EU Directive shifts to ‘catch-all’ approach, targets pay

The latest draft of the EU’s Directive on Alternative Investment Fund Managers Directive would apply to private equity real estate, private equity and venture managers both large and small.

Amendments have been made to draft EU legislation that would force all private equity real estate, private equity and venture capital firms to comply with its proposed regulations, which now include rules on pay similar to those being considered for bank staff.

The suggested amendment is part of a raft of changes proposed by European Parliamentary minister Jean-Paul Gauzès. As the appointed “rapporteur”, Gauzès is responsible for guiding the Parliament process on the Alternative Investment Fund Managers Directive.

Gauzès says that managers of alternatives funds in Europe should be included in the “international consensus concerning remuneration of staff in banks and other systemically important financial services firms” as discussed at September’s G20 Summit in Pittsburgh.

The section on remuneration seems vague and needs clarification.

Elizabeth Ward

Gauzès stops short of saying how this would be put into practice. “The section on remuneration seems vague and needs clarification,” said Elizabeth Ward, counsel at law firm Linklaters, who added that his suggestions did not take into account the “large differences” between the private equity remuneration model and those used by lenders and other investment firms.

In a move that has caused uproar among industry associations and market participants Gauzès has widened the scope of the directive to cover all managers of alternative investment funds – not just those at the larger end of the spectrum.

Previous drafts decreed that any manager which did not use leverage at a fund level – most private equity firms do not – would need to have at least €500 million under management before having to comply with the directive. For those funds which did use fund-level leverage, the threshold was set at €100 million. Gauzès has deleted this exemption so that the new rules apply to all managers regardless of size.

Richard Wilson, chairman of the European Private Equity and Venture Capital Association (EVCA), said the redraft “places obligations on even the very smallest venture-backed businesses which could damage their ability to grow and innovate”.

Ward said it “would be a disaster for the venture capital industry”.

The language in Gauzès’ report suggests that some issues raised by the industry have at least been taken into consideration.

For example, concerns had been raised that reporting standards imposed on private equity-owned companies would damage their competitiveness compared to similar businesses under different ownership structures. Gauzès’ report says that it is “necessary to ensure that portfolio companies are not subject to more stringent requirements than any other issuer or non-listed company”.

This comment, however, does not go far enough to calm private equity fears. Simon Walker, chief executive of the British Private Equity and Venture Capital Association, said the laws discriminate against fund-owned businesses. “Such firms simply cannot afford the £30,000 it will cost for disclosure which does not apply to competitors, whether they are owned by individuals, families, Russian oligarchs or sovereign wealth funds,” he said.

Linklaters’ Ward described Gauzès’ requirement that the European Commission ensures a “level playing field” between portfolio companies and other companies as “unlikely to be workable”.

Progress on the directive is ongoing and Gauzès’ report will now be reviewed and may be subject to further amendments from other ministers and Gauzès himself.