evaluation of the alternative investment fund managers … · 6 impact on funds raised and...
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Evaluation of the Alternative
Investment Fund Managers
Directive
December 2017
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Contents
1 Summary of Findings ..................................................................................................................................................... 1
1.1 Introduction ........................................................................................................................................................... 1
1.2 Our findings ............................................................................................................................................................ 2
1.3 Overall evaluation of the AIFMD using the European Commission’s criteria ....................................... 5
1.4 Final conclusion ..................................................................................................................................................... 6
2 Introduction .................................................................................................................................................................... 8
2.1 Background to the Study .................................................................................................................................... 8
2.2 Methodology .......................................................................................................................................................... 9
2.3 Structure of this Study ....................................................................................................................................... 10
3 Private Equity in Europe ............................................................................................................................................ 11
3.1 How the private equity industry works ........................................................................................................ 11
3.2 The private equity industry in Europe ........................................................................................................... 14
4 AIFMD — Background and Purpose ...................................................................................................................... 21
4.1 The motivation for introducing the AIFMD ................................................................................................. 21
4.2 Regulating private equity and the impacts expected at the time of the AIFMD’s implementation . 22
5 Impact on Operations and Organisational Change ............................................................................................. 27
5.1 Introduction ......................................................................................................................................................... 27
5.2 Authorisation and notification requirements ............................................................................................... 28
5.3 Marketing rules .................................................................................................................................................... 29
5.4 Depositary requirement .................................................................................................................................... 34
5.5 Minimum capital requirements ........................................................................................................................ 37
5.6 Disclosure and reporting .................................................................................................................................. 37
5.7 Valuation requirements ..................................................................................................................................... 38
5.8 Portfolio company disclosure and asset-stripping rules ............................................................................ 39
5.9 Leverage rules ...................................................................................................................................................... 41
5.10 Remuneration rules ............................................................................................................................................ 42
6 Impact on Funds Raised and Investment Opportunities .................................................................................... 45
6.1 Impact on funds raised by the private equity industry ............................................................................... 45
6.2 Impact on opportunities available to European investors ......................................................................... 51
6.3 Third country regime ......................................................................................................................................... 56
7 Costs .............................................................................................................................................................................. 58
7.1 Introduction ......................................................................................................................................................... 58
7.2 Qualitative analysis of compliance costs ....................................................................................................... 58
7.3 Quantitative analysis of compliance costs ..................................................................................................... 59
7.4 Industry-wide compliance costs ...................................................................................................................... 61
7.5 Fees paid by investors ........................................................................................................................................ 62
8 Benefits and Wider Impacts ..................................................................................................................................... 65
8.1 Introduction ......................................................................................................................................................... 65
8.2 Benefits .................................................................................................................................................................. 65
8.3 Wider impacts ..................................................................................................................................................... 70
9 Overall Evaluation using the European Commission’s Criteria ....................................................................... 72
9.1 Introduction ......................................................................................................................................................... 72
9.2 Relevance of the AIFMD ................................................................................................................................... 72
9.3 Effectiveness of the AIFMD .............................................................................................................................. 72
9.4 Efficiency of the AIFMD ..................................................................................................................................... 73
9.5 Coherence of the AIFMD ................................................................................................................................. 73
9.6 EU added-value of the AIFMD ......................................................................................................................... 76
10 Conclusions .................................................................................................................................................................. 77
10.1 Introduction ......................................................................................................................................................... 77
10.2 Impact on GPs ..................................................................................................................................................... 77
10.3 Impact on LPs ...................................................................................................................................................... 79
10.4 Impact on the wider economy ........................................................................................................................ 79
Summary of Findings
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1 Summary of Findings
Europe has a developed and successful private equity industry. Overall, there are at least 2,000 private equity
firms in Europe — with about €600 billion in assets under management (AUM).1 The European industry
invested about €50 billion in almost 6,000 companies in 2016.2
The European economy needs risk capital so that businesses can innovate, grow and create added value —
and the private equity industry’s business is to provide that risk capital. The Alternative Investment Fund
Managers Directive 2011/61/EU (AIFMD) is the first EU-level framework for direct regulation of the
alternative investment sector. As such, it covers a wide range of fund managers, including private equity.3 The
application and the scope of the AIFMD are due for review by the European Commission in 2017.
The aim of this research is to assess the direct impact the AIFMD has had to date on Europe’s private equity
and venture capital sectors,4 as well as their investors. In doing so, we have drawn distinctions between those
private equity fund managers who are fully within the scope of the AIFMD and those who are out of the
scope but are nevertheless impacted by the Directive’s provisions, and the indirect impact the Directive
might have had on investors within and outside of Europe.
1.1 Introduction
The AIFMD reflects the notion that Alternative Investment Fund Managers (AIFMs) — whilst “largely
beneficial” — “may […] spread or amplify risks” (Recital 2) through the financial system, and it proposes (in
Recital 4) to provide an internal market for AIFMs and a harmonised and stringent regulatory and supervisory
framework for AIFMs’ activities.
The AIFMD includes two key differentiations:
Above versus below the €500 million AUM threshold5: Private equity fund managers above this threshold
are fully within scope and need to be authorised under the AIFMD and to be fully compliant with all the
Directive’s provisions. Those below the threshold, provided that the funds managed are unleveraged and
closed-ended, are only subject to a lighter registration and reporting regime. Although they do not need
to comply with all of the Directive’s requirements, the Directive does have an impact on the fund
managers’ marketing activities.
EU versus non-EU: The AIFMD currently only applies to EU fund managers and the internal market
passport is only available to EU managers marketing/managing EU funds. Non-EU fund managers (“third
1 Assets under management are defined by Invest Europe as the total amount of capital managed from Europe. This
includes the total amount of funds available to fund managers for future investments plus the amount of funds already
invested (at cost) and not yet divested. Fees already paid to managers are excluded, but accumulated management
fees are not excluded. 2 Invest Europe “2016 European Private Equity Activity. Statistics on Fundraising, Investments & Divestments”,
https://www.investeurope.eu/media/651727/invest-europe-2016-european-private-equity-activity-final.pdf. 3 European Commission (2009) “Financial services: Commission proposes EU framework for managers of alternative
investment funds”, IP/09/669, Brussels, 29 April 2009, http://europa.eu/rapid/press-release_IP-09-
669_en.htm?locale=en. 4 In the remainder of the report “private equity” will be used to capture all these asset classes, unless otherwise
specified. 5 This is the de minimis threshold that applies to portfolios of AIFs that are unleveraged and have no redemption rights
exercisable during a period of five years following the date of initial investment in each AIF. See 4.2.1 for more
information.
Summary of Findings
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country” fund managers) do not need to become authorised under the AIFMD. Again, this has
implications for the managers’ marketing options.
Our aim is to fully describe the operational impact that the AIFMD has had on the private equity industry at
large, recognising both the achievement of benefits, and also the costs and other effects resulting from this
legislation. In this summary we set out the conclusions we have drawn in two schemas:
First, we describe our conclusions on how different private equity stakeholders have been affected. The
two main groups are General Partners (GPs), which we split into sub-threshold GPs (i.e. below the €500
million AUM threshold) and above-threshold GPs (i.e. with more than €500 million AUM), and Limited
Partners (LPs, or the — typically institutional — investors in the funds managed by the GPs). Where
relevant, we have also made reference to non-EU fund managers. Since the private equity industry makes
a significant contribution to the EU economy, we also consider what macroeconomic effects the AIFMD
may have had.
Second we consider these findings against the European Commission’s own criteria for the ex post
assessment of its policy measures.6
In conducting this study, we combined desk-top research, data analysis and fieldwork with both GPs and the
LPs in the funds the GPs manage, as well as legal advisers, in order to develop our analysis of the AIFMD’s
impact. Overall, we had contact with over 100 unique stakeholders.
1.2 Our findings
While, as in any evaluation, there are many subtleties in the way the AIFMD has affected various stakeholders
and the wider economy, the high-level conclusion that can be drawn from our research is that the AIFMD
induced relatively insignificant benefits in the private equity industry but at a relatively high cost. The latter
includes both direct compliance costs and unintended consequences which might retard the growth of the
industry. One such unintended consequence, following from inconsistencies in the AIFMD’s implementation,
is the creation of a barrier for non-EU managers to market their funds in the EU, effectively discriminating
against non-European GPs and also reducing the universe of funds LPs can invest in. Finally, in terms of
headline findings, not all of the main goals of the Directive have been achieved; most notably, the AIFMD has
not created a fully harmonised regulatory and supervisory framework for all AIFMs within the EU.
Below we present a summary of impacts the AIFMD has had on GPs, LPs, and the wider economy.
1.2.1 Impact on GPs
Overall, above-threshold GPs — being directly within the scope of the AIFMD — are the group most
significantly affected by the AIFMD. However, sub-threshold managers and non-EU fund managers have also
experienced some changes due to the AIFMD. We consider the most important impacts to be as follows.
Marketing and fundraising. Many GPs believe that the AIFMD has made the marketing process in the
EU/EEA harder, slower and more costly (even though, globally, funding rounds have been closing more
rapidly). This applies to both above- and sub-threshold GPs. The increase in both time and cost was (at
least partially) attributed to differences in how the AIFMD was implemented across Europe. The
differences between the National Private Placement Regimes (NPPRs) of various Member States was
seen as a particular factor here. The GPs arguably most affected by these differences are those that
cannot currently benefit from a passport and need to rely on the NPPRs for their marketing activities in
the EU/EEA. These include: fund managers that are constituted outside the EU/EEA (and those EU/EEA
fund managers marketing non-EU/EEA funds), and sub-threshold fund managers who want to fundraise
6 See European Commission’s guidance on the evaluation criteria can be accessed at http://ec.europa.eu/smart-
regulation/guidelines/tool_42_en.htm.
Summary of Findings
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cross-border because they are not able to solely rely on their local market and/or reverse solicitation
(itself subject to varying interpretation by the supervisory authorities).
In both cases, the ability to navigate the different NPPRs and to raise funds across several Member States
might be restricted or overly costly. An important factor in this respect is the delayed extension of the
AIFMD passport to non-European AIFs and AIFMs. In the absence of such a third country passport, non-
EU/EEA AIFMs need to grapple with local NPPRs and there have been concerns about protectionist
behaviour by national competent authorities. Very strict requirements imposed by some supervisors as
part of their NPPRs create a barrier to (at least some) non-European AIFMs. However, despite all the
problems linked to the NPPRs, some non-European GPs (particularly those based in the USA) indicated
that if and when a third country passport is accessible — at which point the AIFMD envisages
discontinuing the NPPRs — they would prefer to continue to market via the NPPRs. Some of the
interviewed GPs expressed the view that “imposing” the passport, i.e. not giving the option to choose
the NPPRs, could impose a not insignificant cost on their operations or else even discourage some of
them from marketing in the EU altogether.
Increased operating costs. Not all costs have yet been incurred but we estimate that when they are the
total one-off industry-wide costs would amount to between €106-195 million, with an industry-wide
annual ongoing cost estimated to be between €60 and €180 million, i.e. around 1.3–3.8 bps of the total
assets under management of all the GPs that will ultimately be within the scope of the AIFMD. Whilst
some GPs welcomed the AIFMD-driven refreshing of policies and the related increased attention of front-
office staff, this has come at a high cost. The most material drivers of these higher costs are: (i) the
authorisation process, (ii) the marketing rules, (iii) the depositary requirements, and (iv) the minimum
capital requirements. Many GPs are independent, owner-managed and tightly-controlled businesses: one
cause of the high operational cost burden is the lack of recognition of this in the AIFMD’s rules. This is
amplified by:
insufficient recognition by policymakers of the differences between private equity and hedge funds,
and the inadequate tailoring of rules to the former (e.g. reporting deadlines are appropriate to liquid
investments but not illiquid ones), or to the true nature of private equity more generally (the “asset-
stripping” and leverage rules have not noticeably affected the activities of private equity firms, but have
still managed to increase compliance costs);
implementation of the AIFMD with significant variation between Member States (e.g. supervisory
reporting does not always follow the ESMA template); and
the lack of experience in regulation or supervision of private equity fund managers among many
National Competent Authorities resulting in a less pragmatic approach in interpreting the AIFMD (e.g.
making the authorisation process unnecessarily onerous).
Overall, GPs have seen little or no benefit from the AIFMD. Of course, regulation need not directly benefit
the regulated parties but the AIFMD was intended to lead to a deeper, more connected pan-EU market for
private equity, and it has not delivered this.
1.2.2 Impact on LPs
Overall, most LPs do not seem to have very strong views on the changes the AIFMD induced — either
positive or negative. This is particularly true for non-EU/EEA investors, who — as the interviews with private
equity representatives suggested — are often not aware of the existence of the Directive. While obviously
non-EU/EEA investors are not directly affected by the AIFMD and its marketing rules (which only apply to
marketing to EU investors), this points to the fact that the AIFMD did not succeed in increasing confidence
in EU/EEA-based funds among non-European investors.
Willingness to invest in private equity. Except for a small number of investors who stated the AIFMD
decreased their willingness to invest in private equity, the Directive has generally not materially changed
Summary of Findings
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investors’ appetite to invest in this asset class. Those whose willingness declined were most likely to
attribute this change to the rules governing marketing.
Management fees. Almost half of the respondents agreed that management fees were about the same as
five years ago, a third stated that the fees were slightly lower, and only a fifth of LPs said they were higher.
When asked about how costs of the AIFMD had been divided between GPs and LPs, a majority of LPs
that responded to this question indicated that more than half of the additional costs is passed onto LPs,
with the average (and median) distribution of costs of three to one, suggesting that LPs bear three times
as much costs as GPs. (NB Some increased costs, such as depositary fees, can be passed directly onto
LPs, i.e. over and above management fees). Where fees had changed, the AIFMD — alongside other
regulatory and tax developments in the EU/EEA — was identified as one of the main drivers behind this.
