The debate surrounding the European Union’s proposed directive on Alternative Investment Fund Managers (AIFM) intensified in March with various parties – from both within Europe and without – decrying the so-called “third party” or “passporting” rules.
In the current draft, these measures make it impossible for foreign fund managers to market within the EU unless they can demonstrate that they are subject to a regulatory regime of equivalent rigour in their home country. Currently, many major EU trading partners, including the US, Russia, China, India and Brazil, do not meet this standard, and therefore would be denied a “passport” to market within the EU.
On 10 March Lord Myners, the UK’s financial services secretary to the Treasury, warned that protectionist measures such as those in the proposed directive risked sparking “tit-for-tat” regulation with the US, which would potentially see its fund managers barred from raising institutional capital in Europe. “We must avoid tendencies towards protectionism and national interest,” he told delegates at a breakfast event organised by the British Venture Capital & Private Equity Association. “Instead we should focus on the ultimate prize of greater convergence in international regulation, with an eye to not only longstanding partners such as the US, but emerging economic powerhouses in Asia and beyond.”
It subsequently emerged that US Secretary of the Treasury Tim Geithner had written to both Michel Barnier, the European Commissioner for internal market and services, and the Spanish finance minister Elena Salgado to express his feelings about the directive. “We are concerned with various proposals that would discriminate against US firms and deny them the access to the EU market that they currently have,” he wrote, going on to highlight the fact that the US “maintains full access for EU fund managers and custodians to our market”.
Various other industry groups have joined the lobbying effort. The Emerging Markets Private Equity Association has written letters to the European Commission, the European Parliament and the Spanish presidency, expressing concern that the directive could prevent alternative fund managers in developing countries from accessing the EU market, limiting the ability of EU member development banks “to promote private sector growth in the world’s poorest countries”.
The European LP community is now paying increased attention to the potential impacts of the new rules. The directive was a big talking point at the European Private Equity & Venture Capital Association’s annual Investor Forum in early March. “Finally the LPs have woken up to the problem as well,” said one delegate at the forum. “Now AIFM really is all-pervasive.” The Institutional Limited Partners Association (ILPA) – whose roughly 220 members control the vast majority of commitments to private equity funds across the world – sent a four-page letter to Commissioner Barnier, describing how the diminished access to capital for EU companies will harm European private equity.
Other proposed measures in the directive include caps on leverage and heightened levels of disclosure. The next stage of the legislative process requires three European bodies – the Council, the Parliament and the Commission – to agree on the wording of the directive to be passed. The “first reading” of the Directive is scheduled for July, at which time the legislation will either be adopted, rejected or returned for a second reading.