This week, the European Union's Alternative Investment Fund Managers Directive finally came into force (or to be more precise: the grace period for most groups came to an end).
Whether this is a good thing is a moot point, to say the least. The feeling persists that as post-crisis legislation goes, it’s trying to solve to a problem that doesn't exist; worse still, it's doing so in a way that has forced alternative fund managers to expend substantial amounts of time and money that could have been put to better use elsewhere. You'd be hard pushed to find any regulator who felt that private equity fund managers caused the financial crisis – and yet arguably they're being penalised as if they had.
However, that particular ship has sailed: the directive is clearly here to stay. At least during its extended five-year gestation period, the industry has been able to mitigate some of its original excesses, thanks largely to sterling lobbying work by EVCA and the national associations. And at least managers have had plenty of time to get used to the idea and make their preparations (although that doesn't mean that everyone has done everything they're supposed to have done, as a BNY Mellon survey reminded us this week).
Nonetheless, while most GPs will not look hugely different on the surface as a result of AIFMD – apart from the extra bodies in the compliance department and the extra dollars on the cost line – it is becoming clear that AIFMD will have far-reaching implications for the way the industry operates, both in Europe and beyond.
Within the EU, for example, the directive requires GPs to disclose much more information about how much they pay their staff annually, including the division between senior and junior staff, and the relative proportions of fixed and variable remuneration. If GPs turn out to be too top-heavy, or too generous with their base salaries, LPs might start asking more questions about their fee structures and talent retention. At the same time, dealmakers will have to be more open about their plans for a target company pre-acquisition, particularly in terms of potential job losses – which clearly increases reputational risk for all concerned.
Of course, it's not just European firms who will be affected by AIFMD: life is now substantially more complicated for any manager looking to raise funds in the region.
Some GPs, particularly at the smaller end of the market, will take the view that marketing in Europe has become more trouble than it's worth (thus effectively closing off a high-performing part of the market to European investors, which presumably wasn't the outcome the regulators were trying to achieve). Instead, some will be writing carefully-worded letters to their existing EU investors, according to market sources, in which they'll try to hint that investors should keep an eye out for their future funds and come in via the 'reverse solicitation' exemption (which allows GPs to accept commitments from LPs who approach them directly).
At the other end of the spectrum, expect some of the big non-EU managers to set up parallel or feeder vehicles within the EU; this will allow them to apply for a pan-EU marketing passport immediately, which they couldn’t otherwise do until July 2015 at the earliest.
As for the rest, they’ll continue trying to make sense of the confusing patchwork of different marketing regimes that has developed as different EU countries have transposed the directive into law in different ways. The likeliest outcome is that GPs will be willing to suck this up if they think the potential reward (in terms of snagging a big investor) is worth it. For other countries – particularly those that have been over-zealous in their transposition – they probably won't bother.
Either way, it's clear that AIFMD will be a game-changer. Maybe its positive benefits – in terms of standardising and clarifying best practice – will end up outweighing the negative implications like extra costs and constraints on investments. But frankly, we'll believe it when we see it.