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Laven Partners AIFM Directive Update – October 2009

Posted on 9 Oct 2009

Welcome to the fourth edition of the monthly Laven Partners’ Monitoring Update on the proposed AIFM Directive.

The new Directive seeking to regulate hedge funds is charging ahead to become law. Laven Partners provides a monthly update on the development and status of this Directive. In the true Laven Partners style, we also look at any interesting comments made by regulators and leading industry players in relation to the Directive.

Our aim is to involve the financial community and notably to aggregate the representation of investors as we believe the Directive severely reduces their access to investment opportunities. Please register your interest and comments by emailing us at ecdirective@www.lavenpartners.com. Please feel free to forward our monitoring update to anyone who may be interested.

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Since we began our monthly updates in July, there have been a number of heated industry debates around the protectionist nature and potential consequences of the Directive all while the European Commission has remained relatively silent on the issue.

In our update last month, we reported that the European Parliament would hold a plenary sitting in February 2010 and that the adoption of the Directive had been forecasted for March 2010. Since then, the legislative process has been delayed once again and breaths will now be held until next May, when a plenary vote is expected. However, Uwe Eiteljoerge, a European Commission representative, noted at a recent regulatory event attended by Laven Partners that the deadline will likely be pushed as far back as July 2010.

At the same event, it was put to a panel of EU and industry body representatives that the draft Directive was heavily Eurocentric and potentially anti-global. Concerns were raised that investment choices would be limited considering the apparent exclusion of the United States, Japan, Hong Kong and other non-EU markets for investment. Jonathan Russell, Chairman of the European Venture Capital Association noted that the EU should expect a quid pro quo response from regulators in other jurisdictions, such as the United States.

At the event, it was also noted that although investors are increasingly seeking greater transparency and more regulation, they are concerned about the expected increase in costs associated with compliance with the Directive. It has been reported that today’s costs passed through to investors from regulatory compliance on funds in which they invest, are around 5bp. Following the Directive these costs are expected to rise to around 7bp. The panel at the event commented that a cost/benefit analysis should be conducted by the European Commission this November.

Think-tank Open Europe recently carried out a survey of 121 hedge funds and fund of funds, which showed that nearly half of the UK’s hedge fund managers would strongly consider a move abroad if the Directive came into effect unchanged. This has been evidenced by a substantial increase in demand from our clients considering establishment in or a move to Luxembourg or Switzerland or both thereby excluding any UK presence. Open Europe further estimated the resulting cost of the Directive for the hedge fund and private equity industry to be between £1.2 billion and £1.6 billion in its first year if the Directive were implemented in its current form. A breakdown of this estimate reveals that fund managers expect compliance costs to increase by approximately a third in order to meet stricter regulations. In response to the survey’s findings that just 2% of alternative investment fund managers’ clients are in favour of the Directive, Simon Walker, chief executive of the British Venture Capital Association reaffirmed the collective belief that: “When only two percent of investors believe a Directive will improve investor protection, it is clear that it will be counterproductive.”

Meanwhile, AIMA has put forward an alternative directive to the European Commission which has received a positive response. In other recent news, industry professionals have found themselves a most unexpected ally in the Church of England. Church commissioners wrote a letter to the House of Lord’s EU select committee, raising concerns over the Directive which would “significantly restrict [their] ability to generate funds to pursue [their] charitable missions and thus reduce [their] impact for good.” The Church manages diversified investment portfolios and “maximising the returns” on these “is an essential part of delivering [their] foundations’ missions”.

Last month, the FSA and the SEC agreed to identify a common set of data to collect from hedge fund advisors and managers to help the SEC and FSA identify risks that might affect their regulatory objectives and mandates. We believe that although this progress is in line with the suggestions made during the G20 meeting in April, if the FSA and the SEC opt for new reporting rules and data sharing, this should be done in a coordinated way with any new regulatory changes that may be introduced by the Directive. Cooperation not only between the UK and US but also with the EU is essential to ensure any new rules are not too onerous.

Finally, in a panel appearance at a recent industry conference, Robert Mirsky, Managing Director at the Laven group, has been in touch with Claus Tollmann of the European Commission’s AIFM team to offer him Laven Partners’ assistance in providing practical insights into the UK, European, off-shore, or US alternatives industry or other areas of focus. Mirsky also took the opportunity to express Laven’s sentiments that participants of the Directive lacked understanding of the exact effect the draft might have.

At the end of this fourth edition of our monthly update, we feel that time is being bought by the industry and that with luck this time will be used well and lead to a substantial redraft of the Directive. At least the prospect of a vote by Christmas seems well out of the way for now.

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Please keep a look out again for our next monthly monitoring update on the EC Directive and on the progress of discussions within the industry…