AIFM – a ticking time bomb?

For some in the investment industry the Alternative Investment Fund Managers (AIFM) directive is just another layer of unnecessary legislation clogging up the headlines. However, for a large portion of fund managers and investors this directive could have destructive effects on the way they conduct their business.

The directive effectively aims to establish a regulatory framework for managers of collective investment undertakings which will facilitate monitoring and supervision of systemic risk, increase disclosure and transparency and enhance investor protection. The proposal was introduced on the 29th of April 2009 by the European Commission and came to life through a disturbingly short consultation period. Viewing it as rushed and ill-prepared, the chairwoman elect of the European Private Equity & Venture Capital Association commented that it "will crush venture and other sources of innovation capital". Sadly, venture capital is not the only victim of this directive; increased costs and a reduction in choice and scope of investments will have a far reaching impact. The IMA's Jarkko Syyrila said that "Anyone who has savings, anyone who has invested in a fund, an investment trust, a real-estate fund, everyone who has a pension in Europe – a Greek or German pension fund – will be negatively impacted by this directive."

Commission figures suggest that in the EU alone around 30% of hedge fund managers, managing almost 90% of assets of EU-domiciled hedge funds, will be affected by the directive. However, repercussions are not limited to the EU. Tim Geithner, US Treasury Secretary, stated that the directive could cause "a transatlantic rift" by discriminating against US firms and denying them access to the European market. The US wrote the book on reactionary and protectionist policy, so perhaps the rift that's already well oiled at the moment, will have a direct impact. If Europe legislates first then some feel the US will not exactly be backward in coming forward with their own legislation. Tit for tat.

The directive's progress has been anything but smooth with a litany of delays, postponements, criticisms and antagonism from major influencing parties and institutions along the way. With over 1000 amendments at one point, the directive was eventually passed in May and will be put to a final vote by the European Parliament in the coming months – providing no further postponements.

Jean-Paul Gauzes, the French MEP and AIFM champion, recently replied to the exhaustive criticisms: "I know that most of private equity and hedge funds are perfectly respectable, but there have been some problems, such as in Germany where companies were bought and broken up, which have been very traumatic". I have to admit I'm not entirely convinced by his argument to potentially destroy an industry that last year, in the UK alone, generated over £60bn in tax revenues – perhaps events will turn out to be a little more than traumatic this time.

LB & AVD