In the wake of the 2008 financial crisis, which prompted a call to stricter regulations across the board, the European Commission decided to develop the Alternative Investment Fund Managers Directive (AIFMD). The European Commission pointed out that managers of alternative investment funds are responsible for the management of a significant amount of invested assets and can exercise an important influence on markets and companies in which they invest. Furthermore, the Commission believed activities of such alternative investment funds may amplify risks through the financial system. The directive has been developed to address a number of risks identified by the Commission relating to alternative investment funds, including systemic risk, through a single set of rules that would apply across the board.
The Alternative Investment Fund Managers Directive came into force on 22nd July 2013. Since then, the alternative investment fund managers, including managers of hedge funds, private equity firms and investment firms, have been working on submitting the 35-page application form to get registered under the directive before it comes into effect in less than four months.
The Alternative Investment Fund Managers Directive will most likely affect private equity funds if they are located in or have investors in the European Union and are identified as the alternative investment fund manager. Fund managers at private equity firms will need to obtain and comply with transparency and the reporting requirements of the directive in order to manage and market private equity funds within the EU.
How will the AIFMD impact private equity firms?
The AIFMD will impact private equity firms in Remuneration, Depositary, Risk Management, and Transparency and Reporting.
Let’s have a look at these in more detail below:
Carried interest - whether existing remuneration arrangements meet the requirements of AIFMD
Requirement applies to senior management, those in control of functions or individuals whose professional activities have a material impact on the risk profile of the private equity fund they manage
There are some options for disclosure of fixed and variable remuneration, but the underlying requirement is that this needs to be disclosed in the Annual Report of the fund
Typically custodians have not been used extensively beyond cash services, therefore a selection process for a suitable Depositary supported by appropriate due diligence procedures will be required
Additional costs may result
Procedures required to ensure the depositary receives the appropriate information and escalation procedures for the depositary, if required
Smaller private equity houses may not have the resources to achieve this functional separation. A key member of senior management who is not involved in the acquiring or managing of investments will need risk management duties assigned.
Due diligence procedures are currently determined according to professional judgement exercised by the private equity house; this will become more formalised under AIFMD
Transparency and reporting
A number of detailed disclosure requirements, including: investment types & concentrations, valuation, risk management and stress test
For more information, read AIFMD’s Impact on US Hedge Funds: An Expert's View which features insights from Bill Prew, Founder of INDOS Financial Limited.