Investor protection. A large proportion of LPs recognise that the AIFMD has slightly improved investor
protection, at least around reporting to LPs. This has facilitated access for at least some LPs to more
information on GPs’ ongoing activity, and has made it easier for LPs to determine a GP’s regulatory status.
LPs see the rules around depositaries as mildly beneficial in investor protection terms. These changes,
however, have not made LPs more likely to invest in private equity. Indeed, the pass-through of costs
(e.g. related to depositaries) onto LPs is seen by them as more consequential than the gains in investor
protection.
Investable universe. The AIFMD (primarily due to the marketing rules) has restricted the investable
universe of non-EU/EEA funds for EU-based investors. Since the best-performing funds tend to close
more quickly, GPs based outside Europe may look to prioritise non-European investors to secure
commitments first. Over-subscription by these investors can reduce what is available to market within
the EU/EEA, and the absence of a third country regime will mean that GPs from outside the EU/EEA will
focus on a restricted set of countries, at most. These limitations in investable universe might also inhibit
investors’ ability to diversify risk, or else increase the cost of such diversification. Past academic research
has shown that diversification across multiple funds is an important tool to mitigate capital risk (i.e. the
risk of losing capital).
1.2.3 Impacts on the wider economy
Financial stability
One of the main motivations of the AIFMD was to enhance the stability of the financial system. However, we
find no evidence that private equity was responsible either for the onset or the severity of the recent financial
crisis. More generally, there are several arguments demonstrating/showing that the private equity industry
does not have strong links with systemic risk:
Even the largest AIFMs in a given segment do not account for a dominant part of the market, i.e. the failure
of even the most important GP would not materially impair the choice and scale of capital available for
financing the real economy.
In the private equity model AIFMs are not involved in maturity or liquidity transformation in the way that
banks and other financial institutions are. We found no evidence in our fieldwork of lending from typical
pure private equity-focused funds (though it should be recognised that some AIFMs do engage in such
activities and also manage credit funds).
While private equity AIFs are generally not leveraged, the use of leverage in portfolio companies is a
feature of private equity, especially of LBO activity. As such, LBOs provide a connection to the banking
system should there be a default on the debt in an LBO (i.e. a default by the corporate vehicle making the
acquisition and where the debt sits). However, the debt in private equity portfolio companies is used to
fund a change in ownership. As part of private equity’s hands-on approach, a lot of attention is
consequently paid to governance in the acquired company and enhanced cash flow management, i.e. such
portfolio company debt has a disciplining effect on management.
Summary of Findings
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Whilst debt within portfolio companies may also be used in writing Collateralised Loan Obligations
(CLOs), increasing interconnectivity in the system, the primary originators of debt and the
decision-makers around any collateralized instruments are the banks — as is the case when debt capital
is provided to fund acquisitions of listed companies or unlisted companies without private equity backing.
It is the banks and some specialist financial institutions that create these connections with more opaque,
derivative instruments. It is unclear why this should be used to justify prudential regulation for the private
equity sector, and not, for instance, large acquisitive corporates or other debt issuers.
The above evidence does not support the construct implicit in the AIFMD that private equity is meaningfully
to be considered as part of the shadow banking sector or that it poses systemic risks. The prudential aspects
of the AIFMD applied to private equity fund managers are therefore neither relevant nor effective.
Macroeconomic impacts on performance in Europe
The private equity industry plays a beneficial role in the EU economy. Introducing barriers and restrictions
to its natural growth would have negative consequences on the macroeconomic level, such as reduced
innovativeness and competitiveness of the EU compared to the rest of the world.
1.3 Overall evaluation of the AIFMD using the European Commission’s
criteria
We have summarised above the main impacts the AIFMD has had, both on the private equity industry and
the wider economy as a whole. We now re-examine these findings against the European Commission’s own
criteria for the ex post assessment of its policy measures.
1.3.1 Relevance of the AIFMD
This form of analysis is intended by the Commission to consider whether the legislation is still relevant given
the current needs and problems in society. Based on our research, the original objectives of the AIFMD do
not seem to be well-justified. First, in most areas of the AIFMD only a minority of investors considered that
the AIFMD has led to increased protection, suggesting that the measures imposed by the Directive were not
all necessary from an investor point of view — such as those around remuneration — and fewer yet consider
any increased investor protection to merit the additional costs borne in consequence. Second, there is no
evidence suggesting that AIFMs spread or amplify risk through the financial system.
1.3.2 Effectiveness of the AIFMD
The effectiveness analysis focuses on how successful the legislation has been in achieving its objectives. The
effectiveness of the AIFMD seems to be limited. Whilst the AIFMD has been partially successful at increasing
the level of investor protection (e.g. by increasing the amount of easily accessible information), its
effectiveness at reaching the overarching objectives — such as creating a harmonised regulatory and
supervisory framework for all AIFMs within the EU — has been achieved only to a limited degree.
In particular, we find no evidence suggesting that the private equity industry’s contribution to systemic risk
(if any) is any different now than in the past, i.e. it was and remains negligible. Furthermore, it seems that
while some stakeholders see an improvement in the harmonisation of the regulatory and supervisory
framework, a vast majority points out significant differences in the implementation of the AIFMD across
Member States.
Summary of Findings
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1.3.3 Efficiency of the AIFMD
The efficiency analysis compares the resources used to implement the legislation with the impacts it induced
(either positive or negative). Only a small number of market participants recognise some (usually limited)
benefits of the legislation, specifically in the field of investor protection, and the policy intervention therefore
appears unlikely to have been cost effective.
1.3.4 Coherence of the AIFMD
The coherence criterion is intended to capture how well the legislation in question works with other policy
actions. Although the AIFMD is a minimum harmonisation instrument, there are significant differences in its
implementation across the EU. This is particularly marked in various aspects of marketing (e.g. the
interpretation of what constitutes marketing and pre-marketing, and the accessibility and attractiveness of
the local NPPR). These differences are driven partly by divergent local legislation that was unaffected by the
AIFMD and partly by divergent stances to transposition adopted by the relevant national competent
authorities. There is a clear understanding amongst market participants that some national authorities bring
much more experience and superior responsiveness than others.
The AIFMD stands out internationally as the EU regulation providing a comprehensive supervisory framework
for alternative investment fund managers, including — among several others — private equity. As such, there
is no genuine international norm to diverge from. Even so, institutional investors did believe it compared
unfavourably to the SEC’s much more focused initiatives in the USA. For example, the main focus of one set
of SEC rules is to oblige detailed disclosure of fees and expenses by GPs. LPs favoured this approach because:
(i) it was targeted and as such did not result in unnecessary administrative burdens being placed upon GPs,
and likely passed through to LPs either through higher management fees or reduced returns, and (ii)
disclosure of fees and expenses was broadly considered by LPs to be an area where they considered
themselves less able to secure a good outcome for themselves independently of such an intervention. Some
LPs felt that the AIFMD rules could potentially be used to generate a similar result, but were not being
interpreted in a way that would support sufficiently detailed disclosure of fees and expenses.
1.3.5 EU added-value of the AIFMD
The EU added-value analysis looks at impacts and changes which can be attributed to the legislation in
question. In a way, this criterion relies on the findings related to the previous four criteria.
The main value of the AIFMD is the internal market passport, reducing the barriers for an AIFM to market
and operate across the EU. However, the notable differences in implementation of the Directive as well as
varying levels of experience and responsiveness from national competent authorities have contributed to the
value of the passport being below its full potential. A more harmonised and unambiguous implementation
could help in this respect.
1.4 Final conclusion
Overall, the impact of the AIFMD has not been very material but it has not been insignificant either, with the
negative consequences outweighing the positive. Furthermore, the evidence we gathered seems to suggest
that the development of the private equity industry in Europe has likely been disrupted and retarded by the
AIFMD.
Summary of Findings
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Given that some of its (adverse) effects are yet to be fully experienced (e.g. due to temporary grandfathering
provisions, managers not actively raising funds since the Directive’s implementation or the lack of a fully
established third country passport regime), a revision of the AIFMD to better rebalance its costs and benefits
may be timely and helpful as it might allow these fund managers to avoid the cost and administrative burden
from becoming compliant with rules which might change. Such a review should, of course, also pay attention
to those fund managers who are already fully authorised to assess what streamlining of or change to the
AIFMD’s provisions could achieve for them to encourage the growth of the private equity industry in Europe
— and, by extension, the continued development of the EU economy.
Introduction
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2 Introduction
2.1 Background to the Study
Europe has a developed and successful private equity industry. The Alternative Investment Fund Managers
Directive 2011/61/EU (AIFMD) is the first EU-level framework for the direct regulation of the management
and marketing of alternative investment funds, including private equity.7
One important criterion for the application of the AIFMD is the de minimis threshold. The AIFMD only applies
in full to private equity managers operating in the EU/EEA with aggregate assets worth €500 million or more
(calculated on a rolling basis in accordance with the Delegated Regulations supplementing the AIFMD).
Managers of closed-ended, unleveraged funds with less than €500 million in assets under management need
only comply with national registration and reporting requirements and are exempted from other AIFMD
requirements. The first group are called “above-threshold” managers, the second are “sub-threshold”
managers.
The application and the scope of the AIFMD are due for review by the European Commission in 2017. As
stated in the Directive itself — “[t]hat review shall analyse the experience acquired in applying this Directive,
its impact on investors, AIFs or AIFMs, in the Union and in third countries, and the degree to which the
objectives of this Directive have been achieved. The Commission shall, if necessary, propose appropriate
amendments.”8 The review’s main focus is supposed to be on:
marketing;
investments into alternative investment funds;
impact of the depositary rules;
impact of the transparency and reporting requirements;
potential adverse impact on retail investors;
impact on the operation and viability of private equity and venture capital funds;
impact on investor access;
impact on investment in or for the benefit of developing countries;
impact on the protection of non-listed companies and on the level playing field between alternative
investment funds and other investors after the acquisition of such non-listed companies.
In light of this EU-level review, Europe Economics has been commissioned by Invest Europe to assess and
evaluate the impacts that the AIFMD has had to date on the private equity and venture capital industry.
Europe Economics is an independent economics consultancy, specialising in the application of economic
thinking and practice to a range of private business and public policy questions. Our work in financial services
has been for various regulators and supervisors — such as DG FISMA of the European Commission, the
European Parliament’s ECON committee, the UK’s Financial Conduct Authority, and the European Securities
and Markets Authority — and also for private parties — such as the Association of Financial Markets in
Europe and the World Gold Council.
7 European Commission (2009) “Financial services: Commission proposes EU framework for managers of alternative
investment funds”, IP/09/669, Brussels, 29 April 2009, http://europa.eu/rapid/press-release_IP-09-
669_en.htm?locale=en. 8 Article 69 of the Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative
Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No
1060/2009 and (EU) No 1095/2010.
Introduction
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2.2 Methodology
In this study we strive to identify the overall impacts the AIFMD has had to date. Our approach is summarised
below.
We conducted desk-top research to describe the recent evolution of (the) private equity (industry) in
the EU/EEA.
This work also enabled us to establish a full set of potential mechanisms of effect, i.e. the cause and effect
linkages that describe how an intervention (legal measure) could be expected to have an impact. This
includes both those mechanisms whereby its objectives might be expected to be attained, and how it
might have unintended consequences. This work created a clear structure to the project and informed
the impact analysis that was performed subsequently, e.g. by helping us design the stakeholder
engagement materials.
In order to gather more practical insights and evidence on the day-to-day operational impact of the
AIFMD we also engaged directly with the relevant stakeholders, including fund managers, investors and
service providers. The stakeholder engagement process allowed us to assess the validity of various
potential impacts which would not be observable in readily available information (e.g. because the
required information is not in the public domain; the confounding factors are likely to make detection
difficult if not impossible; the effects — even after several years — have not yet been fully exhibited in
the available data, etc.).
We adopted a multi-strand approach to this stakeholder engagement:
We developed three bespoke surveys: one each for Limited Partners (LPs), above-threshold General
Partners (GPs) and sub-threshold GPs. The surveys were developed using Survey Gizmo, and links to
these surveys were distributed through Invest Europe and the national private equity and venture
capital associations. The surveys were live from November 2016 to February 2017.
We conducted over 30 interviews with GPs,9 LPs and lawyers working in the private equity industry
across the EEA. The interviews were complete by April 2017.
Overall, we had contact with over 100 unique stakeholders across these different research strands.
Figure 2.1: Summary of stakeholder engagement
Source: Europe Economics.
We also analysed data from Invest Europe describing the quarter-by-quarter evolution of fundraising and
investment by the private equity industry in Europe, over the period 2007 through to 2016.
9 The GPs included mid-market and large buyout firms as well as smaller venture capital fund managers.
Introduction
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We combined the above to develop a comprehensive qualitative and quantitative analysis of the impact
the AIFMD has had, and then mapped our conclusions to the European Commission’s own criteria for
an ex post evaluation, namely the Directive’s effectiveness, efficiency, relevance, coherence and EU
value-added.
2.3 Structure of this Study
This report is organised as follows:
In Chapter 3 we describe the private equity industry in Europe, and its recent evolution.
In Chapter 4 we elaborate on the nature and background of the AIFMD.
In Chapter 5, we analyse the impact of the AIFMD on the day-to-day operations of private equity
practitioners. We discuss how each of the AIFMD’s provisions has affected the different constituents of
the European private equity industry, distinguishing between above-threshold (i.e. fully AIFMD-
authorised) fund managers, sub-threshold fund managers and institutional investors.
In Chapter 6 we examine the impacts the AIFMD has had on funds raised and investment opportunities.
On top of the organisational impacts discussed in Chapter 5, we investigate whether AIFMs’ ability to
access funding has been affected, whether the cost of fundraising has changed and whether the investable
universe available to investors has altered.
