The hotly debated Alternative Investment Fund Managers (AIFM) directive took center stage at the European Venture Capital Association’s annual investors’ forum in Geneva in March.
Many of the general partners in attendance were visibly distressed when discussing the implications that additional regulation would have on their industry. “We’re dead,” said one private equity pro, when he was asked for his opinion about the proposed legislation.
The European Commission proposed the directive in April 2009 in response to the global financial crisis, which hit in 2008. The goal of the directive is to register and supervise managers of alternative investment funds, including private equity funds and hedge funds, that do business in the European Union.
The proposal has been met with much criticism from those who would be regulated. The Institutional Limited Partners Association, among others, says that the proposed regulatory measures in the AIFM directive could close off Europe from international private equity and severely limit the prospects of European firms.
Javier Echarri, secretary general of the European Venture Capital Association, says that increased regulation would burden investors with additional costs and may even preclude European investors from investing in funds outside of Europe.
“The regulatory impact is yet to come and we really haven’t felt the full force of this directive yet,” Echarri says. “The directive will affect the kind of recovery we see in Europe, whether it happens in two year’s time or 10 years.”
Opponents of the directive say it would hurt an already weakened investment climate in Europe. Figures released by EVCA last month showed that 2009 saw the lowest fund-raising activity in 15 years. European funds raised €13 billion last year, down dramatically from €112 billion in 2007, according to the EVCA.
Whether institutional investors are also worried about the implications of increased regulation depends on who you ask. The latest survey from EVCA revealed that two-thirds of institutional investors plan to withdraw from venture and growth investing or substantially reduce their allocations if the AIFM is implemented in its current form.
However, LPs in attendance at the EVCA conference seemed to have few concerns about increased regulation. One investor said that he was reducing his 13% venture commitment because of low returns, not because of the potential implications of the AIFM directive.
Arnaud Begle, an investment manager with limited partner Lyrique, says he knows very little about the regulation and is not concerned about its implications for the industry. “It will always be difficult when you put increased restrictions on an industry, but our clients want to keep investing in venture, which may mean we need to change our structure,” Begle notes. “If the directive gives people peace of mind, then I don’t think it will be such a bad thing.” —Aimee Donnellan