AIFMD: High price for investor security?

Up until now, private equity has been a largely unregulated sector. However, with the introduction of the AIFM Directive, which came into force on the 21st July 2011, EU countries now have just two years to apply the regulation to their national legislation.

Many industry professionals are unsure about the overall impact the directive will have, even at this late stage. Ralph Guenther, principal at Pantheon is positive about some aspects of the AIFMD as it will provide a minimum requirement regarding personal qualifications for fund managers. "At the moment everyone can call themselves fund manager and launch a fund, which does not make much sense to me," he says.

That fund managers will have to meet certain standards in order to operate should provide greater protection small investors who may not have the same capacity as larger LPs to track fund manager performance and quality. It could also help open up retail investment in listed private equity funds, by bolstering public confidence in the asset class.

However, less risk for the end investor will likely mean higher costs for GPs. In order to meet the AIFMD's requirements, GPs will face increased legal costs. This will particularly affect smaller houses, as larger PE outfits usually already have their own in-house legal department. "A smaller competitor on the market might have to employ additional staff such as a compliance or risk manager," Guenther points out.

Aside from rising costs, the new regulation will also increase the level of bureaucracy for private equity funds. Concerns are that GP's might need to raise fees in order to cope with the increased cost of compliance. This cost burden comes at a time when GPs are already struggling in a difficult fundraising climate and there is the shadow of further regulation to come, such as Basel III and Solvency II, both of which could have a significant impact on LPs appetite, meaning GPs will be reluctant to hike fees further.

GPs are in two minds regarding the AIFMD. While increased regulation will have a positive effect on the industry's image and investor confidence, the squeeze on costs could be detrimental for many smaller operators. "Looking at AIFMD, I believe that the impact of the directive will be relatively minor for a well-led fund management team which already operates under its own set of guidelines," Guenther concludes.

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• Topics
• UK / Ireland
• Southern Europe
• Benelux
• DACH
• France
• Nordics
• Regulation
• AIFM Directive
• Pantheon Ventures