Poul Nyrup Rasmussen, a driving force behind Europe’s Alternative Investment Fund Managers directive and the former prime minister of Denmark, rejects criticism the AIFM regulations were drawn up to quickly and questions why LPs invest in ‘risky’ alternative funds in the first place. Interviewed by Toby Mitchenall
PERE: As it stands, the directive could catch private equity real estate funds in its net. Do they really need to be regulated?
Poul Nyrup Rasmussen: Yes they do. All financial institutions must be regulated in order to shut down for good the shadow financial system. It does not mean they are the same – in fact we acknowledge the great differences between the various types of institutions. But all alternative investment funds (AIFs} share a number of common characteristics, the most important by far being a general lack of transparency. This calls for an “all encompassing” approach.
Private equity often argues its compensation model incentivises genuine long-term performance. What are your thoughts?
I would not personally be too proud of being a genuine long-term performer by extracting revenue and imposing a short-term view on the companies that I’d managed. This is in my opinion a very poor line of defence, because the higher the carried interest on profit above the hurdle rate, the greater the incentive is for the manager to operate in a way that has great negative economic and social externalities.
How would you respond to criticisms that the AIFM draft has been drawn up too quickly?
I can assure you that it hasn’t. An expert group on [alternative investment funds] was set up by the European Commission four years ago, kicking off the normal EU legislative process. In the [European Parliament], I presented a report recommending the Commission come up with a proposed directive in September 2008. This was largely drawn from previous work, notably a report drafted with the socialist group at the [European Parliament] in March 2007. Since then, the Commission's first proposal has already undergone two revisions, and is far from being adopted. So you can see that no one is rushing such an important matter.
Costs incurred will ultimately be handed on to the funds' investors, which are comprised mainly of pension funds. Is this something that concerns you?
That’s a disingenuous statement! If a fund wants to invest in a risky product, it will have to pay the price for it. And it is rather healthy that the cost of risk is corrected upward. Don't forget that the crisis started because of unexpected default – for the very reasons that risk had been underestimated and consequently undervalued for too long. And furthermore, should pension funds really invest in risky, [alternative investment fund] products? Should institutions that are being trusted by millions of people to deliver them a means of existence once they are retired be allowed to gamble hard-earned savings? People who invest in pension funds should know what they are getting. If some of them wish to take more risk for potential higher returns that’s fine by me, but I don’t think you can claim it was the rational choice of the thousands that lost everything in the crisis.
Private equity and private equity real estate industry associations are concerned the directive will hurt them and their portfolio companies at the worst possible economic time.
First of all, the political cycle and the business cycle are not synched. The crisis helped us to gain momentum for reform, it is now urgent to seize this opportunity if we want to avoid a repetition of the crisis. When the US Glass-Steagall Act was implemented in 1933 it was a pretty tough time for financial actors, too. But it had to be done and could be done at that moment. And it worked, in providing nearly 40 years of financial stability. My second point is that the very reason why private equity firms are at the worst possible time today, is because we lacked the appropriate regulation prior to the crisis. A directive like the AIFM would have helped prevent some of the overleveraging and pro-cyclicality that have made the downturn so deep.