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AIFMD: Letting the genie out may not give you 3 good wishes

24 Sep 2020

What are the first things that come to mind when you think about “the AIFMD”? …. Most likely “oh wow … another incomprehensive EU abbreviation, that doesn’t mean anything for sensible people”… or if the concept hits slightly closer to home/ your chosen business in the European financial services sector: “oh no – are we flogging that dead horse again”?

But: no, it’s not incomprehensible and no, it’s not a dead horse. The AIFMD, in full the Alternative Investment Fund Managers Directive, is by far the biggest piece of EU legislation that the European private equity and venture capital industry have ever needed to get to grips with. The industry has come a long way since the Directive was initially adopted in 2011. Over the last decade, private equity and venture capital fund managers, as well as their investors, have made the necessary arrangements and adjustments to their operations and other procedures to ensure they are compliant with the AIFMD requirements and have gradually gotten used to the post-AIFMD world.

Let there be no doubt. However small or big a fund manager is, or whether they are based inside or outside the EU, if there is a certain link to the EU, then the AIFMD will have a – small or large – impact on them. For example, even though the AIFMD includes a de minimis threshold, i.e. a threshold below which full authorisation under the AIFMD is not necessary, small fund managers will still be subject to some minimum requirements. And also firms and/or funds that are based outside the EU will need to comply with certain AIFMD obligations if they want to raise money in the EU.

Given the large amount of resources, both human and financial, that the industry has invested in embracing the AIFMD, there is no desire among our members for that regulatory framework to be changed again. Even if there are issues under the current regime that the industry has identified as not working optimally and imposing unnecessary burdens, it is inevitable that any review of the AIFMD will bring a period of legal uncertainty and in due time a second round of investments in adapting to the new reality. On top of other changes to the AIFMD and its Delegated Acts that are already underway (for example, in relation to ESG), this is simply not desirable, especially in a time frame when the Covid-19 pandemic is still causing economic disruption and companies all around the world will need to face and find their way out of the current crisis.

The short and long-term consequences of Covid-19 should not be overlooked or underestimated. All European companies, irrespective of their size or strength, will be hit in one way or another. Private equity and venture capital fund managers will need regulatory stability in order to be able to deploy their capital in the real economy and fully contribute to the recovery from Covid-19 in a period when such investments will be absolutely critical and can have the most impact.

Around 85% of the companies invested by private equity and venture capital fund managers are SMEs, active in all sectors of the European economy, from ICT to biotech and healthcare, energy, or transportation. Some portfolio companies will be at the very start or at a turning point in their business cycle, some are operating in sectors that will face harsher conditions than others. Reducing private equity and venture capital managers’ ability or capacity to invest in these innovative start-ups and scale-ups would be detrimental.

According to both the KPMG report and the subsequent European Commission report assessing the application and the scope of the AIFMD, the Directive is working well and has significantly contributed to creating an internal market for AIFs by establishing a harmonised and stringent regulatory and supervisory framework for AIFMs. Most of the AIFMD provisions are also assessed as having achieved the intended objectives efficiently and effectively.

In addition, much as our members have had to get used to being fully regulated at the EU level, similarly we have to – happily – recognise that the AIFMD has served a purpose and that being an AIFM today can actually be a very strong and attractive branding, especially when positioning to investors outside the EU. In parallel, there is a sentiment among investors that the AIFMD has improved investor protection, in particular through increased reporting and transparency. In light of the above, we struggle to see a fundamental need for fundamental or far-reaching changes to the AIFMD framework. While there may be a number of areas which require further analysis and where some changes may be helpful or necessary, it will be important to balance carefully the advantages and disadvantages of re-opening the AIFMD, whether at Level 1 or Level 2 and to undertake a thorough and in-depth impact assessment. One crucial element in this exercise which should always be borne in mind is the diversity of the AIF and AIFM universe. The AIFMD covers a wide range of financial market participants with very different characteristics, purposes, strategies and investor bases. The actual effect and concrete impact of the AIFMD will therefore not be the same for everyone and any proposed changes should avoid a one-size-fits-all approach, taking account of the different business models. Private equity and venture capital is just one small piece of the AIFMD puzzle, but it is an important one – an asset class focused on long-term value creation, whose contribution to the EU economy has been recognised by many stakeholders, including the European Institutions. Let’s not lose sight of this asset class, which supports employment, creates jobs, drives innovation and fosters growth, as the debate on AIFMD II is getting into second gear.

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