Commission proposals: a "lucky escape"?

Ashley Wassall
01 May 2009

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After the storm that followed the launch of the EU Commission's proposal for an Alternative Investment Fund Managers Directive the full text has finally been released, with one prominent lawyer describing the private equity industry as having had "a lucky escape"

The full details of the EU Commission's proposed Alternative Investment Fund Managers Directive are in; and reactions are mixed at best. Disclosure requirements, including details on risk management, conflict of interests, strategy and auditing arrangements, do not go far beyond already existing national legislation. The implentation of capital adequacy requirements is also tame: fund managers will be required to have their own funds of just EU^R125,000, which increases moderately when the value of the portfolio exceeds EU^R250m.

Some concern, though, has been voiced at the new rules being implemented in respect of third country funds - now those vehicles based in investor-friendly Jersey or Guernsey will not fully escape the new proposal. Non-EU managers will be able to market funds in the EU only after "stringent criteria" has been met, and even EU-domiciled investors will have restrictions on marketing third country funds. Clearly, the Commission is keen to exert pressure on other jurisdictions to follow suit with the regulations.

Anger has also been expressed at the rule governing use of leverage, which vaguely states that the Commission will "adopt implementing measures setting limits to the level of leverage AIFM can employ." "If this kind of law was proposed in the British parliament it would be thrown out for being too vague," BVCA chief Simon Walker asserted at a press briefing.

The main target of hostility, however, continues to be the thresholds under which the directives apply, even despite the fact that the anticipated EU^R250m minimum benchmark for non-leveraged funds was doubled to EU^R500m. This, the EVCA argues, will affect around 5,000 portfolio companies, putting them at a competitive disadvantage to their non-fund owned peers.

Furthermore, private equity firms will be required to notify shareholders and employees when acquiring an interest of 30% or more in any asset with revenues of more than EU^R50m or a balance sheet total of EU^R43m.

The main thrust of the industry's argument is that it is only even being included in the proposal as a result of political point scoring - and it is hard to argue based on the content. In the words of EVCA secretary general Javier Echarri, private equity trade bodies feel they have been "been caught up in something that was aimed at a different asset class"; namely hedge funds.

To make matters worse, Poul Nyrup Rasmussen has already been quoted as saying he feels the proposals do not go far enough, and it is likely that by the time of a second reading the socialist bloc will have ever more influence in Brussels.

The private equity industry may not like to admit it, but the current proposals may actually represent something of an escape; in the long run it may not be so lucky.