We discuss the cost implications of the AIFMD in Chapter 7.
We then turn to benefits and wider impacts of the AIFMD in Chapter 8.
Based on the above findings, in Chapter 9 we evaluate the AIFMD as a whole against the policymakers’
objectives and set out our overall conclusions on the European Commission’s own criteria for an ex post
evaluation, namely the Directive’s effectiveness, efficiency, relevance, coherence and EU value-added.
In the final Chapter 10, we summarise all the main findings, making a clear distinction between the impact
on GPs, LPs and the wider economy.
Private Equity in Europe
- 11 -
3 Private Equity in Europe
The economy needs risk capital so that businesses can innovate, grow and create added-value. Risk capital
can come from various sources, with our focus here on the provision of institutional risk capital in a private
market setting. This can be applied to finance business start-ups or to purchase large, mature companies —
and much in between.
Such private risk capital provided to finance the growth of companies in the early stages of their life
cycles, i.e. seed, early-stage, development, or expansion is typically referred to as venture capital. Venture
capital will typically involve a minority stake invested in an early-stage or pre-profitable business. Where
private risk capital is provided to more mature companies, it is often termed growth capital rather than
venture capital.
Buyouts are another common example of private equity investment. Invest Europe’s Professional
Standards Handbook defines buyout as “a minority or majority stake invested in portfolio companies at
critical points of their development”.10 Buyout funds will typically acquire companies by purchasing
majority or controlling stakes, financing the transaction through a mix of equity and debt. It may use a
significant amount of borrowed capital to meet the cost of acquisition (hence the term leveraged buyout).
In the remainder of the report “private equity” will be used to capture all these asset classes, unless otherwise
specified.
Europe has a substantial private equity industry, albeit less well-established than that in the USA. Overall,
there are about 1,200 private equity firms active in any year in Europe (e.g. raising funds, investing in or
divesting of companies), and around 2,000 firms in total — with about €560 billion in assets under
management. As the data from Invest Europe show, between 2007 and 2016 €480 billion was invested in
over 30,000 companies.11 About €50 billion was invested in almost 6,000 companies by the private equity
industry in 2016 alone.12 Invest Europe’s statistics cover over 90 per cent of the assets under management in
Europe. Whilst investment levels have risen over the past few years, these remain below pre-crisis levels.
In comparison, in the USA (which has a broadly equivalent GDP to that of the EU), the market comprised
almost 4,200 private equity firms13 which together invested around €289 billion in the twelve months to Q3
2016.
3.1 How the private equity industry works
The managers of a private equity fund first need to raise capital to invest. A common form of fund is a Limited
Partnership, with the investors in it being known as Limited Partners (LPs). The managers of this fund are
General Partners (GPs).
Once investors have committed to a fund, the GPs will research and seek out investments. Normally,
investors would only pay into a fund when an investment is being made. Funds usually have a fixed term, often
of ten years, with some fraction of LPs’ committed funds undrawn for a substantial part of that lifespan.
10 Invest Europe (2015) “Professional Standards Handbook”. 11 Invest Europe (2015) “2015 European Private Equity Activity. Statistics on Fundraising, Investments & Divestments”,
https://www.investeurope.eu/media/476271/2015-european-private-equity-activity.pdf. 12 Invest Europe “2016 European Private Equity Activity. Statistics on Fundraising, Investments & Divestments”,
https://www.investeurope.eu/media/651727/invest-europe-2016-european-private-equity-activity-final.pdf. 13 The sets of private equity firms active in the US and in Europe are not necessarily mutually exclusive, i.e. most likely
a significant proportion of private equity firms operates globally.
Private Equity in Europe
- 12 -
As the investments made mature, so the GPs will seek to realise cash back from them through a divestment
process, e.g. through a trade sale or via an Initial Public Offer (IPO) on a stock market. Until that point, the
investments are highly illiquid.
The typical fund structure is illustrated in Figure 3.1.
Figure 3.1: Overview of a typical private equity fund’s structure
Note: Dashed lines signify some optional variations.
Source: Adapted from diagram contained within Invest Europe’s (2015) “Professional Standards Handbook”.
3.1.1 What are the main characteristics of private equity?
Private equity is an illiquid asset. There are several reasons for this.
It is characterised by long holding periods; this is linked to the time it may take to improve the company’s
prospects, and subsequently to find an interested party for onward sale or to organise an IPO.
In addition, private equity funds tend to be closed-ended, i.e. investors cannot just withdraw from the
fund (there are no redemption rights). The money invested into private equity funds typically comes from
institutional investors such as insurers and pension funds. Based on 2016 data, the leading investors in
private equity were pension funds (34 per cent of private equity investment), followed by funds of funds
and other asset managers (18 per cent) and insurance companies (12 per cent). Sovereign wealth funds
constituted 10 per cent of total investment in private equity in 2016.
Private Equity in Europe
- 13 -
Private equity invests in the real economy. The underlying investments/assets of the fund are mainly
illiquid, i.e. operating companies with their own directors, not liquid financial instruments with volatile
prices which require daily active management.
In general, “alternative assets” (e.g. hedge funds, real estate and private equity) are attractive to investors
because of the expectation of higher returns, improved diversification of overall portfolios, and as hedges
against inflation risk. The average allocation to alternative assets among investors active in this segment of
the investment market is about 20 per cent. However, there are some key differences between private equity
and other assets that need to be clearly understood as part of this study.
Public equity — Private equity offers much lower liquidity to its LPs than public equity and, it typically
offers GPs (acting on behalf of the LPs) a degree of management control over the companies invested in.
Private equity has historically demonstrated comparable, or sometimes lower, volatility than public
equities and can provide investors with portfolio diversification (albeit its performance is correlated with
the equity market) and higher total return potential for long-term investment. As a result, private equity
is seen as an effective match for long-term or illiquid liabilities like those in pension funds and life
insurance. That said, private equity will typically only constitute a relatively small proportion of a typical
institutional investor’s portfolio, so such holdings do not typically raise liquidity concerns but do offer
the opportunity for yield enhancement.
Hedge funds — Hedge funds deploy a diverse set of strategies. Even so, there are a number of distinctions
that can (and need to) be drawn between the hedge fund and the private equity industries.
Hedge fund investments are generally open-ended with no specific duration and the ability to buy and
sell units of investment in the fund, while private equity funds are locked-in (with an investment period
of 3-5 years, although this has been increasing over time).
Hedge funds tend to be highly leveraged and aim to create returns through trading strategy. This is in
contrast to private equity, which is not generally leveraged at the fund level, and aims to create lasting
value in their portfolio companies (and generate a return for their investors) through active ownership
and a hands-on strategy, involving strengthening management expertise, delivering operational
improvements and helping companies to access new markets.
Whilst private equity is typically characterised by high information and management control, hedge
fund investment typically exhibits low information and no management control.14
Hedge funds may involve risks not very relevant to private equity, such as maturity transformation
(e.g. short-term deposits into long-term loans), “liquidity transformation” (liquid liabilities to finance
illiquid assets) and the use of high levels of in-fund leverage.
3.1.2 How does private equity contribute to the economy?
Private equity is an important driver of the EU economy. There are three main ways in which it achieves this:
Companies backed by private equity are among the fastest growing and innovative companies in the
economy. According to a 2013 report by Frontier Economics,15 private equity backed companies are
more focused in their innovation efforts and deploy better management of innovation processes than
their peers. This is evidenced by the fact that, while companies backed by private equity account for just
6 per cent of private sector employment in Europe, they account for up to 12 per cent of all industrial
innovation. Furthermore, total economic value of patents granted to private equity backed companies in
Europe from 2006 to 2011 is up to €350billion. Similarly, in the USA, research has found that private
14 Gilligan & Wright (2010) “Private equity demystified. An explanatory guide”, Second edition, ICAEW Corporate
Finance Faculty, March 2010. 15 Frontier Economics (2013) “Exploring the impact of private equity on economic growth in Europe”, a report
prepared for Invest Europe (then the EVCA), May 2013.
Private Equity in Europe
- 14 -
equity participation increases the number of citations for a patent up to 25 per cent, while in the field of
biotechnology, R&D expenditure by private equity backed companies can be up to nine times more likely
to lead to patent creation than non-private equity financing of R&D.
Companies backed by private equity exhibit improved operational performance. Private equity has
generally (but not exclusively) been found to improve the operating performance of portfolio companies,
e.g. improving productivity as measured by EBITDA per employee. Part of the improved performance
relates to the active hands-on approach followed by the GP and enhanced budgeting. For example, it has
been found that private equity owned companies hold, on average, only about half as much cash on their
balance sheet as their publicly-owned peers.16 A study of European private equity deals executed between
1998 and 2014 found that — relative to non-private equity owned companies — private equity-owned
companies experienced faster sales growth and greater improvement in operating profitability.17
The private equity industry generates value and produces performance where others would not.
The industry often finds undervalued opportunities (“untapped potential”) in the market to achieve
(financial) returns and create value for investors. Private equity backed acquisitions of companies tend
to be bought at relatively low purchase prices. A study of European private equity deals found that
EBITDA-based valuation multiples were about 8 per cent lower than comparable acquisitions by
corporate acquirers (and a difference of over 10 per cent if the crisis period itself is excluded).18 A
successful investment would then be sold on at a higher multiple (i.e. both profits and the multiple
applied to those profits to value the company would be higher at the investment’s end than at its
inception).
Private equity backed companies are at least as resilient as other companies. Even though private
equity backed acquisitions of companies tend to involve substantial leverage — especially at the
beginning but this leverage is typically reduced over time — some studies suggest that private equity
backed companies are up to 50 per cent less likely to fail than non-private equity-backed companies
with similar characteristics.19 Likewise, there is evidence to suggest that the terms achieved with banks
can be superior to those achieved by corporate acquirers.20
In addition, if insurers and pension funds achieve better returns then, all else being equal, this will flow
through to higher values in pension pots and improved performance in life-insurance. In what
continues to be a low interest rate environment, this aspect has enhanced importance.
3.2 The private equity industry in Europe
Europe is both an important source of the funds invested by private equity fund managers, and an important
destination of investments by the private equity industry. In this section we provide a brief overview of the
industry.
16 Gao, Huasheng, Jarrad Harford, and Kai Li (2013) “Determinants of corporate cash policy: Insights from private
firms.” Journal of Financial Economics 109.3: 623-639. 17 Aleszczyk, Aleksander A., Emmanuel T. De George, Aytekin Ertan and Florin Vasvari (2016) "ADVEQ Research
Series on Private Equity Value Creation in Buyout Deals: European Evidence". 18 Aleszczyk, Aleksander A., Emmanuel T. De George, Aytekin Ertan and Florin Vasvari (2016) "ADVEQ Research
Series on Private Equity Value Creation in Buyout Deals: European Evidence". 19 See Deloitte (2015) “Private equity as a catalyst for growth in the EU”. 20 Ivashina, Victoria and Kovner, Anna (2011) “The private equity advantage: Leveraged buyout firms and relationship
banking” Review of Financial Studies.
Private Equity in Europe
- 15 -
Figure 3.2: Fundraising, investment and divestment by quarter (2007-2016) — European private equity
overview (€ bn)
Note: Country coverage — EEA, Former Yugoslavia, Switzerland and the Ukraine.
Source: Invest Europe.
As illustrated in Figure 3.2 above, fundraising has exhibited considerable volatility in the recent past. The
impact of the financial crisis is clear, particularly after Q4 2008. Before this date, funds raised within any given
quarter varied between €15–25 billion, whereas afterwards quarterly funds raised did not again exceed €15
billion until Q3 2013. This volatility reflects an interaction with the general business cycle (particularly the
recovery from the credit crunch) and, at a more granular level, the fundraising cycles of different funds (the
aggregate data is to a large extent driven by the activities of the very largest funds and fund managers21).
Regarding investments, before the financial crisis, the total level varied between €15 and €20 billion per
quarter. This reduced to around €5 billion in 2009. In more recent years, it has recovered to €12 billion.
The quantum of investment into portfolio companies has exhibited greater resilience than the flow of funds
into private equity during the financial crisis and its aftermath. There are two main drivers of this.
First, the private equity industry does not operate on a pay-as-you-go basis, i.e. institutional investors are
approached to commit funds and then subsequently this money is invested by the AIFM into portfolio
companies over a period of several years.
Second, the reduction in asset values associated with the financial crisis can be seen as a ‘buying
opportunity’ for the private equity industry.
There do not seem to be significant variations around the time of AIFMD and its two-year transposition
period. For several reasons — e.g. due to grandfathering and transitional provisions and the fact that most
private equity projects are relatively long-term — it is unlikely that we would be able to observe any
regulatory impact from these figures alone.
The dynamics of divestments are different again. The aggregate level of divestments was not significantly
affected by the downturn (the chart shows divestments at initial cost, i.e. any effect on the pricing of
divestment would not be apparent). The volume of divestment has gradually increased over the period,
reflecting the growth of the industry and the consequent accumulation of capital to be divested.
21 For example, nine out of 393 funds that raised capital accounted for over 50 per cent of the total amount raised in
2016. See Invest Europe (2016) “2016 European Private Equity Activity”.
0
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Fundraising Investments Divestments
Private Equity in Europe
- 16 -
3.2.1 Fundraising in Europe
As illustrated in Figure 3.3, the bulk of capital raised is for buyout funds. The amounts raised by buyout funds
display greater volatility and cyclicality than the amounts raised by other types of funds. In particular, the
share accounted for by growth funds clearly increased in 2010-2011 whereas that of buyout funds declined.
The proportion of fundraising for venture funds, on the other, appears to be relatively stable over time
accounting for around 10 per cent.
Figure 3.3: Evolution of fundraising across Europe by type of fund — rolling 12-month data (2007-2016)
Note: Country coverage — EEA, Former Yugoslavia, Switzerland and the Ukraine.
