Fund Managers Voice AIFM Fears
Wednesday, December 29, 2010

A Preqin survey of over 100 alternative assets fund managers and investors found that just under a third support the European Union Alternative Investment Fund Manager (AIFM) Directive to some extent, with firms in certain countries where the new legislation will replace more restrictive existing rules believing that it will serve to improve conditions. However, for the majority there exists significant resentment towards the Directive.

Key findings show that 89% of fund managers and investors want the legislation amended to take into account the differences between the various asset classes, while more than half (59%) foresee the AIFM Directive creating a European 'lock-in/lock-out.'

Almost one half of the respondents (45%) think it likely or very likely that fund managers will relocate to outside of Europe as a result of the AIFM Directive; 26% felt that it was likely their firm specifically would relocate.

Over one quarter of those polled (28%) believe that the introduction of the EU Passport will have the biggest impact on the industry, while 22% feel the requirement that non-EU fund managers comply with the Directive will be the most significant measure.

Just 3% believe that increased regulations relating to retail investors will have the greatest impact.

The impact of the Directive on innovation, the additional costs firms will incur, and the effect of these costs on profitability are all major causes for concern, according to the results of the survey. A significant number feel that venture capital firms should be excluded from the jurisdiction.

Tim Friedman, Head of Communications, Preqin, commented: “Preqin’s survey suggests that there is a certain level of support for the AIFM Directive, with just under a third of respondents stating that they back it. There is a feeling among practitioners in countries such as Italy and Croatia that conditions will actually be less restrictive as a result of the Directive’s introduction. However, the overriding response was negative, and a number of the issues that were raised voluntarily by respondents were recurring: lack of differentiation between the asset classes, the negative impact liquidity requirements will have on innovation, and the fact that the legislation has been constructed by politicians with little or no understanding of the alternative assets industry. Perhaps most of all, there is a feeling that alternative assets firms were not responsible for the financial crisis, and that the new legislation will create significant extra burden while not serving to enhance the stability of financial markets.”

Under the directive, as agreed by the European Parliament and the European Council in October, a European AIFM with a portfolio of more than EUR100m (USD140m) will be required to obtain an authorization from national authorities to operate. This permit will entitle them to market funds throughout the EU single market.

The most controversial proposal in the directive has been that AIFMs from 'third countries' would be able to obtain that EU permit, or ‘passport’, to sell their funds within the EU without first having to seek permission from each member state and comply with different national laws - a planned regulation the terms of which have been widely awaited, for instance, by US funds wanting to continue to operate in Europe.

The possible allowance of non-EU hedge funds to obtain such a EU-wide passport caused long-standing divisions on hedge funds between various EU countries to resurface. Those divisions ranged, for example, from the United Kingdom, in which most European hedge funds reside and which is against too-stringent regulation, to France, supported by Germany, which has expressed a wish for the strongest rules and is against allowing non-EU funds into the European market at all.

The passport for AIFM from countries outside the EU remains, however, within the text of the agreed directive, but such AIFMs will obtain passports only if the non-EU country they are located in meets minimum regulatory standards and has agreements in place with member states to allow information sharing. The latter stipulation is important because many of the US and UK hedge funds, themselves, are invested out of other countries, such as, for example, the Cayman Islands.

Initially, only EU AIFMs will be able to obtain a passport, with those based outside the EU having to market through the current national private placement regimes. After an opinion from the European Securities and Markets Authority (ESMA), and the adoption of implementing legislation by the European Commission (EC), the passport will then also become available to non-EU AIFMs.

The EP has also insisted on the insertion into the directive of rules to deal with asset stripping, and the agreement now includes a number of provisions to this end, relating primarily to limits on the distribution of capital within the first years that a company is taken over by a private equity investor. This, it was said, is intended to deter private equity investors from attempting to take control of a company solely in order to make a quick profit.

The EP has also introduced information and disclosure requirements to be imposed on private equity investors, particularly regarding the information to be provided to employees and their representatives on the planned strategy for the company. The intention is to oblige investors to develop longer-term strategies for the companies that they take over.