When it comes from a fund manager, complaining about the Alternative Investment Fund Managers Directive (AIFMD) can come across as a little self-serving. Of course GPs don’t want to file more regulatory reports, appoint a depositary and figure out what the directive’s pay provisions mean for bonus season. But the point of the directive isn’t to provide managers a pleasurable to-do list, but primarily to protect investors.
Investors, though, are seeing fault with the directive too. And it’s that argument that private fund managers should use as their trump card in the fight for better AIFMD rulemaking.
At the moment, the European Securities and Markets Authority is digesting responses to a consultation it launched in November. The pan-EU regulator is considering how marketing rules have been impacted by the AIFMD, which sought to harmonize how fund managers raise cash across Europe. But instead of making things easier, managers say things are as confusing as ever, leading many GPs to rethink their fundraising strategies in such a way that they will omit Europe altogether if they possibly can.
Private equity investors are backing the sentiment that the marketing rules for Europe are too cumbersome. ILPA has done something unique in its consultation response by first polling its 3000 members about the directive’s impact. In other words, it presented ESMA with some hard-to-ignore facts. Some of the key findings:
– 86 percent of LPs said there has been a drop in the number of non-EU managers pitching funds in Europe;
– 46 percent of LPs said their efforts to initiate contact with non-EU managers have been rebuffed due to compliance concerns;
– 69 percent of LPs said their private equity programs are at a competitive disadvantage to their non-EU counterparts because of the AIFMD restricting access to non-EU managers.
The numbers make clear that EU-based LPs are receiving less calls from managers outside the continent, but regulators may still wonder if their portfolios are safer with more local, AIFMD-supervised managers.
According to investors, and this is crucial, the answer is no. A majority of LPs said the directive is having a somewhat or very negative impact on investor protections in Europe. And it’s that limited access to GPs that is the cause of the problem. If the AIFMD regime doesn’t work – still a very possible outcome – LPs in Europe lose access to top-performing managers, thus resulting in lower returns and potentially too much geographic concentration within their portfolios.
ESMA is expected to issue an opinion on the matter this July (though some expect the regulator to request a time extension). One thing up for debate is making a pan-EU marketing passport available to non-EU managers, something for which the US private equity industry is lobbying. Specifically, the PEGCC is making the case that US managers are already subjected to sufficient regulatory oversight to be afforded access to the passport. It’s a satisfying argument, but one that regulators would have thought twice about if private equity investors hadn’t supported the idea too. GPs would be wise to remind them of that.