Source: Invest Europe.
Figure 3.4 shows the proportion of funds raised by GPs in different regions within Europe. The UK & Ireland
— i.e. the UK being where the largest European funds are most concentrated — have been consistently the
main location of the GPs raising funds, and accounted for more than half of the funds raised in 2007. During
the financial crisis, there was a substantial reduction in the proportion of fundraising by UK- and Ireland-
based GPs, however this region remains the primary location of fundraising. Similarly, the proportion of funds
raised by GPs based in Southern Europe reduced significantly during the Euro crisis.
Figure 3.4: Incremental fundraising by country of location of GPs — rolling 12-month data (2007-2016)
Note: Country coverage — EEA, Former Yugoslavia, Switzerland and the Ukraine.
Source: Invest Europe.
0%
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Total Venture Buyout Generalist Growth Mezzanine
0%
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CEE DACH France&Benelux Nordics Southern Europe UK&Ireland
Private Equity in Europe
- 17 -
In terms of geographic location of LPs, a significant fraction of funding is sourced from outside Europe (see
Figure 3.5), with the USA being particularly prominent. Whilst it is unwise to draw too firm conclusions due
to the scale of unclassified sources, there does appear to have been a step change around the time of the
credit crunch and subsequent Euro crisis whereby LPs from the UK & Ireland reduced exposure to private
equity in Europe, whereas LPs from France and the Benelux countries only did so on a temporary basis.
Since the cross-border flows of funds are an area where we might expect some AIFMD-related impacts, a
more detailed analysis of these data is discussed in Section 6.1, where we assess the impact of the AIFMD on
funds raised by the private equity industry.
Figure 3.5: Evolution of fundraising across Europe by geographic location of LPs — rolling 12-month data
(2007-2016)
Note: For clarity of presentation, the chart excludes capital gains as they account for a very small proportion of the overall funds.
Source: Invest Europe.
As shown in Figure 3.6, the main types of contributors to private equity funds are pension funds (18 per cent
in 2007, and 26 per cent in 2016), fund of funds (11 per cent in 2007, and 9 per cent in 2016) and insurance
companies (8 per cent in 2007, and 9 per cent in 2016). In 2007 another key provider of funding to the private
equity industry were banks (accounting for 12 per cent) but their importance has since declined (to only 4
per cent in 2016). It should be noted that these figures, while based on the entire universe of private equity
funds, is most likely to be representative for large buyout funds as due to their size they generally dominate
industry-wide averages.
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Outside Europe Europe Unknown
Private Equity in Europe
- 18 -
Figure 3.6: Evolution of fundraising across Europe by type of investor
Note: Country coverage — EEA, Former Yugoslavia, Switzerland and the Ukraine.
Source: Invest Europe.
3.2.2 Investment by GPs in portfolio companies
Figure 3.7 shows the proportions of investments in the region/country where the portfolio company that is
receiving the investment is located. The geographical distribution of investment is notably more balanced and
less variable than the distribution of incremental fundraising (see Figure 3.5 above) where the UK dominates.
The DACH region, France and Benelux, and the UK & Ireland together account for about 80 per cent of all
private equity investments. That said, the share of investments located in the UK & Ireland has gradually
declined.
Figure 3.7: Evolution of investment by location of investment — rolling 12-month data (2007-2016)
Note: Country coverage — EEA, Former Yugoslavia, Switzerland and the Ukraine.
Source: Invest Europe.
We also analysed the difference between funds raised and funds invested by region.
12%
11%
3%
8%
18%8%
3%
4%
33%
2007
Banks Fund of funds
Government agencies Insurance companies
Pension funds
4%9%
4%
9%
26%
7%
7%
3%
31%
2016
Private individuals
& Family offices
Sovereign wealth funds
Academic institutions /
endowment funds
Other
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CEE DACH France&Benelux Nordics Southern Europe UK&Ireland
Private Equity in Europe
- 19 -
First, we compared the amount of fundraising by GPs based in a region and the investment made by those
GPs in it. This is intended to capture the amount of funds still available to invest. Our analysis shows that
the UK & Ireland experienced positive fund flows in most years, other than during 2009-2010 when the
credit crunch was at its peak and the Euro crisis was starting to unfurl. The picture is more varied for
other regions, however the data indicate that the difference between funds raised and funds invested in
the DACH region has been declining over this time period.
Second, we compared the funds raised by the location of the GP with the location of the portfolio
companies invested in. This speaks to the scale of cross-border flows within the private equity industry.
Our analysis shows that the UK & Ireland region is typically a net exporter of equity.
3.2.3 Divestments and overall performance
Figure 3.8 shows the proportion of divestments by the region of the portfolio company. The geographical
distribution of divestment is more balanced than that of fundraising. Funds divested from portfolio companies
located in DACH, France and Benelux, and the UK & Ireland roughly account for about 70 per cent of all
divested funds.
Figure 3.8: Evolution of divestments by region — rolling 12-month data (2007-2016)
Note: Country coverage — EEA, Former Yugoslavia, Switzerland and the Ukraine.
Source: Invest Europe.
The performance of a fund is usually expressed as Internal Rate of Return (IRR).22 IRR is a discount rate at
which the investments going into the fund and the cash flowing out of the fund balance each other, i.e., a
discount rate at which the net present value of the investment is equal to zero. This metric gives a
standardised measure of the attractiveness of investments which can be compared across different
investments. The higher the IRR, the more profitable a given investment opportunity is likely to have been.23
The average IRR targeted should also be higher for riskier investments. This means that the private equity
industry should offer higher returns to investors than, for instance, a broad equity index such as FTSE 100 or
MSCI Europe. Within the private equity industry, IRR should be higher for venture investments than for
buyouts. As reported by Bain & Company (2015), European private equity (buyout funds) indeed
22 Another commonly used measure of performance are multiples, which capture the ratio of the value of the returns
to the amount of money invested. 23 It is worth noting that the length of the period from investment to divestment affects the IRR. The same multiple
(e.g. 3 times) would correspond to a 25 per cent IRR after a five-year holding period but only to a 20 per cent IRR
after six years etc.
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CEE DACH France&Benelux Nordics Southern Europe UK&Ireland
Private Equity in Europe
- 20 -
outperformed public markets, but only in a longer time frame (see Figure 3.9). It should also be noted that
there is a wide variation in the performance of different funds.
Figure 3.9: Private equity vs public markets — IRR comparison
Source: Bain & Company (2015), “Global Private Equity Report 2015”, p. 20.
24
9
15 16 17
30
8
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)
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AIFMD — Background and Purpose
- 21 -
4 AIFMD — Background and Purpose
4.1 The motivation for introducing the AIFMD
The AIFMD was intended to provide regulatory oversight of alternative investment fund managers, including
private equity managers, hedge fund managers, real estate managers, and managers of other alternative
investments operating within the European Union.
In a nutshell, the AIFMD imposes a number of requirements on Alternative Investment Fund Managers
(AIFMs), including in the fields of:
Authorisation and marketing;
Disclosure and reporting;
Capital obligation/adequacy; and
Organisation and governance.
The vast majority of the requirements apply only to private equity fund managers with assets under
management above €500 million (“above-threshold” GPs). These managers are fully in scope and need to
become authorised under the AIFMD. The rationale for excluding managers of smaller funds (i.e. closed-
ended, unleveraged funds below the €500 million threshold) from the scope of the Directive was that they
are unlikely to have any systemic impact on the economy and complying with the same set of rules as larger
funds would not be proportionate given their size.
The overall motivation and aims for the AIFMD are set out in its Recitals 2 and 4:
“The impact of AIFMs on the markets in which they operate is largely beneficial, but
recent financial difficulties have underlined how the activities of AIFMs may also serve
to spread or amplify risks through the financial system. Uncoordinated national
responses make the efficient management of those risks difficult.” (Recital 2)
“This Directive aims to provide for an internal market for AIFMs and a harmonised and
stringent regulatory and supervisory framework for the activities within the Union of all
AIFMs.” (Recital 4)
The AIFMD aims to bolster the protection afforded to investors into AIFs. The AIFMD’s protection measures
include reliable and objective asset valuation, robust governance controls, sound remuneration policies to
ensure alignment of interest, and minimum capital requirements. The case for why professional investors
require such protections is not made within the AIFMD’s text. Whilst the accompanying European
Commission Impact Assessment24 references a few sources on investor protection, only one considers
private equity (cf. hedge funds). This source is a 2008 survey conducted globally amongst institutional
investors by Pricewaterhouse Coopers:25 this does identify a few areas of concern amongst European
investors, e.g. 46 per cent were dissatisfied with the reporting of management fee structures by GPs, and 35
per cent similarly rated disclosure of conflicts of interest to be poor. On the other hand, evidence of actual
24 The European Commission’s Impact Assessment was revised substantially after review by the Impact Assessment
Board. The revised version can be accessed here:
http://ec.europa.eu/internal_market/investment/docs/alternative_investments/fund_managers_impact_assessment.p
df. This was still subjected to substantial criticism, e.g. by Europe Economics (2009) “Quick Impact Assessment” on
the AIFMD, conducted for the European Parliament. 25 PwC (2008) “Transparency versus returns: The institutional investor view of alternative assets”.
AIFMD — Background and Purpose
- 22 -
detriment encountered by institutional investors is not provided, i.e. this is presumed not demonstrated. It
is also unclear what proportion of European GPs were considered to be poor in making such disclosure. It
is also worth noting that the AIFMD was conceived and implemented in a politicized context with some
stakeholders raising (not necessarily substantiated) concerns about the private equity industry.26
The Directive came into force on 21 July 2011 and envisaged a two-year transposition period. That said,
some Member States required a longer period of time to fully implement the AIFMD; even in mid-2015,
several Member States (largely newer ones) had not achieved full transposition.27 As of 13 January 2017, all
28 Member States had the AIFMD transposed into their national regulation.28
4.2 Regulating private equity and the impacts expected at the time of the
AIFMD’s implementation
In this sub-section we present an overview of how the Directive regulates the private equity industry,
including its definitions, and a short summary of the requirements and rules set out in the AIFMD. This section
also includes a high-level analysis of the potential impacts the AIFMD might have had on the industry and
broader markets, which are investigated more fully in Chapters 5–8.
4.2.1 Basic AIFMD definitions
The AIFMD introduces various concepts and definitions that relate to the alternative investment sector,
including private equity.29 These are a natural starting point in describing what it does, and we set these out
below.
An ‘AIF’ is an Alternative Investment Fund. An EU AIF is:
an AIF which is authorised or registered in a Member State under the applicable national law; or
an AIF which is neither authorised nor registered in a Member State, but has its registered office
and/or head office in a Member State.
An ‘AIFM’ is an Alternative Investment Fund Manager (i.e. someone responsible for managing an AIF). An
EU AIFM has its registered office in a Member State, whilst a non-EU AIFM does not.
Although private equity is not itself defined in the AIFMD, the Directive introduces a couple of differentiators
to distinguish between the wide range of AIFMs covered. Criteria include:
whether a fund is closed- or open-ended;
the existence of redemption rights; and
the absence of leverage at the fund level.
As such, it is recognised (for example, in Recital 34) that private equity funds tend to be closed-ended and
not to have redemption rights (at least within five years).
26 See, for example, The Economist (2007) “The trouble with private equity” which describes some critiques that “private
equity is routinely charged with”, such as weak disclosure and the use of high levels of debt
— http://www.economist.com/node/9441256. The extent to which these concerns are valid in the context of the
private equity industry has not always been strongly evidenced. Similarly, the PwC work “Transparency versus
returns” refers to the “mistrust manifested [about private equity] in the European media and among the political
classes”. 27 http://www.kpmg.com/LU/en/IssuesAndInsights/Articlespublications/Documents/AIFMD-transposition-overview-
08052015.pdf. 28 However, “[d]ue to the lack or delay of the notification of national transposition measures or their incompleteness,
an Infringement proceeding for non-communication of the national transposition measure is pending against Poland”
https://ec.europa.eu/info/publications/alternative-investment-fund-managers-directive-transposition-status_en. 29 It also applies to the hedge fund sector, but this is outside of our field of interest in this study.
AIFMD — Background and Purpose
- 23 -
All of these factors are directly linked to the de minimis threshold based on assets under management. A
‘sub-threshold fund manager’ is one with total assets under management below the €500 million threshold
and whose portfolios of AIFs consist of funds that are unleveraged and have no redemption rights exercisable
during a period of five years following the date of initial investment in each fund. Fund managers that satisfy
those conditions remain outside the full scope of the AIFMD. However, although not subject to full
compliance, they need to comply with registration and certain reporting obligations, as well as national rules
which are (largely) determined by each Member State separately.
The AIFMD is EEA-relevant, i.e. these definitions can also apply (once transposition has taken place) to AIFs
and AIFMs in Iceland, Norway and Liechtenstein. The Channel Islands (e.g. Jersey) and Switzerland, for
example, are outside of the EU and the EEA.
The Directive applies directly to EU/EEA-based AIFMs managing AIFs within the EU/EEA. Only these can
benefit from the internal marketing and management passport. Non-EU/EEA AIFMs willing to market their
funds in the EU/EEA and EU AIFMs with non-EU AIFs cannot do that via the AIFMD passport and, therefore,
need to rely on National Private Placement Regimes (NPPRs).
4.2.2 Overview of the AIFMD’s requirements and their potential impacts
The AIFMD contains multiple provisions affecting private equity. As mentioned above, the main motivation
for it was to improve financial stability and to protect investors from inadequate information or misconduct.30
We set out — in brief — what we consider to be its most important aspects below along with their possible
impacts. In the following chapters, we examine the extent to which these hypothesised effects are valid based
on the results of our research and the stakeholder engagement process.
