AIFM: The end of a long road

John Bakie
26 October 2010

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With todayтs news that European Parliament negotiators have agreed on the final text of the Alternative Investment Fund Managerтs Directive (AIFM), the private equity industry can look forward to greater certainty about the regulatory environment going forward. John Bakie takes a look back at the short but substantial history of the AIFM.

Just 18 months ago, in the midst of one of the worst recessions in living memory, the AIFM was proposed to enable greater scrutiny of private equity and hedge funds and protect investors. The original draft was, understandably, rather worrying for private equity fund managers, as it would place substantial restrictions on their investors and the way they run portfolio companies.

Industry professionals were worried by a number of proposals, including suggestions their portfolio companies would need to disclose commercially sensitive information, that non-EU funds would no longer be able to market to European investors, and high capital adequacy requirements. Fortunately, many of the original suggestions turned out to be rather tame when details were published. Despite initial fears that funds would need large capital reserves, proposals suggested they hold just €125,000 in reserve, increasing modestly when a fund reached €250m. Similarly, many disclosure rules were not any more onerous than those already implemented by many member states.

However, the issue of rules regarding non-EU funds was a major point of contention, and one that has continually held up the Directive's implementation until reaching a breakthrough last week. The initial rules would place heavy restrictions on any alternative investment fund not domiciled in the EU marketing its products to EU investors, a move which many felt would be highly damaging to the European private equity industry.

Following numerous delays and major disagreements between the European Commission and the European Parliament, the current Belgian Presidency proposed an amendment, which would ultimately bring the long saga of the AIFM Directive to an end. It suggested that third country funds should be able to obtain a "passport" if they met certain criteria, enabling them to market their services in the EU, while still giving European regulators some control.

While the amendment was initially met with hostility by both France and Germany, it was eventually agreed to by finance ministers last week. Now that European Parliament negotiators have also accepted the final text of the Directive, it looks set to be formally approved on 11 November.

While it may seem the industry has now reached the end of a very long road, the journey may be just beginning. Over the next two years, member states and the industry will need to ready themselves for the new regulatory regime, to ensure business can continue after the 2013 implementation deadline.

The debate over the Directive's worth will, no doubt, rage on. Just today, the British Venture Capital Association (BVCA) has continued to object to the AIFM, saying: "This remains a defective Directive. The EU has taken a hostile interest in the wrong industry at the wrong time and for the wrong reasons."