Come the revolution...

SJ Berwin LLP

There is now only a little over a year to go before the deadline for full implementation of the Alternative Investment Fund Managers Directive across Europe. There cannot be anyone left who does not know that this regulatory revolution will have a dramatic impact on the hundreds of European private equity and venture capital fund managers who will be required to seek authorisation, even for the many who are already regulated. And yet, very few people know exactly how they will be affected. An alarming position, given the scale of the preparation required.

The most important reason for the lack of readiness, of course, is the continuing lack of clarity about some of the crucial detail of the new rules. The Directive itself expressly left open many issues for "Level 2" law-making (a procedure which is largely in the hands of the European Commission), and many other provisions were poorly or vaguely drafted – so that national legislators and regulators have to decide what was intended (and their thinking will no doubt be shaped by "guidance" from the Commission or ESMA - Europe's relatively new regulator). Leaked drafts of the Commission's Level 2 measures are in circulation, and it is known that these do not follow the published ESMA advice in some important respects. But it is not expected that these will be finalised for another month or so, and they will still leave some important gaps - perhaps most notably over the remuneration rules, which could affect the permissible incentive structures in the industry.

However, there is now enough clarity for managers to start their preparations in earnest and there are some key areas where careful thought now will pay dividends next year.

First, there is the question of whether the manager qualifies under the Directive's thresholds. It is true that some uncertainty does remain about the way these are calculated - particularly in relation to the definition of "leverage", which is crucial for the application of the €500 million threshold that was intended for private equity style funds - but we have enough information to be able to predict the outcome definitively for most.

Secondly, managers really should consider if significant changes to their structure - whether that is currently onshore or offshore - are desirable. Moving the manager offshore could give rise to tax savings as well as avoiding for several years most of the Directive's more expensive rules. Investor preference is a factor here, but many larger funds have concluded that it makes sense to move (or stay put) outside the EU.

For those who will qualify and intend to remain in the EU, there are some key points to start looking at. These fall into three broad categories: internal structures, capital and procedures; fund raising and investment processes; and investor and regulator relations, and external service providers. Of these issues, capital requirements are key, with most managers (particularly those in the UK) needing to increase the liquid capital they have significantly, and selecting and appointing a depositary also being a major headache – and a time consuming one. Existing fund documents will also need to be reviewed, and may need to be amended (with investor consent).

In each case, dramatic, or at least extensive and detailed, changes across every aspect of the business and operations may well be required to comply with the Directive next year. Preparing for them now should minimise next year's inevitable disruption.

For more information please contact:

Financial Markets
Tamasin Little (, Gregg Beechey (

Private Funds
Simon Witney (, Christian Schatz (

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Warning! This bulletin is not intended to offer professional advice and you should not act upon the matters referred to in it without taking specific advice. These regular bulletins provide incisive commentary on legal and tax developments and other topical matters that affect the European private equity community. The views expressed in this bulletin are those of its author and not necessarily those of SJ Berwin LLP.

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