relevant regulatory information.
- Ownership and control structure charts.
- Beneficial ownership information and identification documents.
- AML policies and supporting compliance documentation.

The LPA deserves particular attention. It establishes important governance and contractual arrangements between the GP and LPs, but may contain confidential commercial terms.

Consequently, funds may need to provide relevant excerpts rather than the entire agreement, subject to the requesting institution's requirements.

Managing these documents becomes increasingly complicated when an AIFM oversees multiple funds, each with its own GP, investors and banking relationships.

How Can Technology Simplify KYC for Alternative Investment Funds?

From a product management perspective, one of the biggest opportunities in fund KYC is reducing the need to repeatedly reconstruct information that already exists.

Fund structures may be complex, but much of the underlying information is relatively stable and reusable.

A centralized approach allows teams to maintain structured information about each fund, its GP, its AIFM and its investors, alongside the documents associated with those entities.

This creates opportunities to standardize investor onboarding, improve collaboration, track documentation requirements and reuse approved information when responding to external requests.

Avallone's KYC Collector supports the collection of investor and counterparty information through structured questionnaires, document management, screening and risk assessment workflows.

Avallone's KYC Responder helps funds and investment managers organize corporate KYC information, manage incoming requests and reuse validated answers and documents across banking relationships.

Together, these approaches address both sides of the fund KYC process.

KYC Needs to Reflect How Funds Actually Operate

Effective KYC for alternative investment funds requires more than collecting a set of corporate documents.

It requires understanding the relationships between the fund, its investors, its GP and its AIFM, including how ownership, control and regulatory responsibilities are distributed.

For fund managers, there is a clear operational opportunity: Structure KYC information around the entities and relationships that actually exist, rather than rebuilding the same information for every new request.

With centralization of fund information and improvements to how it is collected, maintained and shared, investment managers can reduce administrative effort while supporting more consistent and transparent due diligence.

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Sources:

European Parliament and Council of the European Union, Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD), June 8, 2011 (consolidated version). https://eur-lex.europa.eu/eli/dir/2011/61/2026-04-16/eng

European Commission, Investment Funds. https://finance.ec.europa.eu/financial-markets/financial-markets-policy/investment-funds_en

Financial Action Task Force (FATF), Guidance on Beneficial Ownership of Legal Persons, March 2023. https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Guidance-Beneficial-Ownership-Legal-Persons.html

Financial Action Task Force (FATF), FATF Glossary. https://www.fatf-gafi.org/en/pages/fatf-glossary.html