The Alternative Investment Fund Managers Directive (AIFMD) doesn’t have many fans in the private equity community. Often portrayed as a knee-jerk response to the financial crisis, it imposed strict pan-European rules on private equity fund managers (along with the managers of hedge and other private funds), and its regulatory objectives were not always easy to discern. Now, because the AIFMD included provisions for its own review, policy-makers have the chance to assess how it is operating in practice, and decide whether changes should be made. And, while a complete re-write seems unlikely, there is an expectation that some changes will follow.

The Directive itself required the European Commission to start its review by July 2017, but the first sign of concrete output came this month, when a report commissioned from KPMG was published. Although the report does not reflect the Commission’s own views, it is likely to influence its deliberations – especially since it includes a survey of 478 market participants drawn from 15 member states, and additional data provided by national regulators, fund managers and industry bodies. (The complete report is available here, and our detailed summary is here.)

The KPMG report concludes that most provisions of the AIFMD have achieved their objectives. It claims that the Directive has created uniform standards in the EU and promoted investor confidence – although it also notes that 84% of institutional investors (or bodies representing them) said that the AIFMD had not influenced their decision to invest in alternative investment funds, and almost the same number said it had not affected whether they choose to invest in EU (as opposed to non-EU) funds.

The Report goes on to identify areas where improvements could be made, in particular to ensure more consistency across member states.

Many private equity fund managers will instantly recognise many of the problems identified by the KPMG report, but will find other conclusions hard to accept. So, for example, the report is right to argue that many of the Directive’s reporting obligations – including those made to investors, regulators and portfolio companies – are redundant and duplicative. It is also right to highlight unduly restrictive rules in many areas that cause issues for managers (especially smaller ones) and, often, lead to sub-optimal outcomes: valuation rules and separation of risk management functions are two cited examples. There is also scepticism about the effectiveness of the “anti-asset stripping” rules, which apply to investments by private equity funds in large controlled portfolio companies.

The report also provides evidence that the single market passport has delivered benefits, most notably a steep increase in cross-border fund marketing. It points to the well-known issues with the operation of the passport, including the inconsistent approach taken to “pre-marketing” across the EU, and confirms that the Commission is already working on solutions to these problems. And the private equity industry will strongly support the market’s general view that private placement rules are essential for third country firms who cannot access the passport, and should be retained – even once a third country passport becomes available.

But the industry will want to take issue with some aspects of the report. For example, the uncertainties created by the AIFMD’s approach to measuring and reporting leverage are not properly highlighted and, in particular, the report does not specifically address the fact that funds typically adopt a closed-ended structure and do not draw down capital all at once, but on an “as needed” basis when investments are identified.

Moreover, there is no criticism of the fragmented market that now exists for smaller private equity fund managers, who either have to step in to full AIFMD compliance (which would be disproportionate or impossible for most) or face a patchwork of national rules that often provide less market access than for equivalent third country firms. And there is little comment on the extension of the AIFMD passport to third countries – which is now, of course, a political question given the UK’s impending departure from the EU.

The KPMG report includes some interesting comparative data, and helpfully highlights some key areas for adjustments to the rules. But it will be up to the Commission which of these it chooses to adopt, and it is likely to also look at other areas not fully considered by KPMG – for example, the AIFMD specifically requires the Commission to consider whether to enhance the supervisory responsibility of the pan-EU securities regulator, ESMA (something that the Commission is, in fact, already considering).

So we shall have to wait a little longer, probably until 2020, for more concrete proposals – and there is still plenty of time for the industry to engage and influence the outcome.