New regulation of alternative investment fund managers in the European Union could end up costing as much as €1.9 billion in the first year in compliance costs alone, according to new research from Open Europe, a think tank focused on EU reform. Much of these costs, according to the report, are expected to be handed on
EU Directive: Could cost billions
The proposed Directive on Alternative Investment Fund Managers, which is currently the subject of fierce political debate, was drafted to bring increased regulation to bear on hedge funds that also catches private equity fund managers. If it was to be enacted as law in its current form, it would impose a raft of measures on managers requiring them – among other things – to disclose more information about their organisation to investors and regulators, hold a minimum amount of capital at all times and to deposit their cash and assets with an EU-based bank.
The research report issued this morning by Open Europe estimates that the compliance cost of implementing the directive to both the hedge fund and private equity industries would total between €1.3 billion and €1.9 billion for the first year, with a subsequent annual recurring cost of between €689 million and €985 million.
The total cost for private equity funds throughout the EU was estimated at around €1 billion. Estimates were based on interviews with 41 private equity firms conducted during August.
“Europe is facing the dual challenge of huge public deficits and an ageing population,” said Open Europe research director Mats Persson in a statement. “This is a terrible time to burden a sector that could provide the funds and returns we need to help us cope with that challenge.”
The study also concluded that if the directive comes into force, the ability of European investors to choose freely from amongst the best funds and managers could be cut by up to 80 percent.
The proposed directive is currently being debated by the European Parliament and the Council of Ministers, who must reach a consensus on the proposal before it can become law. Sweden, which took up its six-month leadership of the European Union in July, is understood to want to get the directive ratified during its tenure, before the presidency and the associated power to redraft the directive is passed to Spain in January.
Mats Odell, the Swedish finance minister, gave private equity firms reason for some optimism when his country assumed its leadership of the Union, by expressing support for the asset class. “There is an exaggerated fear that private equity contains big systemic risk,” he said, “Our opinion is that it does not.”