Authorisation. The AIFMD introduced the EU passport — an authorisation for EU managers allowing
them to freely manage, operate and market their EU funds across the EU. Fund managers above the €500
million threshold are required to be AIFMD-authorised, while sub-threshold fund managers — being
largely outside the scope of the Directive — are not required to seek full authorisation (though they still
have to be registered) but can choose to become fully AIFMD-compliant if they wish. Non-EU fund
managers do not need to seek authorisation under the AIFMD and cannot, at this stage, benefit from the
internal market passport. All funds managed by non-EU managers, as well as non-EU funds managed by
EU managers, can only be offered to EU investors under the NPPRs, to the extent they are available, and
subject to the national conditions in a given EU Member State. Authorisation under the AIFMD can also
affect, under certain circumstances, co-investment vehicles. Whether or not co-investment vehicles are
categorised as AIFs may differ between Member States based on national interpretations and the specific
facts. There are several possible impacts related to co-investment structures. In cases where co-
investments are captured by the national implementation of the AIFMD the cost of syndication might
increase for AIFMs. Reduced syndication and risk diversification among many parties, could in turn
discourage some investors from investing in private equity. We return to this topic at 5.2.
Marketing. While the AIFMD sets out a number of marketing rules, there is a certain level of discretion
and it does leave room for national regulators to design and tailor these themselves. On a general level,
the rules around marketing, including the introduction of the internal market passport, were aimed at
creating a more homogenous regulatory framework within the EU. If AIFMs and investors find it easier
30 It should be noted that the AIFMD applies to a number of asset classes with different characteristics. As a result, it
is possible that some of the requirements are more tailored or adequate for one asset class than another. In
particular, the extent to which the private equity industry (as compared to other asset classes included in the scope
of the AIFMD) contributes to financial instability or is characterised by insufficient investor protection was not
unequivocally established in the literature either before or after the AIFMD was implemented. Moreover, the private
equity industry is characterised by a long-standing push towards self-regulation, as shown by the industry’s
Professional Standards Handbook (for more details see Invest Europe (2015), “Professional Standards Handbook”.)
AIFMD — Background and Purpose
- 24 -
to operate across EU borders this would be pro-competitive. A stronger and more deeply integrated
single market is likely to facilitate day-to-day operations for many types of funds. For investors that could
mean increased variety of products available, and possibly lower fees for investing in AIFs. A more efficient
European capital market might also reduce the overall cost of capital and facilitate capital accumulation.
Ultimately, through consequent capital deepening, it might lead to a higher capital to labour ratio and,
ultimately, a higher level of output per worker. On the other hand, the marketing rules, as well as the
third country regime, might also affect the distribution of AIFs and/or AIFMs between the EU and the
rest of the world. Increasing regulatory barriers to marketing funds in the EU might discourage some
funds and/or fund managers outside the EU from looking for investors in Europe. This would mean that
there would be a lesser competitive pressure from non-EU AIFMs on the funds and/or fund managers
operating within the EU. As a result, it is possible that EU AIFMs might demand relatively higher fees.31
Ultimately this could slow economic growth. Moreover, with more limited choice of alternative
investment products European investors would be less able to diversify risk and may be able to achieve
lower risk-adjusted returns than otherwise. We discuss the operational aspects of these rules at 5.3 and
the actual impacts on marketing and fundraising throughout Chapter 6.
Depositaries. For each fund managed, the AIFM needs to ensure that a single depositary is appointed.32
The main functions of the depositary are threefold: (i) safekeeping the fund's assets; (ii) the day-to-day
administration of the fund's assets; and (iii) the control of the fund’s operation. The objective of this
requirement is to limit investors’ exposure to losses arising from potential fraud or incompetence on the
part of the AIFM. However, it is worth noting that the institutional investors confirmed in our fieldwork
that they do not see the scope for fraud by a private equity AIFM as a real world concern, given the due
diligence and research undertaken by institutional investors before investment, the evidencing of (change
in) ownership through extensive legal documentation (e.g. a sale and purchase contract) and the relatively
low (in contrast to, say, a typical hedge fund) transaction volume. Indeed, depositaries — as a particular
way of protecting investors’ interests — were not commonly used in the private equity industry before
the implementation of the AIFMD, at least outside France. This means that the market for depositaries
servicing the private equity industry was significantly under-developed relative to the post-AIFMD need
across much of Europe and that this obligation to appoint a depositary for each of the managed funds has
tended to increase overall costs for AIFMs. The main discussions around depositaries are at 5.4 and 8.2.1
below.
Minimum capital requirements. The AIFMD requires all managers of AIFs to hold at least €125,000
(€300,000 if funds are internally managed) in liquid assets which could be easily converted to cash. In
addition to that, where and when applicable, AIFMs are required to hold 0.02 per cent of the amount by
which the assets under management exceed €250 million. The total minimum capital requirement is
capped at €10 million. We discuss this at 5.5 in the next chapter.
Transparency and reporting. The AIFMD lays out a series of transparency requirements that AIF
managers have to comply with.
The Directive specifies information to be provided to investors (this includes information on the
identity of the AIFM, the AIF’s depositary and the procedures and methodology of valuing assets, as
well as a description of the investment strategy and objectives, along with how these might change, of
the AIF’s liquidity risk management and of all fees, charges and expenses); and annual report
requirements (including a balance sheet, an income and expenditure account, a report on the activities,
and data on remuneration).
The objective of these requirements is to provide investors with the information relevant for their
investment decisions. In theory, increased transparency can reduce adverse selection (i.e. the risk of
investing in low quality AIFMs due to the lack of information which would enable them to distinguish
31 We examine this hypothesis more closely in Section 7.5. 32 Unless the fund operates across more than one country. For each fund operating across many jurisdictions there
needs to be one depositary in each of the jurisdictions.
AIFMD — Background and Purpose
- 25 -
between high quality and low quality managers) and lead to more informed decisions by investors. A
reduction in the overall riskiness and better capital allocation on financial markets could then result,
provided that before the AIFMD investors did not have equal access to all the relevant information
(i.e. the AIFMD has to result in better and useful information, not simply more, to create such
benefits). That said, to the extent that investors’ confidence increases not because of additional
information available, but simply because the AIFM market is regulated, i.e. regulatory badging effects,
there could be adverse consequences due to investors being potentially discouraged from conducting
their own equally thorough due diligence (though this is not very likely).
The AIFMD also requires fund managers to provide information to competent authorities on liquidity,
current risk profile, and main categories of assets in which the AIF invested. This is intended to
improve monitoring and supervision of the private equity industry.
The extent to which these hypothetical impacts actually materialised in the market is analysed at 5.6.
Portfolio company disclosure. The AIFMD imposes stronger disclosure obligations on managers regarding
their acquisitions of major holdings in non-listed EU companies.
The manager is required to notify the competent authorities and the acquired company (along with
its shareholders) of the proportion of voting rights held.
When the manager acquires control over the portfolio company, additional information should be
provided regarding the identity of the manager, the conflict of interest policy, and communication
policy (especially in regards to its employees). In addition, the manager has to ensure that annual
reports include information on the company’s operational and financial developments as well as its
likely future.
To prevent asset-stripping, during the first 24 months after the acquisition of control the manager is
not allowed to facilitate, support or instruct any distribution, capital reduction, share redemption and
/ or acquisition of own shares by the company.
The objective here is to provide relevant information to stakeholders other than the private equity
investors themselves. On the other hand, depending on the confidentiality controls imposed at the level
of a portfolio company, transparency requirements could result in board level, commercially sensitive
information becoming more widely available. The intention of the “asset-stripping” provisions is to
prevent suboptimal behaviour and to encourage investments and management strategies creating value
through growth, innovation and/or efficiency rather than asset-stripping. We discuss these rules further
at 5.8 below.
Leverage. Under the AIFMD, fund managers are required to set leverage limits in each of the funds they
manage, and such limits have to be reasonable and complied with at all times. Where a fund is substantially
leveraged — which appears to be a rarity in the European private equity industry given that typically
private equity funds do not use leverage at the fund level33 — then the fund’s managers are obliged to
provide additional information to the relevant competent authorities regarding the overall level of
leverage as well as the break-down between leverage arising from borrowing of cash or securities and
leverage embedded in financial derivatives. The primary objective of the leverage rules is to discourage
over-levering and, as a result, improve financial stability. The underlying premise is that private equity
funds were over-levered in the first place — but, contrary to hedge funds, private equity funds do not
tend to have large volumes of debt at the fund level, which implies that the impact of the leverage
requirements is likely to be small or non-existent simply because they will rarely have been applicable.
We examine the extent to which the leverage rules are binding for private equity and discuss the impacts
they had on the asset class at 5.9.
33 In our fieldwork, 75 per cent of GPs responding to our survey did not use in-fund leverage at all. None “typically”
used leverage resulting in a debt-to-equity ratio above three.
AIFMD — Background and Purpose
- 26 -
Remuneration. The AIFMD requires managers to put in place remuneration policies and practices, which
would mitigate conflicts of interest and promote effective risk management. In particular, the AIFMD
imposes some limitations on guaranteed bonuses, and the proportion, form and timing of variable pay.
The aim of these rules is to better align managers’ and investors’ objectives and to mitigate potential
incentives for managers to take socially unbeneficial risk at the cost of investors. On the other hand, if
the requirements are too restrictive, they could decrease the incentives to innovate and take risks which
could be beneficial for investors. Our analysis and conclusions around these impacts are at 5.10.
As with any regulatory intervention, benefits can only be achieved if behaviours change, and the latter means
that there are some associated costs and also the risk of unintended consequences. From the investors’
perspective, if the benefits are not sufficient to justify the costs, the AIFMD might deter them from investing
in private equity funds. Alternatively — if the costs are not passed onto investors but instead are
predominantly borne by private equity firms themselves — they might create a barrier to entry for new
private equity firms or to expansion for firms already in the market, and thus damage competition. The
following chapters (Chapters 5 and 6) assess in more detail what impacts each of the above provisions has
had on the operations, functioning and fundraising activities of private equity practitioners.
Impact on Operations and Organisational Change
- 27 -
5 Impact on Operations and
Organisational Change
5.1 Introduction
Based on our survey among above-threshold GPs, i.e. those that are directly within scope and need to be
fully compliant, the most significant organisational changes were induced by the AIFMD requirements around:
(i) authorisation and notification, (ii) depositaries, and (iii) marketing. Moderate changes were required in
response to the rules on: (i) transparency and reporting, (ii) portfolio company disclosures, and (iii) minimum
capital requirements. The least disruption was due to the requirements related to leverage (as these were
most often not relevant or applicable to private equity fund managers), and remuneration.
Figure 5.1: The scale of organisational changes induced by the AIFMD — above-threshold GPs
Question: Please indicate the scale of organisational changes induced by each area of the AIFMD.
Source: Europe Economics, above-threshold GP survey, based on 23 responses.
Even though sub-threshold GPs are generally outside the scope of the AIFMD, the Directive’s implementation
may still have had a direct or indirect impact on some aspects of their operations. In particular, the
adjustments introduced by Member States to their NPPRs post-AIFMD might have had significant implications
for sub-threshold GPs. In addition, there are differences in national transposition and some Member States
even decided to apply the Directive to all private equity firms, regardless of their size.
Since the nature of the consequences of the AIFMD is likely to be different for each of these groups, in the
following sections — where appropriate — we distinguish between the impacts on above- and below-
threshold GPs. Where relevant and in particular as regards marketing, we also highlight the views of non-
EU/EEA GPs, which — despite being outside the scope of the AIFMD — also observed some organisational
changes associated with the Directive.
52%
48%
52%
26%
26%
9%
13%
4%
13%
39%
30%
22%
39%
48%
35%
43%
17%
13%
9%
13%
17%
17%
13%
26%
26%
17%
30%
9%
9%
17%
13%
30%
17%
61%
43%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Authorisation and notification requirements
Marketing
Depositaries
Minimum capital requirements
Transparency and reporting
Valuation requirements
Portfolio company disclosure
Leverage
Remuneration
Significant Moderate Small or limited Negligible or none
Impact on Operations and Organisational Change
- 28 -
5.2 Authorisation and notification requirements
Above-threshold GPs
Our fieldwork indicated that the process necessary to achieve authorisation under the AIFMD involved
organisational change at all GPs affected.
The authorisation requirements are widely seen by GPs as neither accommodating the nature of private
equity (i.e. they were not adequately adapted from rules aimed at hedge funds) nor the nature of private
equity firms (i.e. the majority of GPs, even those above the AIFMD threshold, are generally independent,
tightly controlled and owner-managed entities). GPs were required to consider — and in particular —
document policies in, for example, risk management and on conflicts of interest that investors do not tend
to show an interest in (either because they already have access to this kind of information or because it is
not relevant). On the other hand, a few firms did see benefits of the process: partly refreshing policies, but
also — and perhaps more importantly for pre-existing legal and compliance personnel — “gaining the
attention” of the deal-makers for such activity.
For some firms, the changes required were relatively small-scale, e.g. reviewing pre-existing processes. These
tended to be the larger GPs, including those GPs that were already listed at the time of the AIFMD’s
implementation. Such firms might well be better resourced, e.g. with an in-house legal team and a dedicated
investor relations team, providing the necessary resources to negotiate the authorisation process.
The authorisation process is seen as one that could take several person-weeks or even several months to
accomplish. The National Competent Authorities in many Member States had no prior experience in the
regulation or supervision of alternative investment fund managers including private equity, and this may have
made for a less pragmatic approach in interpreting the AIFMD, driving up the costs experienced.
EU/EEA vs non-EU/EEA GPs
The organisational impacts observed by the non-EU/EEA GPs that participated in our survey were equally
distributed between “significant”, “moderate” and “small or limited”. This suggests that a non-negligible
proportion of such GPs — despite being technically outside the scope of the AIFMD — were affected by the
Directive. Based on the information provided in the survey, it is not clear whether these impacts are due to
the rules comprising marketing under the NPPRs (including notifications), or other indirect channels.
