unquote" regulation update: AIFMD

Anneken Tappe
09 March 2012

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In this week's unquote" regulation update, Anneken Tappe looks at the latest developments surrounding the Alternative Investment Fund Managers Directive.

The Alternative Investment Fund Managers Directive (AIFMD) is the first regulation of its kind in Europe. Unlike other legislation designed to reduce systemic risk in financial markets and to protect institutional investors, such as Basel III or Solvency II, the AIFMD aligns legal conditions for fund managers across the EU for the first time. But regulatory conditions are very different across Europe and opinion is therefore not entirely against the Directive. In Spain and France, for example, current requirements for fund managers are already very close to those proposed by the AIFMD.

"We claim that France is one of the most regulated private equity industries in Europe. So I can't say that [the AIFMD] will seriously impact the way we do business," says Charles Diehl, partner at French mid-cap firm Activa Capital. He points out that despite the risk of investments going off-shore when regulation becomes stricter, French legislation has been encouraging firms to stay on-shore.

In Spain, SJ Berwin partner Isabel Rodriguez describes the existing PE act as very pro-business - PE funds need to be registered with the Spanish regulatory authorities and are obliged to fulfil certain capital and annual disclosure requirements.

"Due to existing regulation currently in force in Spain, the AIFMD won't affect the industry much," says Julio Veloso of law firm Broseta and the Legal and Fiscal Committee of ASCRI.

But GPs are much more outspoken about their dislike of obligatory depositories prescribed by the directive. "No LP has ever told me they're worried about their money because of too little regulation," says Simon Havers, chief executive of Baird Capital Partners Europe.

"The sole positive effects for the industry are the EU passport and the possibility that AIFs will become a recognised brand like the UCITS," says Donnacha O'Connor, partner at Irish law firm Dillon Eustace.

"It is burdensome from a bureaucratic point of view and will just increase costs without better protection. But this is not going to go away. There is significant compliance infrastructure in place at Baird, but I feel sorry for my competitors who don't have that advantage," explains Havers.

But the requirement of depositories is not the only feature that upsets the industry. "Two parts that are penalising are the ability to fundraise, which impacts the private nature of the industry, and the frustration that comes with being treated like a hedge fund," says Diehl.

It seems like policy makers are unaware of any sub-categories in the asset class, and that is reflected in the industry sentiment. But unlike in the US, where a special SEC enforcement unit will be set up to deal with alternative investments as part of the Dodd-Frank Act, there is no equivalent in the EU.

"The business model and fund structures in private equity are very different from those in the hedge fund industry. The industry is not opposed to appropriate and proportionate regulation. But this one-size-fits-all approach is more burdensome for PE houses, especially with regard to current structures and processes," Ulrike Hinrichs, managing director of German trade body BVK, points out.

Rodriguez stresses that it is wrong to put all forms of alternative investments in one category; "But now everybody is in the same boat and this is the time to make the industry be heard by the Commission," she adds.

PE and VC not created equally
The anger towards unfitting definitions does not end with hedge funds. Some have complained about PE and venture capital being too different to be regulated under the same law. The Dutch NVP argued that small venture funds should not be regulated to the same extent, considering their reach and their ability to live up to large additional payments. Since then, the EC has proposed a similar regime for VC funds, allowing them to operate across Europe once a similar passport is obtained.

Koos Teule, director of investment relations at Gilde Buyout Partners, disagrees with the approach: "Buyouts and venture capital have different risk profiles, but the AIFMD is a directive meant for the protection of the investors. I can easily argue that venture is riskier and more illiquid than buyouts in comparison."

The decisive disapproval of a streamlined regulation for a diversified industry might have been the reason for the recent review of venture capital fundraising regulation by the EC.

But no matter how successful or unsuccessful they may be, complaints will not help to get national laws ratified any faster. At this point in time, with a two-year implementation period ahead, funds need to sit back and wait for final laws to be passed in their home countries. Again, opinions differ as to how much time will be needed to implement the legal changes in company strategy.

"A year is nowhere near enough time to prepare," says Joe Steer, head of international public affairs at British trade body BVCA. In Ireland, however, the necessary infrastructure is already in place for Irish-regulated investment schemes, says O'Connor: "It just needs some tweaking to become compliant with the directive."

"People continue to complain, which is understandable, because there are many clauses in the AIFMD. But people also have to understand politicians and the protections of investors. The industry is risky and illiquid. So why would it not be regulated? The problem is they overdid it now and included hedge funds and PE under the same scope. But regulation was to happen, so everybody should stop complaining," says Gilde's Teule.

"Gilde won't waste time fighting it, but use the time to prepare adequately.
But so far we have only looked at the drafts from the EU Commission and assessed the possible implications. We are awaiting final national laws, so we are not prepared yet."

Opinions vary across the industry and even more so across different countries. Differences in initial national legislation are causing panic on one end and comfort on the other. But it is important to see the big
picture: the successfully implemented AIFMD will create equal, or at the very least closely related, conditions across the 27 EU member states. This harmonisation process will make regulated funds the new standard and force smaller AIFs to comply as well, potentially creating safer conditions for investors. The passport regime that will come into action under the directive is viewed by far as the most positive feature among all interviewees.

The difficulties to raise funds and find new investors are a trade-off for unlimited access to 27 developed markets; a feature which will, in theory, drive growth in the European PE industry.