The private equity industry is experiencing a watershed moment, with the closely watched Alternative Investment Fund Managers (AIFM) directive finally taking effect Monday. Below industry professionals name three of their biggest concerns now that the directive has come into force.
Multiple market sources, including a spokesperson for the British Private Equity and Venture Capital Association (BVCA), said the remuneration rules were the biggest ongoing concern for the industry.
One GP source said the remuneration rules are “unworkable in current form”, mostly due to a lack of guidance from national regulators. In the UK for instance, the Financial Conduct Authority (FCA) has yet to issue final guidance on the topic.
The only guidelines that GPs can currently work off are those issued by the European Securities and Markets Authority (ESMA) in February.
The rules state that all payments made by the fund manager, the fund (including carry), and the transfer of the units or shares of fund will fall within the scope of the AIFM’s remuneration code. But questions still remain over whether carried interest will be viewed as variable or fixed remuneration, the former requiring deferral of at least 40 percent of the carry for at minimum three to five years (depending on a funds’ life cycle).
Jane Peace, group director, Ogier Fund Services, said the guidelines on remuneration were developed from those originally structured with banks in mind, which is a problem for private equity. Translating the guidelines into a firm’s unique remuneration policy will be a challenge when the guidelines have a “one size fits all” approach, added Pearce.
Firms also have to correctly document their risk-based approach when disclosing the formulation of their remuneration policies and procedures, Pearce elaborated. “It is essential you can prove you have complied with your own policies by having a robust monitoring program with appropriate escalation and management oversight.”
In June, research from fund administrator KNEIP revealed that just 15 percent of GPs were ready to meet the AIFM’s reporting obligations. KNEIP surveyed more than 90 GPs in London, Paris and Luxembourg.
Mario Mantrisi, chief strategy and research officer at KNEIP, said it is no surprise that so many GPs are not yet ready for AIFM reporting. “The fact that the alternatives industry has lacked formal reporting requirements has meant that many AIFMs have slim operations with limited back-office resource.”
Mantrisi added that the key reporting challenge for GPs is how to best collect the data required by the regulators. “Organising different workflows and developing a streamlined procedure for each stage of data collection can be a time consuming and potentially costly enterprise.”
3. JURISDICTIONAL DIFFERENCES
Although the directive’s aim was to create a harmonised pan-European regulatory framework, differences exist from country to country in how certain portions of the law are being implemented.
The availability of a one year transitional period, which provides GPs an additional year to achieve compliance with the directive, is not being offered by all EU sovereigns. For instance the UK and Luxembourg are offering fund managers the extra compliance year, while Austria and Denmark have yet to make their positions known.
“Managers are going to be operating in uncertain waters for some time to come and will need to check the private placement rules in each country before approaching investors there,” said Glynn Barwick, regulatory lawyer at Goodwin Procter.
Gibson, Dunn & Crutcher corporate partner Selina Sagayam said: “The optionality given to member states in key areas (small AIF exemption; the use of national private placements and the transitional provisions) have opened the door wide to regulatory arbitrage and regulatory chaos.”
The European Private Equity and Venture Capital Association (EVCA) will work to see that the directive is “implemented proportionately and consistently across the member states to ensure a level playing field,” said Dörte Höppner, the EVCA’s secretary general, in an email to PE Manager.
The EVCA will also continue to work closely with Europe’s regulators and push for an appropriate third country regime for the directive in the future, while also trying to keep the ear of European policymakers. The EVCA hopes to iron out “some of the less proportionate aspects of the AIFM as we move towards 2017, the directive’s review date,” added Höppner.