She believed it was critical for firms that are currently
fundraising to take steps to future-proof their fund structures
and documentation as far as possible.
Participants in Europes alternative fund management
industry have urged international regulators to adopt a more
coordinated and considered approach to market supervision.
The European Commissions Alternative
Investment Fund Managers Directive (AIFMD) came into force on
July 21 2011. When it takes effect in July 2013, it will
fundamentally change the activities of all funds other than
UCITS (Undertakings for Collective Investment in Transferable
The European and offshore non-UCITS fund sector must alter
how they distribute funds, pay salaries and operate their
Many of the provisions in level one of the
Directive require further clarification and a significant
amount of the detail is to be defined at level two, through
subordinate measures the final version of which are
yet to be published. Affected hedge funds, private equity
funds and real estate funds therefore remain uncertain how
best to prepare at a detailed practical level.
But Field Fisher Waterhouses Kirstene
Baillie said the EU initiative could not be viewed in
isolation. The challenge for many of the alternative
investment fund managers (AIFMs) is that they are operating
in a number of jurisdictions, she said.
For firms in jurisdictions where regulation is
already required, many of the AIFMD requirements will be
familiar. For example, the majority of alternative fund
managers in Europe are based in the UK and therefore subject
to Financial Services Authority (FSA) regulation.
There could have been a gradual extension
or evolvement of the FSA's approach of regulating operators
of collective investment schemes together with more
information gathering on the alternative funds
themselves, said Baillie.
Good practice probably could usefully be
enshrined in new regulation of alternative fund managers,
which could have made a contribution to more robust
alternative fund structures, she said.
But she did not believe this would necessarily be
the result of the AIFMD implementation.
Instead we have this wide ranging, and
politically-driven, AIFMD initiative which will cause
difficulties for many in adjusting to comply with it and yet
may not achieve its purpose, she said.
Kirkland & Ellis private equity partner
Stephanie Biggs said regulatory uncertainty was causing
significant problems for the industry
The biggest difficulty with AIFMD is that
it takes a one-size-fits-all approach to regulating a diverse
industry, and in some cases it is not clear what mischief the
regulatory requirements are addressing, she said.
Baillie said one approach simply could not suit
all types of alternative investment funds.
Biggs warned the consequences of this oversight
could be damaging. Poorly targeted rules that create
additional costs for firms, with no clear benefits for
investors or other stakeholders, are frustrating and can
affect the extent to which firms buy-in to the
regulatory regime, she said.
The AIFMD process had demonstrated how vital it
was to engage extensively with the EU process at an early
stage, Biggs said, as it is easier to get key messages across
before the legislative process gathers momentum. It had also
demonstrated how important it was to understand the political
drivers behind legislation, and to make the political case as
well as the business case, she said.
Nonetheless, Baillie believed the tailoring
within the level two measures may not be sufficient to
resolve all issues created by the AIFMD.
She predicted implementation of some AIFMD
changes would make some provisions more onerous for
professional investors investing in affected funds than for
UCITS funds intended for retail investors.
Recently-published proposals to amend the UCITS
Directive have recognised the need to at the least
level up the regulations. Even so, Baillie believed
some wider consideration should probably now be given to
which sorts of funds should be viewed as mainstream for
retail investors or alternative for professional investors,
and what sort of protection is really needed for each
category of investor.
Biggs expected the new depositary rules would
also have a big impact. Private equity firms are not
used to external oversight of their investment processes, and
many would argue that this is unnecessary, she
Firms have also expressed concern over the
limitations on their other business activities, the level of
regulatory capital required and the remuneration rules.
While, non-EU firms have questioned whether national private
placement regimes will permit them to market funds to
EU-based investors, as this will have a significant effect on
firms marketing strategies.
For firms in jurisdictions that do not
currently regulate private equity, the transition from being
unregulated to being a fully regulated asset manager will be
very significant, Biggs said.
Biggs was hopeful, however, that changes to
firms day-to-day operations may be limited. Private
equity firms have always had very transparent relationships
with their investors, who are used to receiving detailed
reports about the funds performance on a regular basis,
Firms may have to tweak their existing investor
reporting procedures to comply with AIFMD and Dodd-Frank, but
they should not have to make wholesale changes.
The biggest change is the amount of
information to be reported to regulators, she
explained. This is likely to be time-consuming for the
back-office team, so firms are hoping that regulators will
make the process as streamlined and straightforward as
It is also likely that more information
will end up in the public domain, although many larger firms
are already used to being in the media spotlight from time to
time, she said.