The Impact of AIFMD on Private Equity
Posted on 15 Jul 2013
The Alternative Investment Fund Managers Directive (“AIFMD”) introduces a multitude of concepts which are expected to transform the alternative funds industry, as their scope and reach are substantial. According to last month’s survey by the FCA, some 200 fund managers in the UK alone may have their marketing and management activities disrupted if authorisation is not granted by the AIFMD’s implementation date on July 22nd 2014.
As part of the alternative funds industry, private equity (PE) firms are also impacted by the AIFMD. PE firms have been assimilating to the Directive’s changes rather well as, according to an ADI survey, “PE firms are already ahead of hedge funds in early AIFMD adoption”, and already 30 PE managers have stated that they have applied to the FCA for authorisation.
As is the case with any other alternative-type manager, private equity managers will have to comply with the new requirements imposed by the AIFMD such as the onerous obligation to appoint a depository, which is an independently regulated firm responsible for safe-keeping and monitoring funds assets. Since carried interest will fall within the scope of the new Directive, another change is the requirement to set up remuneration policies based on long term incentives, such as employee bonus shares with a vesting date of at least three years. Also, depending on the size of the firm, a Remuneration Committee may be required.
The directive also outlines specific transparency requirements for the private equity sector, which include reporting details on investments and covering the general issues of investor and employee protection. As a result, managers will have to address extensive disclosure requirements such as: notifying the regulators of voting rights which meet certain thresholds upon an AIF’s acquisition, disposal or holding of a non-listed company; updating them on operational financing conditions and voting rights; and disclosing annual reports as well as future business plans and their possible effects on employment, to both investors and employees.
For some of these new obligations, the level of information which will be required by the regulators is still unknown. However, Laven Partners will continue to closely track and monitor any developments and local implementations of the Directive.
At the portfolio company level, AIFMD imposes asset stripping restrictions. In fact, for two years following the acquisition of control in a non-listed company, the AIFM must use its best efforts to prevent any distributions, capital reductions, share redemptions or acquisitions of own shares.
Restrictions on capital reductions and distributions may give rise to a number of issues for GPs. Reorganisations, such as the extraction of excess distributable cash, will have to be conducted prior to the completion of a deal as the opportunity to do so in the first 24 months would be limited. Moreover, all-equity deals are likely to become less common, since financial engineering associated with potential over-funding of the deals will be restricted. Lastly, tuck-in acquisitions could become hard to implement, as any extraction of excess equity will have to comply with the AIFMD’s asset-stripping restrictions.
For further information see the Laven Partners page dedicated to the AIFMD: http://www.lavenpartners.com/aifmd/