EUROPE - Revised Directive angers trade bodies

The furore surrounding the EU's proposed Alternative Investment Fund Managers Directive rumbles on, with a new report by Jean-Paul Gauzes, rapporteur to the Economic and Monetary Affairs committee, drawing ire from private equity trade associations over the removal of exemption thresholds.

Gauzes' report, which contains almost 140 largely technical amendments to the original proposal, completely omits the section relating to the thresholds under which the regulation would not apply. It has prompted a furious reaction from the industry trade bodies, who had been hoping to have the thresholds raised from the current EUR 500m for unlevered funds.

The British Private Equity and Venture Capital Association has angrily pointed out that the revisions would bring venture capital funds under the Directive, contradicting Governmental rhetoric on supporting investment into SMEs. BVCA CEO Simon Walker said: "It is risible to impose on struggling venture capitalists or small companies battling to restore profitability, a disclosure regime designed for public companies, merely because they are owned by funds."

The report did seemingly seek to address this concern, through the addition of a passage that attempted to mitigate against making the Directive "too burdensome for small AIFs which do not pose systemic risk" through the "application of the proportionality principle". However, with no defined limits as to what this refers and what concessions are offered, Walker dismissed this as "no comfort whatsoever".

The industry will be further angered by a new section on remuneration, which pushes for greater transparency in line with the upcoming rules in the banking sector as agreed at the G-20 summit in Pittsburgh in September. This was not entirely unexpected, following the recently released report from the Swedish EU presidency that suggested deferring all variable remuneration.

There was, though, some notable victories in the Gauzes report. For example, fears surrounding the cost burden being placed on funds as a result of additional reporting requirements were addressed. Managers will now only need to report on companies in the event of them taking a "controlling interest", rather than the 30% stake previously defined, which will obviously help minority growth and venture investors. They will also no longer be required to provide the same degree of detail on the accounts or capital structure of portfolio business.

Further reducing the potential cost burden of the proposals, there will no longer be a requirement for managers to employ a third party when valuing their fund. Critics had said that this provision did not offer any guarantee of improved valuations processes, while imposing high additional costs.

Significantly, there were also considerable concessions in relation to the controversial third country rules, which, in the original draft, imposed strict limits on funds based outside the EU investing, or receiving investment from, inside the EU. The requirement for the third country in which the fund is based to have a firm agreement outlining a similar regulatory approach with the EU has been dropped in favour of a requirement for "an agreement for cooperation and exchange of information". Not exactly an open door policy, but progress nonetheless.

Despite these positive contributions, however, overall the industry is unlikely to be satisfied with this re-draft. Indeed, the fact that this new report spends much of its time outlining complex new rules in relation to hedge funds' short-selling will renew anger over private equity being lumped into legislation ostensibly designed for a different asset class. Said Walker: "This directive... needs wholesale rewriting: not tinkering around the edges."

But the industry is going to have to steel itself for a long fight and will likely have to settle for something of a compromise. A report commissioned by the EU Parliament may have called the directive "poorly constructed, ill-focused and premature", but it seems to have the all-important weight of political and public sentiment behind it.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Regulation
• UK / Ireland
• DACH
• Nordics
• France
• Southern Europe
• CEE
• Benelux