On 1 July 2011, the European Union Directive on Alternative Investment Fund Managers (AIFMD) was published (PDF) in the Official Journal of the European Union and is now law. It is no secret that, since the European Commission first mooted the concept of a generic platform for regulating non-retail investment management in Europe, there has been strong criticism from the hedge fund and private equity industries. Predominantly concerned with the effect that such a regime would have on the sector’s competitiveness, detractors also pointed out deficiencies with a ‘one-size fits all’ approach.
Despite such criticism, and the numerous drafts of AIFMD that have been produced over the last two years, the final version does not go far enough to address the problems associated with a single approach to regulation. Furthermore, the Commission has now admitted it.
Two weeks prior to AIFMD being published, the Commission produced a consultation paper which broadly outlines plans for the creation of an internal market for venture capital in Europe. Driven by the awareness that venture capital provides much needed financing during the start-up phase for many small and medium sized companies (SMEs), the Commission has set out plans to provide a legislative framework for venture capital. Such plans include:
- straightforward registration and notification procedures;
- investment restrictions for retail investors;
- basic reporting obligations;
- simpler operating conditions and legal structures; and
- incentives for focusing capital investment in SMEs.
Whilst neither the initiative behind the consultation paper nor the steps it proposes are particularly controversial – indeed, they are to be welcomed – it does raise some interesting questions.
Firstly, given the rationale behind the consultation paper, there is an apparent inconsistency in the approach to venture capital funds and other areas of the private equity industry. Despite noting that investment in SMEs accounts for 80% of all private equity investment, the paper does not go on to explain in detail why the sole focus is on venture capital to the exclusion of other forms of private equity investment.
More remarkable is the statement in the paper by the Commission, having noted that managers of venture capital funds will be subject to the AIFMD, that “since venture capital was not the focal point of the AIFMD rules, the AIFMD requirements are not tailored for venture capital managers”. The Commission goes on to suggest that one option for dealing with this problem would “entail re-examining the suitability of the AIFMD in relation to certain venture capital funds”. Might not the same be true of other private equity fund managers and real estate fund managers for example?
If, on the virtual eve of the AIFMD being published, the Commission has questioned the suitability of the AIFMD in relation to one major sphere of investment management, can Europe continue to support the ‘one-size fit all’ approach in relation to the rest of the industry?