Regulation and compliance: two words almost guaranteed to provoke a groan in alternative asset management circles. A slew of far-reaching new conditions imposed on the sector over the past five years has transformed fund managers’ operations.
But while the rules push firms to increase their headcounts and consultancy costs, in some cases regulation can turn out to be less burdensome than anticipated – either because industry action results in proposals being watered down, or because assumptions about the impact of new rules are overblown.
The new US debt-equity law, which threatened to increase tax bills by reclassifying certain debt as equity, falls into the first category. After delivering hard-hitting proposals in April this year, the Treasury retreated on some of them, largely due to lobbying by stakeholders.
The revised version, which became law in October, is much more palatable for private fund managers, as it captures far fewer firms in its scope. Most debt issued to portfolio companies by private equity funds will not be subject to the regulations.
Private fund firms in the UK, meanwhile, have been awaiting guidance on dreaded revisions to the taxation of carried interest. Last week the UK tax office circulated details of how the rules should be interpreted by alternative investment managers.
Private equity lawyers said the advice was positive for private fund executives who are resident in the UK but not domiciled there, who – under certain conditions – remain eligible for tax relief on a high proportion of their carry.
Perhaps the best example of the regulatory bark being worse than its bite is the EU’s Alternative Investment Fund Managers Directive. Initially seen as a burdensome assault on the industry, the AIFMD has, to some, turned out to be advantageous.
“[AIFMD] is not as bad as people initially thought it would be. It helps to have clear rules about marketing, depositories, and internal controls,” Marco Pierettori, general counsel of InvestIndustrial said at a roundtable hosted by pfm in September.
And it turns out compliance with the directive has been easier to achieve than anticipated too.
“Although cost and timing implications still remain an area of concern, in particular for smaller or first-time managers seeking access to the marketing passport, many managers have found compliance with the directive less of a traumatic experience than was first feared,” said Marc Schubert, associate at Weil, Gotshal & Manges.