Sub-threshold GPs
Sub-threshold GPs do not need to get authorised under the AIFMD; they are however subject to a simplified
registration and reporting regime in the relevant jurisdiction and are exempted from other AIFMD
requirements.
5.2.1 Co-investment vehicles
The AIFMD requires co-investment vehicles to be treated as AIFs. Our survey results suggest that a majority
of above-threshold GPs did not have to do any re-organisation of existing co-investment structures. On the
other hand, more than half of the respondents agreed that these rules increased their costs. Less than a
quarter of the GPs somewhat agreed that the new requirements led to a better alignment of incentives
between GPs and LPs, and almost 30 per cent disagreed (with 11 per cent disagreeing strongly with this
statement).
Impact on Operations and Organisational Change
- 29 -
Figure 5.2: Impact of rules around co-investment vehicles — GPs
Question: If you have been affected by the requirement to treat co-investment vehicles as AIFs, how do you believe this has impacted on you?
Source: Europe Economics, GP survey, based on minimum 18 responses.
5.3 Marketing rules
Depending on the characteristics of the AIFMs and their AIFs, there are two main ways of actively marketing
funds to EU investors: through the AIFMD passport and through the NPPRs. Given that the marketing options
for each of these groups are very different, so the effects of the AIFMD will be very different for these groups.
In short:
Table 5.1: Marketing options for private equity fund managers, based on different criteria
Passport NPPRs
Above-threshold fund
managers
EU AIFM + EU AIF
EU AIFM + non-EU AIF
Non-EU AIFM + EU AIF No third country passport
available
Non-EU AIFM + non-EU
AIF
No third country passport
available
Sub-threshold fund
managers
EU AIFM Possibility to opt in
Non-EU AIFM No third country passport
available
Source: Europe Economics.
This is not strictly a matter of choice — GPs cannot simply choose to comply with one or the other though
they have in principle the ability to locate their funds or to set up a subsidiary AIFM in a jurisdiction that
satisfies their or their investors’ needs. This is why it is necessary to consider the implementation of the
AIFMD passport along with the rules comprising the NPPRs. Each of the scenarios is discussed in more detail
below.
Finally, as a reminder, it is important to keep in mind that the AIFMD only covers / affects marketing to EU
professional investors. Marketing to non-EU investors is outside the scope of the AIFMD.
Above-threshold GPs
Overall, survey respondents considered the marketing rules as one of the most organisationally burdensome
aspects of the AIFMD and felt that, compared to five years ago, the marketing process had become more
costly and time consuming both within and outside the EU (even though the latter, by its nature, is not within
the scope of the AIFMD).
Cost: The increase in cost seems to be more substantial for marketing within the EU, where 14 out of
20 above-threshold GPs considered that the cost of marketing had increased significantly. This is largely
attributable to the AIFMD, with many above-threshold GPs — both in the survey and in the interviews
— indicating specifically that the AIFMD had made the marketing process significantly harder, slower and
more costly.
37%
6%
22%
26%
17%
50%
26%
56%
17%
6%
11%
11%
17%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
This has better aligned incentives of GPs and investors
This has increased costs
This has led to a re-organisation of how we structure co-investment
Strongly agree Somewhat agree Neither agree nor disagree Somewhat disagree Strongly disagree
Impact on Operations and Organisational Change
- 30 -
Time: According to the survey, 17 out of 21 above-threshold fund managers think that the time
taken/needed for marketing activities within the EU, has significantly or somewhat increased (Figure 5.3).
The different regulatory regimes and regional economic environment could play a role in this, but it might
(at least to some extent) also capture the effect of the AIFMD itself.
It is also worth noting that four out of 21 GPs considered that the time taken to raise funds in the EU
had reduced, which may indicate that the AIFMD passport has been partly successful for at least some
firms. On the other hand, globally, the time taken to close a funding round has been declining in the past
few years.34 This may be due to increased appetite from investors rather than increased organisational
efficiency by GPs and their advisers. This provides an alternative explanation, namely that the additional
grit in the mill in Europe due to the AIFMD is a regulatory drag on private equity’s development there,
but has simply not affected all GPs homogenously.
Figure 5.3 Cost of and time taken / needed for marketing — Above-threshold GPs
Question: Please indicate the extent to which the following dimensions have changed compared to five years ago: (1) The cost of marketing within the EU/EEA;
(2) The time it takes to undertake fundraising within the EU/EEA; (3) The cost of marketing outside the EU/EEA; (4) The time it takes to undertake fundraising
outside the EU/EEA.
Source: Europe Economics, above threshold GP survey, based on minimum 11 responses.
In order to establish how the AIFMD compares with other developments and circumstances that may have
an impact on marketing, we asked above-threshold GPs how, if at all, different factors affected the process
of marketing their funds to EU-/EEA-based investors and, for comparison, non-EU/EEA-based investors (even
though the latter case is not within the scope of the AIFMD). Their responses are illustrated in Figure 5.4.
34 Bain & Company, Inc. (2016) “Global Private Equity Report 2016”. Bain & Company’s analysis of data from PREQIN
indicates that the average number of months to close for a global fund reduced notably in 2014 and 2015 from the
levels seen in 2008–2013.
14
4
6
7
0
5
10
15
20
Within the EU Outside the EU
Cost
Increased significantly Increased somewhat Remained the same
9
8
4
0
5
10
15
20
Within the EU
Time
Decreased somewhat Decreased significantly
Impact on Operations and Organisational Change
- 31 -
Figure 5.4 Factors affecting the ease of marketing — above-threshold GPs
Question: Thinking about the marketing process inside the EU/EEA in the round, how do you believe the following factors have contributed to any change in the
ease of marketing your fund to EU- or EEA-based investors compared to five years ago?; Thinking about the marketing process outside the EU/EEA in the round,
how in your opinion have the following factors contributed to any change in the ease of marketing your fund to non-EU/EEA based investors compared to five
years ago?
Source: Europe Economics, above-threshold GP survey, based on minimum 19 responses.
To facilitate the comparison of the contributing factors, we assigned each response a score, ranging from 1
to 5: 1 if the respondent indicated that the factor made the marketing process significantly easier, and 5 if the
respondent indicated that the factor made the marketing process significantly harder. The average ‘hindrance’
score was calculated by taking the average of all survey responses (see Table 5.2). A higher ‘hindrance’ score
indicates the particular factor made the marketing process significantly more difficult.
Based on this analysis, we found that “global macro / market developments” is the top factor with a positive
impact on marketing to both EU-based and non-EU-based investors. The low interest rates prevalent in major
economies in the past few years may have helped investors to venture out from traditional investment
instruments to alternative assets, which in turn, made the marketing process easier for EU-based investors.
The gradual economic recovery from the credit crunch and Euro crisis might also have positively influenced
the marketing process as investors have had more money or felt more confident to invest.
Table 5.2: Average 'hindrance' score — above-threshold GPs
To EU/EEA-
based investors
To non-EU/EEA-
based investors
Global macro/market developments 2.64 2.52
Macro/market developments specific to the EU/EEA 2.95 3.00
US regulatory & tax developments 3.30 3.53
Non-US/EU regulatory & tax developments 3.30 3.32
EU/EEA regulatory & tax developments (not AIFMD) 3.84 3.53
The AIFMD 4.04 3.41
Evolving in-house strategy or strategies of other GPs 2.79 2.72
Evolving strategies by LPs invested in fund(s) 2.68 2.72 Question: Thinking about the marketing process inside the EU/EEA in the round, how do you believe the following factors have contributed to any change in the
ease of marketing your fund to EU- or EEA-based investors compared to five years ago? ; Thinking about the marketing process outside the EU/EEA in the round,
how in your opinion have the following factors contributed to any change in the ease of marketing your fund to non-EU/EEA based investors compared to five
years ago?
Source: Europe Economics, above-threshold GP survey, based on minimum 19 responses.
2
1
1
1
3
10
8
3
5
5
5
6
15
14
8
2
11
8
4
3
4
6
6
5
1
1
1
3
1
5
12
1
2
0 5 10 15 20
Global macro/market developments
Macro/market developments specific to
the EU/EEA
US regulatory & tax developments
Non-US/EU regulatory & tax
developments
EU/EEA regulatory & tax developments
(not AIFMD)
The AIFMD
Evolving in-house strategy or strategies
of other GPs
Evolving strategies by LPs invested in
fund(s)
To EU/EEA based investors
Significantly easier Slightly easier Made no difference
3
1
2
3
7
5
1
2
1
3
9
10
11
14
11
13
15
9
1
3
6
4
3
3
2
1
2
2
1
4
4
1
0 5 10 15 20
To non-EU/EEA based
investors
Slightly harder Significantly harder
Impact on Operations and Organisational Change
- 32 -
On the other hand, regulation in the EU/EEA — not least the AIFMD — has hindered the process of
marketing to EU- and EEA-based investors. According to our survey, the AIFMD and EU/EEA regulatory and
tax developments are the top two factors that made the marketing process to EU-/EEA-based investors
significantly more difficult. In fact, 76 per cent of all GPs thought that the AIFMD made the marketing process
to EU-/EEA-based investors significantly harder. Even though marketing to non-EU/EEA investors is not
directly within the scope of the AIFMD, 30 per cent of respondents nevertheless thought the AIFMD had a
negative impact on the marketing process to non-EU/EEA-based investors.
As the survey respondents’ answers are primarily based on their last marketing experience, we assessed if
those whose last fundraising was after 2014 (AIFMD’s implementation date in most countries) had different
opinions than those whose last fundraising was before 2014. We found that those whose last fundraising was
after 2014 were more likely to have negative opinions about the AIFMD. Otherwise, the sentiment that the
AIFMD has made marketing to EU-based investors more difficult is similar regardless of the fund strategy or
the location of the GP.
The above findings were supported by the GPs who participated in our interviews; a large majority of them
elaborated on the difficulties in marketing their funds in the EU/EEA due to the AIFMD. In general, the process
got slower and more expensive. Moreover, some of the interviewed GPs suggested that the marketing
requirements meant that more time and effort needs to be put in the upfront preparations. This was
perceived by some GPs as a benefit (i.e. the AIFMD forcing fund managers to develop processes and
strategies) but most viewed this as a source of annoyance and inefficiencies, especially since in the case of
private equity the terms of fundraising, which are set out in the initial phase of the process, may be altered
as the fundraising progresses as a result of negotiations with LPs. As such, some of the Directive’s
requirements are incompatible with the private equity fundraising process.
The interviews also suggested that the increase in both time and cost was (at least partially) attributed to
differences in how the AIFMD was implemented across Europe. This meant that, first of all, the regulation
and relevant requirements had to be analysed and understood on a country-by-country basis, but also
continually monitored in case of any changes. Many GPs recognised this as a significant driver of the initial
cost of marketing post-AIFMD as they required local legal advisers or compliance consultants in each
jurisdiction to ensure compliance with the national rules. Alternatively, some GPs had taken it upon
themselves to understand the national requirements and/or accepted a higher regulatory risk of their
activities in those Member States. Some GPs also indicated that the inconsistencies in the implementation of
the AIFMD across the EU created a barrier for non-EU managers willing to market their funds in the EU (see
Section 6.2 for a more detailed discussion of this issue).
The costs were usually less burdensome for larger funds (e.g. because they already had compliance and legal
teams), and more established funds (which often could rely on reverse solicitation rather than the AIFMD
passport).
On the other hand, while many of the interviewed GPs agreed that the authorisation and marketing
requirements were burdensome and discouraging them from operating on a pan-European scale, very few
claimed that the requirements actually affected their marketing strategies in a significant way. That said, a
large group recognised that because of all the upfront pre-marketing requirements of the AIFMD they
re-evaluated their strategies more carefully, i.e. they considered whether the extra time and cost of
authorisation/notification and marketing in a particular Member State could be justified given their investor
base (actual and potential) in that jurisdiction.
Very few of the interviewed GPs believed that marketing to non-EU/EEA-based investors significantly changed
due to the AIFMD. Seven out of 11 above-threshold European GPs said there was no change — neither in
their strategies/procedures nor in investor’s sentiment. In fact, several pointed out that investors outside the
EU/EEA are not aware of the existence of the Directive, which suggests that the AIFMD has not increased
investors’ confidence in European funds due to them being regulated. In other words, while the AIFMD has
Impact on Operations and Organisational Change
- 33 -
not made marketing to non-EU/EEA investors significantly harder, it also has not helped European GPs in
reaching non-European investors.
EU/EEA vs non-EU/EEA GPs
While EU managers can benefit from the EU passport, non-EU managers can only market in the EU under
the NPPRs. This inevitably leads to a different perspective and experience as to the impact of the AIFMD.
According to the survey, non-EU GPs (i.e. GPs that did not identify themselves as European fund managers)
described the impact of the AIFMD on marketing to EU/EEA-based investors more negatively than European
managers. All five responses coming from non-EU/EEA GPs indicated that the AIFMD made marketing (under
the NPPRs) in the EU slightly or significantly harder. While a majority (11 out of 17) of EU/EEA GPs also said
that the AIFMD had a negative impact on marketing, there were a few respondents who thought the AIFMD
made marketing easier (four respondents) or had no impact (two respondents).
In terms of marketing to investors outside the EU/EEA, EU/EEA GPs were — as expected — more likely to
attribute a harder marketing process to the AIFMD (5 out of 16) than non-EU/EEA ones, who — being
technically outside the scope of the AIFMD — mostly said the Directive made no difference (4 out of 5).
Sub-threshold GPs
Although technically not fully within the scope of the AIFMD, the marketing rules have also had an impact on
the fundraising activities by sub-threshold fund managers.
According to our survey, 26 out of 40 sub-threshold GPs observed an increase in the cost of marketing
within the EU, and 20 out of 32 observed an analogous increase outside the EU. More than half of the
respondents (22 out of 39) also indicated that the time taken for marketing within the EU increased; 15 out
of 32 observed an analogous increase in marketing time outside the EU (Figure 5.5).
