Tuesday, October 27, 2009

FSA Publishes Report on Impact of AIFM Directive

On October 15, 2009, the UK Financial Services Authority published a report (the "Report") prepared by Charles River Associates assessing multiple aspects of the proposed EU directive on Alternative Investment Fund Managers, which we covered extensively since it was published in April. The Report looks at the proposed directive's impact on the alternative funds industry (in particular the cost implications), investor choice and returns, and employment and economic growth in the EU.

The Report, which is based on data gathered from a cost survey and interviews with market participants including professional investors, trade associations and companies involved in the provision of different fund types, estimates that significant new compliance costs would arise for fund managers. In particular, one-off costs are expected to amount to €3.2 billion, while an additional €311 million is expected to be spent on ongoing compliance with the directive. Additional costs are expected to arise in connection with the envisaged depositary duties and their liabilities. The Report forecasts the biggest impact will be felt by private equity funds due to the inconsistency of their business model with the proposed compliance requirements. For example, because private equity funds invest in unlisted companies to which the fund managers often provide ongoing management assistance, the funds typically rely on internal teams familiar with a company's operations to establish the value of the fund's investment. By requiring that private equity funds appoint an independent valuator to undertake the complex valuations associated with such investments, the directive is likely to increase private equity fund operational costs significantly. The interviewees expect these added costs to be passed on to the investors leading to significantly smaller investment returns.

While the Report does not establish what percentage, if any, of non-EU funds will relocate to the EU as a result of the proposed directive, it does suggest that the high compliance costs associated with the directive may present too high of a burden for some non-EU funds, which will instead decline to market their funds within the EU, leading to reduced choice for EU investors. In its conclusion, the Report states that the proposed directive "will cause a fundamental reorganisation in the business model of global fund mangers (with significant one-off costs) and may lead to costly changes of legal structures and domicile", and concludes that its burdens outweigh its benefits.