AIFMD WEEK: ESMA clarifies leverage reporting

The European regulator confirmed portfolio company debt isn’t fund-level leverage for AIFMD reporting purposes.

European super regulator the European Securities and Markets Authority (ESMA) eased concerns that portfolio company debt could be counted as leverage at the fund-level in an updated Q&A paper discussing the Alternative Investment Fund Managers Directive (AIFMD) which took effect this week.

The report touched on a number of areas in the directive, including foreign exchange trading and what level of oversight depositories must perform on a fund’s cash flows, but industry legal sources speaking to pfm said the most important (and relevant) new guidance for private fund advisers was around the calculation of leverage.

ESMA also confirmed expectations that portfolio company debt should not be mentioned when reporting any leverage taken at the fund-level. Similarly GPs do not have to report debt held by a holding company used to acquire a target so long as the structure doesn’t expose the firm to liabilities past its equity investment in the target. ESMA said the same principal held true when executing a dividend recapitalization at a portfolio company.

The clarified guidance was welcomed by the industry’s EU trade association the European Private Equity & Venture Capital Association (EVCA), which originally feared EU regulators would roll up portfolio company debt at the fund level, even though the collapse of one portfolio company didn’t financially impact sister companies in the fund. EVCA director of public affairs said ESMA’s “proportionate approach to private equity” was an important outcome for the industry.

Collins added that the industry needs to “continue to engage with the debate to ensure this remains the case as the AIFMD is applied and when it is reviewed.”