Figure 5.5 Cost of and time taken / needed for marketing — sub-threshold GPs
Question: Please indicate the extent to which the following dimensions have changed compared to five years ago: (1) The cost of marketing within the EU/EEA;
(2) The time it takes to undertake fundraising within the EU/EEA; (3) The cost of marketing outside the EU/EEA; (4) The time it takes to undertake fundraising
outside the EU/EEA.
Source: Europe Economics, sub-threshold GP survey, based on minimum 32 responses.
National differences could be particularly burdensome for sub-threshold GPs (and non-EU/EEA GPs) as —
in the absence of a passport — they have to rely on the NPPRs for marketing into the EU. As indicated by
the interviewed GPs, there are notable differences between the national requirements related to the NPPRs,
which were much more demanding in some Member States than in others. In particular, a majority of our
interviewees confirmed that the spectrum went from the UK (being the most straightforward to market in)
to countries such as France, Italy and Spain (where marketing by non-domestic GPs was often perceived as
137
13
13
14
12
0
5
10
15
20
25
30
35
40
45
Within the EU Outside the EU
Cost
Increased significantly Increased somewhat Remained the same
106
12
9
12
13
4
3
1
1
0
5
10
15
20
25
30
35
40
45
Within the EU Outside the EU
Time
Decreased somewhat Decreased significantly
Impact on Operations and Organisational Change
- 34 -
extremely burdensome, very costly, or even impossible).35 More specifically, the GPs that marketed under
NPPRs (rather than under the AIFMD passport) noted that in some jurisdictions the NPPR requirements
were almost as restrictive as the requirements to obtain the AIFMD passport. Despite the intention of the
European Commission to keep smaller fund managers36 outside the scope of (many of) the AIFMD’s rules,
some Member States designed their NPPRs in a way that forces all fund managers, regardless of their size
and the threshold, to comply with equally rigorous rules if they want to gain access to investors on their
territory.
Moreover, in the course of the interviews, most GPs agreed that reverse solicitation — as an alternative to
NPPRs — is generally not a sustainable marketing strategy, and that the interpretation of what constitutes a
sufficiently clear query from investors to be the basis for reverse solicitation varied greatly across the EU. As
a result, in some jurisdictions reverse solicitation entails a significantly larger regulatory risk than in others.
5.4 Depositary requirement
Under the AIFMD a depositary must be appointed by all in-scope AIFMs, including for non-EU AIFs. Non-EU
AIFMs must also appoint a depositary if marketing (non-EU and EU) AIFs under the NPPRs into particular
jurisdictions, such as Denmark and Germany.
Depositaries were not commonly used by the private equity industry pre-AIFMD. It was a pre-existing
regulatory requirement in only a limited number of countries, like France, but generally was not seen as
having value by either the private equity industry or the investors in it. This is because a fund manager may
complete only a few transactions per annum, all of which would be subjected to extensive due diligence,
including around ownership and its transfer (which would be captured in a sale and purchase agreement, or
equivalent legal documentation).
Given that the depositary requirement was introduced in the AIFMD mainly for investor protection reasons,
in this section we share further insights from the perspective of both GPs and LPs.
Above-threshold GPs
Only two above-threshold GPs reported to have used depositaries prior to AIFMD, and — as perhaps could
be expected — their views on the impact of depositaries on GPs’ operations were positive. The remaining
respondents, who were obliged to use depositaries by the Directive, were much more critical of the impact.
Nearly three-quarters of the GPs considered the depositary provisions to have required moderate or
significant organisational changes to their businesses.
Many GPs also considered there to be substantial overlap between the work done and investor
protection provided by depositaries and that undertaken by auditors — however, very few thought that
the requirement had enabled any cost savings to be made.
In terms of providing additional reassurance to investors, the views were spread with seven GPs agreeing
and seven disagreeing with this statement (five of them strongly). The remaining five neither agreed nor
disagreed.
The results combining the views of those that used depositaries prior to AIFMD and those that only did so
after the implementation of the Directive are illustrated in Figure 5.6 below.
35 One of the interviewed GPs indicated that their strategy was to move their activity outside the EU and therefore
become technically a non-EU fund. This was to access what they saw as the more straightforward NPPRs in place in
some European Member States. On the other hand, a few GPs participating in our fieldwork had made the opposite
move. 36 Those with AUM below €500 million.
Impact on Operations and Organisational Change
- 35 -
Figure 5.6: Impact of rules around depositaries on operations — above-threshold GPs
Question: How would you describe the impact of the depositary requirements on your operations?
Source: Europe Economics, above-threshold GP survey, based on 21 responses.
Focusing particularly on costs, 14 GPs felt strongly that the depositary requirement increased total
operational costs. However, the costs of employing a depositary have been lower than originally anticipated
when the AIFMD was first mooted. Around the time of its implementation, estimates of cost of up to 10
basis points were cited. Whilst there is no definitive schedule of costs by country, smaller funds (say up to
and around €500 million) can access a depositary service at between 4–5 basis points, but this drops to 2–3
basis points — or even much less than that — for larger funds. This cost is not completely trivial, but at the
same time this is not, certainly for larger funds, at a level which makes or breaks investment decisions.
There appears to be a divide between those depositaries that are coming from a custodian bank background
and those specialist players created from a fund administration background. The latter appear more likely to
charge on a fixed sum basis (with perhaps some correlation with activity levels), at rates equivalent to less
than 2–3 basis points of AUM, and even less than one basis point for the larger funds. When an investment
leads to an IPO a sub-custodian may also need to be sought, at additional cost, to hold the financial
instruments then created.
The requirement to have the depositary in the country of residence of the AIF increases the saliency of this,
as it constrains the ability of competition to resolve it. It may, at the margin, even influence fund location.
EU/EEA vs non-EU/EEA GPs
Among non-EU/EEA GPs the reported organisational impact of the depositary requirement was
understandably lower. Only 2 out of 6 non-EU/EEA GPs viewed the impact as significant and equally many
considered it to be negligible or none.
Moreover, 3 out of 4 non-EU/EEA GPs that responded to the more detailed questions associated with the
depositary requirement strongly disagreed that these rules provided additional reassurance to investors and
all four agreed that they increased operational costs.
Sub-threshold GPs
There is no depositary requirement for sub-threshold GPs in the AIFMD. However, several of the
interviewed GPs indicated that some national competent authorities (e.g. in Germany) used the AIFMD as an
opportunity to include such a requirement in their NPPRs. As a result, even smaller funds which are not fully
within the scope of the AIFMD need to comply with this requirement in a way similar to the larger funds.
LP perspective
GPs predominantly view the depositary requirement as an unnecessary complication with little added benefit.
A counter-argument, of course, would be that the beneficiaries are the investors into the funds, not the
AIFMs, so we now turn to the views of the LPs themselves.
Almost half of the LPs participating in our fieldwork recognised that the depositary rules to some extent
improved investor protection, and in some cases the perception was that the improvement was important.
14
8
5
6
1
2
2
2
5
1
17
0 3 6 9 12 15 18 21
It has provided additional reassurance to investors
It has increased total operational costs
It has enabled internal cost savings
Strongly agree Somewhat agree Neither agree nor disagree Somewhat disagree Strongly disagree
Impact on Operations and Organisational Change
- 36 -
Other LPs did not see any additional gain over and above the work performed by auditors and did not see
the scope for fraud by a private equity fund manager as a real-world concern given the due diligence and
research undertaken by institutional investors before investment.
Figure 5.7: Views on rules around depositaries and investor protection — LPs
Question: Considering the rules in the following areas of the AIFMD — where you have a view — how, if at all, have these affected your perceptions of investor
protection?
Source: Europe Economics, LP survey, based on 18 responses.
A large majority of LPs stated that investor protection rules around depositaries made no change to their
willingness to invest in private equity funds neither in their domestic market or elsewhere in the EU/EEA.
Interestingly, some LPs said that those investor protection rules even decreased their willingness to invest in
the EU/EEA.
Figure 5.8: Impact of depositary requirements on willingness to invest — LPs
Question: Thinking still about investing in the EU/EEA, how, if at all, have the following aspects of the AIFMD affected your willingness to invest in private equity
and venture capital funds?; Thinking now about investing in AIFMs based within the EU/EEA but outside your own domestic market (i.e. where your HQ is located),
how have the following aspects of the AIFMD affected your willingness to invest in private equity and venture capital funds?
Source: Europe Economics, LP survey, based on 13 and 3 responses for “EU/EEA” and “EU/EEA, but outside domestic market” respectively.
The critical link between these two findings is that, in many cases, the cost of the depositary is passed on to
the investors in full. This means that an investor could see some incremental gain in terms of investor
protection from a depositary being in place, but still have an unchanged — or even reduced — appetite to
invest in EU/EEA funds because the additional cost is at or above the value of this benefit.
Moreover, LPs were neutral-negative on the impact that the depositary rules have had on the investable
universe of private equity funds.
Figure 5.9: Views on rules around depositaries — LPs
Question: Considering the AIFMD itself, can you identify which elements you believe have had the most effect on the total universe of private equity and venture
capital funds investable in by you?
Source: LP survey, based on 12 responses.
10 3 4 1
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
No difference Minor improvement Moderate improvement Critical improvement
11
3
1 1
0 2 4 6 8 10 12 14
EU/EEA
EU/EEA, but
outside domestic market
Made no difference to willingness to make such investments Slightly decreased willingness to make such investments
Significantly decreased willingness to make such investments
8 4
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Investable universe
No impact Slightly deceased
Impact on Operations and Organisational Change
- 37 -
5.5 Minimum capital requirements
Above-threshold GPs
Twenty-six per cent of the above-threshold GPs that responded to our survey identified the AIFMD’s
minimum capital requirements as a significant driver of organisational change, and a further 39 per cent
thought that the scale of organisational change induced by this requirement was moderate.
Since capital requirements to set up a private limited company are generally very low (e.g. €1 in France) or
even completely abolished (e.g. in the UK or the Netherlands), this requirement could have a significant
impact, especially on smaller managers. Apart from creating an entry barrier for new GPs, this requirement
is diverting a material proportion of assets from potentially high-return investments, and therefore creates
an opportunity cost.37
EU/EEA vs non-EU/EEA GPs
Although the minimum capital requirements do not directly apply to non-EU/EEA GPs, the views in this group
were more diverse with two out of 6 stating the operational impact of the capital requirements to be
significant whilst the remaining four stated these to be negligible or none.
Sub-threshold GPs
Sub-threshold GPs are not subject to the AIFMD’s minimum capital requirements.
5.6 Disclosure and reporting
Above-threshold GPs
The most definitive effect of the transparency and reporting requirements is an increased cost burden on
GPs’ businesses (almost 90 per cent agreed with that statement). On the other hand, a large majority (87 per
cent) did agree that these requirements increased the amount of information available to supervisors. A
smaller proportion (57 per cent) also thought that more information is available to investors. That said, most
GPs clearly did not observe a decline in the number of information requests from investors or (to a slightly
lesser extent) supervisors.
Figure 5.10: Impact of rules around transparency and reporting — GPs
Question: How would you describe the impact of the transparency and reporting requirements?
Source: Europe Economics, GP survey, based on minimum 22 responses.
37 This cost would be estimated as part of the overall compliance costs in Section 7.4.
22%
36%
57%
13%
65%
50%
17%
18%
39%
4%
52%
5%
4%
36%
30%
4%
26%
9%
22%
45%
17%
4%
22%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Increased the amount of information available to investors
Reduced the number of information requests by investors
Facilitated cross-border investment into our AIF(s)
Increased the amount of information available to regulators
Reduced the number of information requests by regulators
Increased the cost burden on our business
Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree
Impact on Operations and Organisational Change
- 38 -
The transparency and reporting requirements do not appear to have had a notable positive effect on the ease
of cross-border fundraising. Only about a fifth of GPs believed there had been such a change.
Reporting to supervisors
The set-up of supervisory reporting was not straight-forward, with a lack of guidance and comparability being
the main issue. On an ongoing basis, there were two-three issues raised repeatedly regarding Annex 4
reporting to supervisors:
First, there are ongoing delays in the implementation by regulators (i.e. not all are ready to accept Annex
4 reports).
Second, although an ESMA template is available, its interpretation differs across countries with many
supervisors adding their own tweaks and additions to it and with differences observed in the required
format (XLS against XML) or language to be used. It is not always possible simply to drop the data from
the report to one supervisor into the template used by another. Some AIFMs have involved third party
service providers to deal with the various national reports required. Anecdotally, a very large GP believed
this had saved it about 0.5 of full time equivalent (FTE) on an ongoing basis, which gives an indication of
the potential scale of the obligation.
Third, the requirement to report within 30 days was seen as not well-tailored to the nature and practices
of the private equity industry. The assets in question are unquoted companies, i.e. there is no ready-made
price (as with financial instruments such as publicly quoted equities) nor a standard formula for calculating
prices (as with OTC derivatives). (The 30-day requirement is much more appropriate in the case of
hedge funds). This leads to unnecessary costs being incurred and also the use of estimates and/or old
data.38 A relaxation of this timing requirement to 2–3 months would align supervisors with existing
industry practice and the reporting schedule used with investors.
Disclosure towards investors
The annual report for investors was often seen as burdensome, without adding notably to the useful
information already available to investors, often on a quarterly basis. GPs noted how few requests for the
annual report were made by investors and how little interaction with LPs was inspired by the annual report
in comparison with the regular reporting required contractually from GPs to LPs.39
EU/EEA vs non-EU/EEA GPs
Half of the non-EU/EEA GPs identified the disclosure and reporting requirements as a significant or moderate
driver of organisational change, and the other half as small or negligible.
Sub-threshold GPs
Sub-threshold GPs are not subject to the full AIFMD disclosure and reporting requirements.
