European Funds Comment: The Costs (and Benefits) of the AIFMD

2 February 2018
Issue 24

The Alternative Investment Fund Managers Directive (AIFMD), passed in 2011 and effective from 2013, is not exactly popular with the European private equity and venture capital industry. Although the final version of the rules was not as draconian as originally mooted, the industry warned that the legislation would deliver very little benefit while imposing significantly higher costs. Among those who were thought likely to suffer were the investors – many of them pension funds and other institutions with a need to deliver above-average returns – and new entrants to the market, who would find the increased barriers to entry problematic.

No doubt policy-makers dismissed all this as special pleading, and ploughed on regardless. But many of those who argued at the time that the AIFMD was poorly targeted and poorly drafted have been living with that reality ever since, while some (independent) academics have expressed scepticism both about the Directive’s aims and its effectiveness. Meanwhile, a scheduled review of the AIFMD – actually required by the clear terms of the Directive itself to be carried out in July 2017 – has been deferred by the European Commission and is not now expected for at least another two years.

When that review does eventually materialise, the European Commission will need some data. In this regard, a comprehensive report published this week by the respected consultancy Europe Economics ought to be of some assistance. The report (commissioned by Invest Europe) clearly conveys the views of industry participants – including, importantly, investors – that the benefits of the AIFMD are modest, while the costs are high. The report seeks to evaluate the AIFMD using the Commission’s own criteria, and finds that GPs have experienced burdens without any significant gains from the marketing passport. Indeed, the burdens are not confined to EU firms that meet the AIFMD’s thresholds: smaller buyout funds and those coming from elsewhere in the world have also been disadvantaged by the newly restrictive national marketing rules.

Investors, on the other hand, reported modest gains in investor protection, but at disproportionate cost. (They estimated that they bear well over half of the additional costs.) At the same time, the report highlights that the fragmentation and increased burdens created by the myriad of national private placement rules has reduced the investible universe of non-EU private funds for investors, a problem that is particularly acute for investors seeking access to the top-performing global funds. That means real costs for them – not only in foregone returns, but also in a loss of opportunity to diversify their portfolios.

The main motivation for the AIFMD was, however, not to help GPs or LPs, but to address perceived systemic risks and to alleviate apparent externalities imposed on third parties, especially employees of private equity-owned companies. As to the first, the Europe Economics report concludes that the Directive was ill-conceived: there is no evidence to support the view that private equity firms operate like shadow banks and contribute to systemic risks; the Directive was therefore “neither relevant nor effective” in this regard. As regards wider stakeholders, just one third of GPs felt that more information was available to employees as a result of the Directive’s portfolio company provisions, and the anti-stripping provisions appear to have had little impact. If protection of wider stakeholders was an aim of the rules, there does not seem to be any evidence that it has been achieved. On the other hand, the report does highlight the uneven playing field that the AIFMD’s rules create for different types of shareholder.

When the Commission eventually undertakes its own impact assessment, it should take careful note of this significant study (which will also be of interest to practitioners who are keen to get a better understanding of the costs and challenges of AIFMD compliance). Clearly there are other stakeholders to consult as well as GPs and LPs, and national regulators and trade unions will be among those who may have a different view to that presented by the industry.

But, in any event, significant changes are not expected imminently, nor would the industry welcome that: having just got used to one set of rules, re-adjustment to another would be unlikely to deliver benefit.

Incremental changes could be helpful, though, and this study could give further impetus to reforms already under consideration that would harmonise some divergent national interpretations of the marketing rules, and make it easier to undertake a cross-border fund raising. That should remain a priority: creating and improving the single market is, after all, one of the defining aims of the European Union.