Latest AIFM proposals a mixed bag

A critical two month countdown has begun for the funds industry to study and respond to detailed AIFM proposals released by EU regulators last week. The industry’s lobbying efforts appear to have borne fruit, but concerns remain.

Last week the European Securities and Markets Authority (ESMA) unveiled a number of new proposals that detail core provisions of the hotly-debated Alternative Investment Fund Managers directive.

ESMA, which replaced the Committee of European Securities Regulators earlier this year as Europe’s new markets watchdog, will accept feedback regarding the proposals until 13 September. The agency has been tasked by the EU government with providing lawmakers technical advice on the directive’s core language, with final proposals due by 16 November.

The current view of ESMA seems to accord with what the private equity and venture capital industry would regard as a sensible and proportionate outcome – but there are also a number of areas of ongoing concern

SJ Berwin

“Input from all stakeholders to this consultation will be particularly vital for ESMA in shaping the final rules that will govern the European alternative investment fund industry,” ESMA chair Steven Maijoor said in a statement.

438 page consultation paper covers a wide range of issues including the use of depositories, calculating leverage and GPs new reporting requirements. In many respects “the current view of ESMA seems to accord with what the private equity and venture capital industry would regard as a sensible and proportionate outcome – but there are also a number of areas of ongoing concern”, noted law firm SJ Berwin in a client memo discussing the proposals.

One potential area of relief for private equity players has been the extent of their depositary liabilities. It appears unlisted shares will potentially fall under a more light-touch approach relative to listed securities, reckons SJ Berwin. Sources in past interviews with PERE's sister publication Private Equity Manager have pointed to the directive’s depository rules as an unnecessary safeguard for private equity funds which do not typically manage tradable securities more prone to market abuse. 

The proposals also demonstrate ESMA has been receptive to industry concerns over the definition of leverage. Fund managers feared portfolio company debt would be counted as leverage at the fund level. “It seems that the current thinking would exclude such debt from the definition of leverage if there is no recourse to the fund”, said SJ Berwin, adding it was nevertheless still the subject of ongoing debate amongst EU regulators.

How the directive determines “assets under management” is one hazy topic GPs will need to still await clarity on. Funds with aggregate assets under management no greater than €100 million will be exempt. Likewise, unleveraged funds under the €500 million mark will also be out of the directive’s scope. For closed-ended funds the proposals say the net asset value of the portfolio “may not be relevant or calculated with sufficient frequency and  perhaps other methods could be used, such as acquisition cost of assets held, or commitments less realisations at cost for private equity and venture capital AIFs”.

One of the directive’s more controversial areas, relating to “third-country” rules, was not included in the consultation. ESMA said developing more detailed third-country rules, which will determine non-EU managers and funds marketing rights across the continent, is less urgent as they would not be operational until 2015 at the earliest.

The AIFM directive comes into force this week. EU member states will then have until July 2013 to work the directive’s provisions into their own legal frameworks.