The Alternative Investment Fund Managers Directive (AIFMD) became effective across the EU this week, and the private equity industry could already be forgiven for being utterly fed up with it. The build-up has lasted long enough to test the attention span of even the most determined compliance chief, and the continued changes to the text, and the alarming – and, at times, alarmist – messages coming from industry observers confused and frustrated many others. But, whether they like it or not, fund managers do now have to operate their business within this new regulatory framework, while policy makers across Europe would do well to ask how they could have done better.
Debates about pan-European regulation of alternative investment fund managers began soon after the financial crisis (even though no-one blamed private equity for that crisis), and it then took several years for the law to be finalised and passed. Even when that finally happened two years ago, the detailed regulations needed to make any sense of the law were still to be drafted, and even now are not completely finalised. There have been many consultations, both on the pan-EU laws and the national implementations of them, and countless re-drafts of rules that started out as unworkable but, in most cases, got better as the process went on – thanks, in large part, to the determined efforts of the industry associations and those working with them, and the willingness of many EU and national authorities to engage with them.
Now that the rules are effective, their impact will be felt in different ways and at different times by private equity firms, and so the shockwaves will be dissipated. Only the smallest firms will escape the Directive entirely (or almost entirely – even sub-threshold firms will be subject to a registration regime, and many of those will have other national regulation to deal with). A handful of EU based firms are already authorised (with a few regulators processing applications in time for this week's implementation date), but most will take advantage of transitional provisions to get authorised and become fully compliant between now and this time next year. Some EU firms who are currently out of scope will, as they make investments and see them grow, meet the qualifying thresholds and need to become authorised over the next few years, while others will opt to comply voluntarily to make fund raising easier. Non–EU firms who want to market funds in Europe from this week may be able to take the benefit of certain transitional provisions. However, many more will have to rely upon national private placement requirements which will require compliance with certain parts of the Directive immediately. Ultimately even they may have to comply in full, but that is still some years away.
So the impact will be felt gradually, but it will be dramatic for many – especially those who have previously had no regulation at all, as had been the case in many member states until this week. Managers remain concerned about the remuneration rules and the upheaval caused by new reporting rules. The application of proportionality principles will allow certain firms to disapply the more onerous remuneration requirements but only if they can justify such an approach to their regulator, and the final attitude of regulators to this is not yet clear. The need for a depositary adds cost and complexity, and increased capital requirements are troublesome for some, especially younger firms.
It is not all bad news: a marketing passport for AIFMD authorised firms is certainly going to reduce headaches when marketing, and in time the AIFMD brand may be seen as a quality mark which will help to sell funds. It may also add to the willingness of regulators to embrace the asset class, and (for example) allow it to be more widely offered to retail investors, as is implied by the European Commission’s recent proposal for Long Term Investment Funds, and ensure it is treated appropriately in other legislation with an impact on the sector, such as capital requirements for pension funds or insurers investing into private equity. Some of the new rules are sensible, and will in time prove to have boosted the whole asset class. And it is certainly true that the end result is better than it might have been – if that can be counted as good news.
But there is no doubt that different attitudes of regulators and governments across Europe will perpetuate, and in some cases exacerbate, regulatory divergence across the EU – which seems counter to the aspiration of a single market – while the sub-optimal process through which these rules have been made (and, absurdly, are still being made, even after firms are supposed to be compliant) does not reflect well on the EU's law making machine. As firms get to grip with their new world, it may be little comfort that lessons may be learned from their case study – but it would be a good idea for all parties to reflect on how to craft better regulation in future, and with less upheaval.