Still solving the puzzle

There is something of a crisis of confidence among fund managers when it comes to reporting rules under the Alternative Investment Fund Managers Directive. The directive requires GPs to submit “Annex IV reports” detailing information like investment strategies, portfolio diversification and risk exposure, though GPs aren’t exactly sure what types of details to include when they get down to the nitty gritty. In fact, a Moore Stephens survey released just a few weeks shy of a January 30 reporting deadline for most GPs found that half of UK fund managers were experiencing this problem, leading about one in three respondents to flat out declare they weren’t feeling prepared to file their first reports.

One of the most common problems, say fund administrators working on the problem, is GPs don’t always understand which questions in the report even need to be answered (and which don’t).

“We were surprised that most private equity managers that we talked to didn’t know that many of the questions are optional rather than mandatory,” says Justin Partington, commercial director at fund administrator Ipes. “The message out there was that there are 333 questions to answer and that makes people panic.”

Part of the issue is that regulators used a blanket approach when writing regulations for “alternative investment managers,” which includes a range of asset classes.

“The content and terminology in the AIFMD reporting template is geared towards hedge funds and some of the questions can therefore look tricky to answer from a private equity perspective. It has taken some time to map the terminology,” says Swen Kupferschmid, who co-manages fund administration at Zurich-based private equity firm Adveq.

And technical guidance provided by the European Securities and Markets Authority (ESMA) – delivered in an Excel spreadsheet containing more than 500 rows of data, spaced with 12 columns across five separate tabs – was of limited help. “It’s very complicated, and at first glance it’s not obvious what it means,” says Partington.

Once a fund manager figures out their specific reporting requirements, they then run into a second challenge: collecting the necessary data. Bobby Johal, a compliance consultant with Cordium, says gathering the right data is difficult for GPs that consider AIFMD reporting strictly as an exercise in compliance.

“It’s because of the extent and the nature of the data you need access to front office systems, meaning your administrator, risk systems and more. All the front, middle and back offices need to come together to aggregate, validate and normalize the data. It’s a firm-wide project and should not be just left to the compliance team.”

Format fear

Adding to fund managers’ woes is the technology behind filing the report. ESMA’s guidelines ask for an XML file, which sources say caused serious consternation because it’s not something easily created from data contained in Excel, with which GPs are more familiar. “[The XML file] has to be built by a programmer or the data has to come from a system,” says Partington, who added that some fund managers aren’t even familiar with how XML works.

Making matters worse is that every regulator is asking for a different format.

“The challenge is that we have to file for each individual country, and each member state has its own reporting platform with different reporting file versions and terminology, as well as different bodies to report to,” says Sven Gasser, co-head of fund administration and services at Adveq. “For example, in the Netherlands, the Central Bank (DNB) is responsible for AIFMD reporting, and not the Dutch Authority for the Financial Markets (AMF). These differences require a supplementary effort to comply with the varying formats.”

UK financial watchdog, the Financial Conduct Authority (FCA), is giving GPs the option to file their first report via its Gabriel system, which fund managers use for their local regulatory filing. Ireland too wants its fund managers to submit their Annex IV Reports through the Central Bank’s Online Reporting System Portal (ONR).

Non-EU managers arguably have it worse. Under AIFMD, non-EU fund managers must file a report with each European country they’ve registered to market in, regardless of whether any cash is actually raised.

The UK especially is proving problematic for outside managers. US-based managers tell pfm that they’re still waiting for RN codes, which is preventing them from accessing the FCA’s online systems. The UK regulator planned on issuing the codes by last November but missed its deadline, leaving the XML format as US managers’ only option to file their AIFMD reports.

Finding an answer

Even for fund managers that have managed to crack the formatting problems, there are still banana skins that await them in the report itself. Again, sources point to a lack of clear guidance as the root of the problem.

“It would have been helpful if there were more worked examples. What I have seen quite a few times is people getting tripped up by fairly basic calculations,” says Richard Heffner, counsel at law firm Dechert.

For instance, things as simple as AUM and NAV, which are used across the report have no guidance in terms of how to calculate each, says Tauqeer Jamadar, a business analyst at Ipes who is leading the firm’s AIFMD reporting services.

A few specific questions – namely question 138 on risk and questions 279 and 280 on stress testing – have proven to be especially cumbersome.  

Question 138 includes seven possible selections for answering the firm’s “risk measure type” but none of them make much sense in a private equity context, says Jamadar.

Questions 279 and 280 pose a similar problem, though some GPs have discovered a make shift solution. “We have clients asking how to answer this mandatory question when it is not applicable. And that’s all they can do, put ‘not applicable,’” says Jamadar.

The timing of the AIFMD reporting is also making it harder for fund managers to file accurately. Take for instance any area of the report that covers portfolio company valuations, says Joseph Henkel, operations manager at fund administration firm SEI. “Most private equity and real estate firms have an elongated valuation cycle, so semi-annually or quarterly, but the AIFMD says you need to report December’s information in January. Most funds won’t have those valuations until February or March.”

But, Kinetic Partner’s head of regulatory compliance, Andrew Shrimpton, does point out that in the UK at least, fund managers can submit estimated figures for these hard-to-value assets and request re-submission. Sources expect other jurisdictions will follow suit.

And fund managers should take respite that regulators are at least trying to be helpful. Many expect that AIFMD reporting will be an evolving process with regulators learning lessons along the way.

“ESMA continues to update its Q&A – which goes to show both that there are questions coming in on a regular basis, and that ESMA feels that there are issues of wider interest where more guidance should be provided,” says Christopher Gardner, financial services partner at law firm Dechert.

“I think there will be more guidance issued and improvements to the guidance as there are more and more submissions,” adds Jamadar.

So despite the pain fund managers are feeling right now, things may get better; which is a small consolation prize for all the recent AIFMD-induced stress.