Depositories pegged a top cost concern

Ahead of all other pending rules and requirements set forth in the Alternative Investment Fund Managers Directive the use of depositories will cost the most, according to a recent Ernst and Young survey of GPs with operations in Europe.

More than one third (38 percent) of respondents cited depositories as the Directive’s biggest cost, followed by risk management (31 percent) and disclosure and reporting (24 percent).

EU regulators view depositaries as a way of safekeeping investors' assets, but the industry argues that illiquid private equity assets are less prone to abuse or misplacement. Moreover 86 percent of respondents said using a depositary would result in a duplication of tasks already performed by fund managers (including anti-money laundering checks and ownership verification policies).

Daniel Green, partner at international law firm Pinsent Masons, told PE Manager that the “practical benefit to an investor of a fund complying with AIFMD is likely to be minimal; albeit that some may prefer the AIFMD-compliant badge”.

However, Greenaway added that “the attitude of investors may become more pronounced though when the costs of compliance are clearer and when they realise that most of those costs will be passed on to them”.

Compounding the cost issue is the question of what types of organisations will take on the role of depository for the private equity industry.

“It is likely to be only the very largest administrators that will offer this service and so the lack of options may lead to high costs for fund managers,” said Greenaway, who adds existing private equity administrators would make a natural fit for the role but may not be interested in taking on depository risks. A separate industry source said a smaller concentration of depositories in the market will create new counterparty risks.

The May issue of PE Manager will explore the latest on depositories and other AIFM-related issues as follow-up rulemaking progresses.