The AIFMD may not be perfect but it is pretty good, so please don’t reform it after the current on-going review by the Commmission. This was the uniform message from a discussion at the ALFI European Asset Management conference on 16 March. On the topic of ‘redesigning AIFMD – the industry’s wish list’ panel came up with a very short list: ‘please don’t touch’.
‘We don’t want to see something that is operating very well being changed, with the risk of unintended consequences’ said Agathi Pafili, head of Europe government relations with the US asset manager Capital Group. ‘AIFMD provides all the necessary safeguards for financial stability and investor protection,’ she added. Martin Bresson, public affairs director at Invest Europe which represents the private equity and venture capital sector, agreed: ‘yes some simplification of the rules would be lovely. But is simplification so important that we want to see the text of the AIFMD reopened? No!’
The AIFMD, which regulates the managers of alternative investments, was passed in 2011 in the wave of regulations that followed the financial crisis. The directive came into force two years later, and is now being reviewed as part of a standard process. The Commission will have the choice of either rewriting the text (so-called “level one” measures) to create an AIFMD II, or to reform the implementing measures (levels two and three) which are at the discretion of the Commission and regulators.
Bresson noted that opposition to reform is the majority, but not universally held view in his association. ‘Some of our members still reminiscence for the good old days when the industry was unregulated,’ he said, adding: ‘We have learned to live with it and thrive with it, including smaller operators’. These views were supported by Jeff Rupp, director of public affairs with European investor advocacy group INREV. ‘It has really been a very successful directive and our investors do, by and large, feel a lot more comfortable as a result of AIFMD,’ he said.
Brand building
Beyond this, the panel said the regulation actively generated business. ‘It has helped the European asset management sector build brands that are well recognised globally,’ said Pafili. Bresson elaborated: ‘It’s probably not so important when relationships are already established, but for international investors looking to the European market, having the AIFM brand gives a level of confidence,’ he said. Making this first step is often difficult, he said, as particularly in his area of venture and private equity, it is a business that relies on trust and individual relationships.
Some commentators have highlighted how reform could open alternative investment strategies to retail investors, going beyond the institutions and high net worth individuals which are the principal clients at the moment. The panel was wary about change in this direction. ‘I’d be particularly concerned if requirements were added in order to meet investor protection measures,’ said Rupp. He predicted that changes would add complexity and cost. ‘Institutional investors have more awareness and experience, and they don’t need the same level of protection that arguably retail investors need,’ he added.
Indeed, he noted that the Eltif (European Long Term Investment Fund) vehicle was already designed to open long-term investments such as real estate infrastructure to a mass market. ‘The Eltif is a terrific product that retail investors can use, that managers can passport around Europe. So let’s not make the AIFMD a regulation to suit everyone,’ said Rupp.
There was also push-back from Agathi Pafili on suggestions that a reformed AIFMD should have an ESG dimension. ‘Alternative investment fund managers already implement sustainability-related requirements under SFDR with more regulation to come,’ she noted. As well, she commented that the fund industry is putting in considerable efforts around sustainably, often more than other business sectors.
Level 2 and 3 reform sufficient
Bresson was pushed to justify the amount of data collected by national and European regulators. ‘I have genuine confidence that the authorities put the information to good use, even if maybe it is not always the use that we think or that is optimal,’ he said. Nevertheless, he noted the tendency for reporting to multiply.
Rupp agreed, adding that all necessary changes to reporting requirements could be handled by the Commission through modifications of their level 2 and 3 interpretations of the original text. ‘Yes some minor improvements could help supervisors understand better where funds are invested. But this doesn’t require a change to the level one text of the directive,’ he said.
Rupp reminded the audience that ‘when AIFMD came into effect, it was really very expensive and time-consuming to implement.’ So, Martin Bresson followed up: ‘the priority at the moment is giving alternative funds the space to help finance the recovery, the green new deal, and innovation, rather than spending time implementing a new wave of AIFMD reform.’