The EU’s Directive on Alternative Investment Managers has moved a few steps closer to law, after two critical votes on Monday night and Tuesday morning.
The EU Parliament’s Economic and Monetary Affairs Committee (ECON) approved a version of the directive on Monday, and on Tuesday the Council of Ministers, which has representatives from each member state, approved its own version of the directive.
There are significant differences between the two versions, however. The Council of Ministers’ version of the directive leaves the question of the “third country” rules open to further analysis and debate. The rules would prohibit foreign fund managers from marketing within the EU unless they can demonstrate that they are subject to a regulatory regime of equivalent rigor in their home country.
The ECON committee’s version, however, adopts the third country rules as previously written. The ECON committee’s and the Council of Ministers’ version also differ in their approach to remuneration rules, and whether professional investors in the EU should be allowed to buy shares or units in funds outside of the EU.
The UK and the US have both publicly opposed the third country rules.
Although the directive aims to protect investors, any increased compliance costs will inevitably be passed onto the investor.
The ECON committee’s version of the directive also includes a controversial section that has the potential to block leveraged acquisitions, according to Elizabeth Ward of law firm Linklaters.
Clause 27a of the text approved by ECON says that “in order to avoid potential asset-stripping, the net assets of a target company controlled by an AIF shall comply with the provisions of the capital adequacy regime under the Second Company Law Directive.”
“The capital adequacy regime under the Second Company Law Directive includes restrictions on a company giving financial assistance for the purchase of its own shares,” Ward said in a statement. “If such a restriction were to apply, this would make leveraged acquisitions of companies by private equity investors subject to the AIFM directive all but impossible.
She added that non-EU investors who are not subject to the directive would be able to carry out leveraged acquisitions of EU private companies, but EU investors would not be able to.
Ward has been involved in the Brussels lobbying process on behalf of the private equity industry.
Three-way “Trialogue” discussions between the parliament, the ministers, and the European Commission will begin on 31 May, during which the three parties will negotiate a final compromise.
The ECON Committee and the Council of Ministers were in agreement on parts of the directive that would impose heightened transparency and reporting requirements on fund managers. One study by the European Parliament found that the one-off compliance costs could rise by between €110 million and €2.2 billion in total for private equity, hedge funds and venture capital.
“Although the directive aims to protect investors, any increased compliance costs will inevitably be passed onto the investor,” said Andrew Bradshaw, a partner at law firm Sackers. “Whilst I recognise the EU's good intentions, large sophisticated institutional investors are big boys and don't really need Brussels holding their hands when it comes to making investment decisions.”