Sweden moves to restrict EU manager pay

Sweden is introducing changes to a proposed EU directive that, if passed, would curb compensation for hedge fund and private equity managers by up to 60 percent in some cases.

Sweden, which currently heads the rotating presidency of the European Union, has said proposed regulations covering private equity and hedge fund managers will be amended to include restrictions on compensation.

If passed as is, the European Commission’s “Directive on Alternative Investment Fund Managers” would already impose stringent disclosure requirements on funds and impose hundreds of billions in additional compliance costs. However, Sweden’s financial markets minister Mats Odell recently told a conference in Stockholm that further planned amendments to the directive would closely mimic rules on banker’s pay – including a minimum deferment of 40 percent of bonuses – that are being debated by the European Parliament now.

The curbs on alternative investment fund pay would be even stricter, according to a report in Reuters, as managers would have 40 percent of their “variable remuneration” spread out over at least three years, while in some cases they would be subject to 60 percent deferral. Odell, who said there needs to be a level playing field for the whole financial sector, added that the proposals could be published by the end of the week.

Sweden’s action is somewhat surprising as the country has been more amenable to changing the directive into something that the industry could live with, especially as its financial minister said this summer that private equity does not pose a systemic risk to the economy. Sweden has still pledged to water down elements of the directive such as borrowing limits and marketing restrictions for non-EU funds, and the country is considered more pro-private equity than Spain, which will take over the EU presidency at the beginning of 2010.

Mark Spinner, partner and head of private equity at law firm Eversheds, said that since much of a manager’s wealth is linked to the performance of the fund, a cap on remuneration would reduce their incentive to work harder and strive for bigger returns. 

“Even in the very largest of all private equity investors, where the management fee payable by the limited partners each year may run into the hundreds of millions, this sum has to cover all of the infrastructure costs of the private equity house as well as salaries,” he said. “As such, even when the bonuses are included, remuneration of private equity investment partners and executives is relatively modest in the global scheme of things.”

Such restrictions could also lead more EU-domiciled funds to move to jurisdictions such as Guernsey or Jersey, which have far less burdensome regulations. With many hedge funds and private equity managers, such as Terra Firma’s Guys Hands, already making such an exodus from the UK – currently home to about 60 percent of Europe’s private equity firms. London Mayor Boris Johnson warned last month that additional regulations and taxes could put his city’s status as a leading financial centre at risk.