Hedge fund managers’ unhappiness postponed along with AIFM directive

EU investment restrictions and tough regulations are only a matter of time.


Bridget Barker
Bridget Barker

It is not often that hedge fund managers find themselves hailing a Labour Prime Minister as their saviour, but that’s what happened earlier this month when Gordon Brown’s personal intervention delayed discussion of EU ­legislation that could drastically alter the funds landscape.

The storm cloud on the horizon for fund managers and their plethora of legal advisers is the Alternative Investment Fund Managers (AIFM) directive, an issue that is causing its fair share of alarm in the City.

“It’s very frightening and has crept up on us,” says Bridget ­Barker, head of investment funds and financial services at ­Macfarlanes. “Everybody knows there’ll be a directive in some form and it’ll be one they’re not very happy with, so it’s a question of making the best of it.”

The consensus, as Barker acknowledges, is that Brown’s ­lobbying to get discussion of AIFM removed from the agenda at a recent meeting of EU finance ­ministers represents little more than a stay of execution until after the impending general election.

So what might the directive involve and what will the ­consequences be? Part of the ­problem is that no one yet knows how far-reaching any regulation will be. The directive needs to be passed by a qualified majority at the European Council, with 90 votes sufficient to block it. With the number currently hovering around that mark and the Spanish presidency keen to get an ­agreement in place before the end of June, it opens the way to some high-level horsetrading.

“This process has been so ­unpredictable until now and it continues to be,” says SJ Berwin private equity partner Simon ­Witney. “It looked like it was going to come out badly [for the funds industry] until Gordon Brown stepped in.”

Witney himself has a particular role to play in the negotiations as a member of the European ­Venture Capital Association’s (EVCA) technical group, which is lobbying for a lighter regulatory touch. The group also includes SJ Berwin regulatory partner Tamasin Little and Travers Smith financial services head ­Margaret Chamberlain.

The issues surround restrictions on investment by EU investors into non-EU funds. The concern for fund managers is that ­draconian regulatory rules could create the possibility of a two-tier system whereby funds operate ­separate European and non-­European entities. This possibility increased last week when a senator suggested that the US could ­retaliate with similar regulations of its own.

The fear for many is that Europe could be left behind as the lure of being based in London or ­Frankfurt diminishes.

Witney continues: “For European-based investors, restricting access to non-EU funds would be a devastating blow. The directive could also reduce the attractiveness of European financial centres for international funds and give competing ­jurisdictions a boost.”

Last week, Simmons & ­Simmons reflected some of the nervousness in the market as it revealed that it was looking at ­setting up in Ireland because of the possibility of hedge funds being forced to move offshore.

“It [the directive] is very much like creating a kind of ’Fortress Europe’,” explains Barker. “Lots of hedge fund managers will be ­looking at setting up in ­Switzerland. The 50 per cent tax won’t help either.”

So with major private equity and hedge fund clients potentially upping sticks for friendlier ­regulatory climes, might some of the City’s big funds practices also be in trouble?
“Actually the reverse may be true,” says one private equity ­partner. “Some [funds] will leave the EU, but there’ll be a lot of legal work for those that are left. The only people who might benefit out of this could be lawyers.”

With a potential avalanche of regulatory work coming their way in the lead up to any directive ­finally being implemented in 2012, it’s fair to say that some firms might find themselves busy as clients learn to adjust.

“The more rules there are, there’s often more work for lawyers,” agrees one regulatory partner. “But that’s only as long as the rules don’t kill the thing they’re supposed to regulate.

“It [AIFM] does create some opportunities for law firms but the benefits could be tiny compared with the downside. There’ll be ­people who’re having second thoughts about [operating in] the UK and EU.”

In some ways, the imposition of the directive is the latest in a series of what many see as politically motivated attacks on the ­alternative funds market.

One funds partner sums up the mood: “I’ve got clients setting up in Switzerland who would’ve been London-based five years ago. The environment’s changed.”

And it is the lack of sophistication to the regulation that is ­frustrating some of those ­lobbying for more lenient rules.

“There’s definitely a ’one size fits all’ reasoning to it,” continues the funds partner. “The political ­motivation is to target hedge funds and private equity together, but there’s not such a simple ­definition so it means lots of other funds have been caught up too. Do they really want to restrict venture capital or real estate funds too?”

However, for others the creation of ’passports’ allowing funds to market themselves in the EU if they fulfil a set of requirements opens up the possibility of a whole new set of clients operating ­alongside the existing ones.

“The London market might lose out as managers say they may as well be in New York or Hong Kong,” explains another City ­private equity partner, “but there’ll be additional funds set up. My ­feeling is that it means more, not less, work.”
gavriel.hollander@thelawyer.com