EUROPE - AIFM provisions a 'trap' for the PE industry

Deborah
13 November 2009

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The new remuneration provisions contained in a fresh re-draft of the EU Commission's controversial AIFM Directive, which could require up to 60% of managers' variable pay to be deferred, has been described as a 'trap' for the industry. Deborah Sterescu reports.

The new proposals state that fund managers will have 40 per cent of their variable remuneration deferred for at least three years, though in cases where the variable remuneration is of a particularly high amount, 60% will be required to be deferred.

The re-draft, which has been welcomed by some, has immediately been slammed by others, who argue that the new provisions do not fit the private equity model.

"I guess you could say that the Commission has 'done it again'. They think that "one size fits all" for all types of alternative investment funds and banks, as if they have one and the same impact. I'm not sure what good all the representations by the private equity industry is doing when the 'Compromise Proposal' of the directive includes entirely new sections on remuneration - which are arguably more controversial than many of the other provisions," says Adam Levin, partner at international law firm Dechert.

He continues: "This seems to be a trap that has been set by the Commission - the hope is that the AIF industry will focus so much on these new proposals that they will lose sight of the other matters contained in the directive or will colour the nature of their protestations on other matters. I hope that the industry doesn't fall into the trap that has been set, otherwise it may find itself winning the battle, but losing the war."

The 'other matters' Levin refers to are the swathe of recent critiques voiced by the private equity industry, predominantly focused on new marketing and distribution as well as third-country fund provisions, which are arguably damaging to EU competitiveness.

According to a recent report commissioned by the European Parliament, the equivalence tests for non-EU domiciles are of particular concern in that they threaten to create a "protectionist spiral", with reciprocal action likely to be taken by other jurisdictions. This is particularly worrying for the UK, as 59% of capital raised for private equity and venture capital comes from outside the EU.

The new section on remuneration, however, is likely to affect hedge fund managers more than private equity. "The proposal to allow guaranteed bonuses for only the first year after someone joins and to require up to 60% of bonuses to be deferred will hit hedge funds much harder than private equity funds due to the fact that the vast majority of bonuses in the private equity industry really comes from the carried interest, which only arises at the end of the life of the fund in any event," says Levin.