5.7 Valuation requirements
Above-threshold GPs
The requirements around valuation are amongst the less impactful overall but are seen as an area where
compliance with the AIFMD is made relatively more difficult and costly for any but the largest GPs. The
AIFMD requires valuation to be conducted in a manner that is functionally independent from portfolio
management and the AIFM’s remuneration policy. Such separation is harder to achieve in GPs with smaller
38 With little guidance and feedback from the national competent authorities firms might assume that they have
interpreted the reporting requirements correctly and the information they had submitted on the previous occasion
is appropriate. When preparing the following reports, they might be inclined to re-use the previously submitted
information. 39 See Invest Europe (2015) “Professional Standards Handbook”.
Impact on Operations and Organisational Change
- 39 -
headcounts — and the alternative of external valuation can be expensive: valuation of a portfolio by an
independent third party might cost up to €20,000 per annum, per company, with perhaps 10–12 companies
in a typical portfolio. GPs also struggled to see the benefit gained by LPs: GP remuneration is ultimately based
around realisation in cash not book values, i.e. the incentives to over-state the latter were not clear.
EU/EEA vs non-EU/EEA GPs
The valuation requirements — not being directly applicable to non-EU/EEA GPs — had close to no impact
on them with 5 out of 6 stating this area of the AIFMD to have a small or negligible organisational impact.
The remaining one respondent viewed the impact as moderate.
Sub-threshold GPs
The AIFMD’s valuation requirement is not applicable to sub-threshold GPs.
5.8 Portfolio company disclosure and asset-stripping rules
Above-threshold GPs
These rules are intended as safeguards against asset-stripping by AIFMs after taking control of an unlisted
company. Portfolio investments are typically five–seven years and as such “asset-stripping” is not generally a
strategic goal. Unsurprisingly, more than half of the GPs who responded to our survey said the rules regarding
portfolio company disclosures did not affect their business and/or investment strategy. Similarly, a large
majority disagreed that those disclosure requirements increased the amount of information available to
investors or made access to that information easier. Many GPs considered the provisions to be similar in
effect to what was done previously, whether motivated by good sense / established market practice40 (e.g.
engaging with employees pre-acquisition), adherence to national rules like the UK’s Walker guidelines or the
disclosures required due to the GP being itself a listed entity.
The views were slightly more divided when it comes to the availability of information to other stakeholders
(e.g. employees), with more than 30 per cent of the respondents agreeing that the new requirements
improved their access to information and 28 per cent disagreeing with this statement. That said, those who
disagreed tended to feel more strongly about it than those that agreed. Over two thirds (68 per cent) of the
respondents agreed that the portfolio company disclosures increased operational costs either at the portfolio
company level and/or the GP level. Finally, more than half said that re-structuring portfolio companies became
more challenging because of the new rules.
40 See Invest Europe (2015) “Professional Standards Handbook”.
Impact on Operations and Organisational Change
- 40 -
Figure 5.11: Impact of portfolio company disclosures — above-threshold GPs
Question: How would you describe the impact of the portfolio company disclosure requirements (e.g. those aimed at limiting asset-stripping)?
Source: Europe Economics, above-threshold GP survey, based on 22 responses.
These requirements are therefore considered as primarily an administrative annoyance. Adherence is largely
seen as requiring upfront legal and compliance costs to understand the requirements and subsequently an
additional item on a deal completion checklist but without affecting the investment strategies adopted.
Even so, there are concerns that the policy needlessly restricts legitimate business practices that do not
equate to asset-stripping. In particular, special dividends being paid in the two years following a recapitalisation
and equity preference shares taken with the intention of liquidating in the next two years could be caught by
the AIFMD. This might temporarily constrain the AIFMs’ ability to access the benefits associated with early
out-performance. Likewise, these provisions can add complexity to “Buy and Build” investment strategies, or
otherwise impact on deal structures (e.g. encouraging the use of loan notes rather than preference shares).
The controlled transaction rules applicable under the AIFMD do not apply to other, similar, potential
investors in corporates. For example, there are no equivalents to the AIFMD’s controlled transaction rules
that would apply to sovereign wealth funds acquiring a private company. Although, as noted above, these
rules do not seem to have affected the private equity industry’s strategies much if at all, such inconsistency
can be seen as distorting the playing field.41
EU/EEA vs non-EU/EEA GPs
Only one out of 6 non-EU/EEA GPs indicated that the portfolio company and asset-stripping rules induced a
significant organisational change. On the other hand, 4 out of 6 thought that the impact of those rules was
small or negligible.
In terms of the potential benefits of these rules — i.e. increasing the amount or accessibility of information
available to investors or other stakeholders, encouraging GPs to change their investment strategies — with
very few exceptions, all non-EU/EEA GPs strongly disagreed that the AIFMD induced such changes. At the
same time, 3 out of 4 agreed that the rules made re-structuring of portfolio companies harder. Half of the
respondents agreed that these rules increased operational costs either at the portfolio company or GP level.
Sub-threshold GPs
There are no equivalent portfolio company disclosure and asset-stripping rules for sub-threshold GPs in the
AIFMD.
41 For early recognition of this idea, see the speech by Dan Waters, FSA Asset Management Sector Leader, FSA
International Fund Forum, Monaco, 24 June 2009,
http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0624_dw.shtml.
5%
5%
18%
5%
41%
18%
14%
36%
27%
27%
41%
14%
18%
36%
41%
18%
9%
14%
18%
5%
5%
50%
50%
45%
5%
23%
9%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
It has encouraged my firm to change its business and / or investment
strategy
It has increased the amount of relevant information available to
investors
It has made access to relevant information easier for investors
It has made the re-structuring of portfolio companies more
challenging
Improved access to information for other stakeholders (e.g.
employees)
It has increased operational costs at the portfolio company and / or
GP level
Strongly agree Somewhat agree Neither agree nor disagree Somewhat disagree Strongly disagree
Impact on Operations and Organisational Change
- 41 -
5.9 Leverage rules
Above-threshold GPs
Typically, private equity AIFMs do not rely on (structural) leverage within the AIFs that they manage. Even
for the relatively few funds that do use such debt, the leverage ratio (measured in terms of debt to equity
value) is typically not substantially above one.
Figure 5.12: AIFM in-fund leverage ratios — above-threshold GPs
Question: We are interested in understanding to what extent, other than short-term bridging facilities, you use leverage in your funds (i.e. as opposed to within
portfolio investments). What, typically, is your leverage ratio in terms of debt / equity value?
Source: Europe Economics, above-threshold GP survey and interviews, based on 41 responses. It is possible that some of these GPs may also be
managing private debt or mezzanine funds, where the use of in-fund leverage can be greater, and this may be influencing the responses.
This is not materially different from the situation pre-AIFMD. GPs, in general, are not under pressure from
LPs to introduce (or increase) the use of leverage in this way. Where LPs wish to leverage returns, investors
would typically rather control this themselves (reportedly, LPs can generally also access lower interest rates).
This is in contrast with portfolio investments where, outside venture and growth capital, it can be an
important element of deal structuring, at least for private equity investments into more mature businesses.
Most AIFMs will not guarantee or provide any security for repayment of debt at a portfolio or acquisition
company level — even the minority of GPs (about one third in our fieldwork) that will do this, tend to restrict
it to exceptional cases, with extremely short-term durations (i.e. 2–3 weeks).
The above indicates that the leverage rules are generally not applicable/relevant for GPs because there is
limited or no embedded debt. On the other hand, AIFMs do use short-term financing for particular capital
needs. In particular, the vast majority of GPs will use bridging or subscription facilities, always against undrawn
but committed funds from LPs. These facilities are typically very short-term, generally of less than one year’s
duration.
The interviews we conducted with GPs suggested that these facilities can have the following objectives.
The administration around a capital call from LPs can take at least a few days to accomplish, even for the
most efficient private equity funds. Access to a bridging facility is an attractive way for an AIFM to close
a deal quickly, and then call on investors only once the capital required is definitively known.
Similarly, to lessen the administrative burden on LPs and to take advantage of the current very low
interest rate environment, GPs will consolidate calls such that LPs are only approached at most a few
times per annum.
0%
10%
20%
30%
40%
50%
60%
70%
80%
0, i.e. we do not use such
leverage
Above 0, but below 1 Above 1, but below 3 Above 3
Impact on Operations and Organisational Change
- 42 -
Importantly, GPs do not see such facilities as leverage within the meaning intended by the AIFMD because
they are short-term and, moreover, against undrawn but committed funds from LPs. However, there is
uncertainty about what should and should not be counted as leverage. Sub-threshold GPs — where being
unleveraged is critical for the application of the de minimis threshold — also make use of such subscription
and bridging facilities. Without access to such facilities, this group would be at a comparative disadvantage
compared to fully authorised AIFMs.
EU/EEA vs non-EU/EEA GPs
Similarly to EU/EEA GPs, a majority of non-EU/EEA GPs (4 out of 6) said that they do not use leverage at
fund level. One reported the leverage ratio to be between 0 and 1, and another between 1 and 3.
The leverage rules had close to no effect on non-EU/EEA GPs with 5 out of 6 stating this area of the AIFMD
to have a small or negligible organisational impact on them. The remaining one respondent viewed the impact
as moderate.
Sub-threshold GPs
There are no equivalent leverage rules for sub-threshold GPs in the AIFMD though it should be noted that
the interpretation of the concept of leverage can have major consequences for smaller fund managers given
that the de minimis threshold is based on it.
5.10 Remuneration rules
The AIFMD requires managers to put in place remuneration policies and practices to mitigate conflicts of
interest, to promote effective risk management and, generally, to align the GP’s incentives with those of the
investors in the funds it manages. Annex II of the AIFMD sets out various principles, although the
proportionality principle means that an AIFM can take into account various factors, such as its size, in the
application of these.
Given the importance of the remuneration rules for both GPs and their investors, we shed some light on this
from the perspective of both GPs and LPs.
Above-threshold GPs
As illustrated in Figure 5.13 below, GPs do not present unanimous views about the remuneration rules:
While 20 per cent agreed that the rules improved the alignment of incentives between GPs and LPs,
almost a third disagreed or strongly disagreed with this statement.
While a quarter agreed or strongly agreed that the AIFMD rules induced changes in their remuneration
policies, almost a third of respondents disagreed or strongly disagreed.
Almost a third of the GPs stated that it neither got harder nor easier to recruit and retain people working
in the private equity industry.
The views were more unilateral in terms of remuneration structure, as 40 per cent of the GPs disagreed
or strongly disagreed with the idea that the AIFMD rules induced changes in their remuneration
structures, and none agreed.
Impact on Operations and Organisational Change
- 43 -
That said, a significant proportion of respondents used the option provided under the proportionality
principle to disapply/neutralise certain remuneration rules in order to be able to maintain existing private
equity remuneration structures, while being compliant with the AIFMD.
Figure 5.13: Impact of rules around remuneration — above-threshold GPs
Question: How would you describe the impact of the remuneration requirements?
Source: Europe Economics, above-threshold GP survey, based on 20 responses.
Moreover, as illustrated in Figure 5.1 at the beginning of this section, almost half of the GPs (10 out of 23)
stated that the remuneration requirements had a negligible or no organisational impact on their businesses,
with another 30 per cent of GPs (7 out of 23) reporting the organisational changes to be small. The remaining
six respondents reported the changes to be moderate or significant.
EU/EEA vs non-EU/EEA GPs
The remuneration rules had close to no effect on non-EU/EEA GPs with 5 out of 6 stating this area of the
AIFMD to have a small or negligible organisational impact on them. The remaining one respondent viewed
the impact as moderate.
Sub-threshold GPs
Sub-threshold GPs are not subject to the remuneration rules in the AIFMD.
LP perspective
A little over half of the LPs (8 out of 14) did not attribute any improvement in investor protection to the
remuneration rules. The remaining respondents said the requirements caused a minor or moderate
improvement in that respect.
Figure 5.14: Impact of remuneration requirements on investor protection — LPs
Question: There are various elements within the AIFMD designed to increase investor protection. Considering the rules around remuneration — where you have
a view — how, if at all, have these affected your perceptions of investor protection?
Source: Europe Economics, LP survey, based on 14 responses.
2
1
4
3
4
5
2
3
6
1
4
6
3
5
2
2
1
5
7
8
6
0 2 4 6 8 10 12 14 16 18 20
Better aligned incentives of
GPs and LPs
Induced a change in our
remuneration policy
Induced a change in our remuneration
structure (e.g. the proportion of fixed
to variable remuneration)
Made the recruitment and
retention of people more difficult
Strongly agree Agree
Neither agree nor disagree Disagree
Strongly disagree Not applicable as we apply the proportionality principle
8 4 2
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Has made no difference Minor improvement in investor protection Moderate improvement in investor protection
Impact on Operations and Organisational Change
- 44 -
The main concern expressed by LPs was that the use of “carried interest” — which is critical to the alignment
of interests between LPs and GPs — as a means of incentivising AIFMs could be affected by the AIFMD. As
can be seen from the GP analysis above, remuneration policies have been tweaked by some GPs but without
generally affecting the balance of variable to fixed remuneration.
The remuneration requirements have not affected LPs’ willingness to invest in the EU/EEA in a significant
way.
Figure 5.15: Impact of remuneration requirements on willingness to invest — LPs
Question: Thinking still about investing in the EU/EEA, how, if at all, have the following aspects of the AIFMD affected your willingness to invest in private equity
and venture capital funds?; Thinking now about investing in AIFMs based within the EU/EEA but outside your own domestic market (i.e. where your HQ is located),
how have the following aspects of the AIFMD affected your willingness to invest in private equity and venture capital funds?
Source: Europe Economics, LP survey, based on 13 and 3 responses for “EU/EEA” and “EU/EEA, but outside domestic market”, respectively.
11
2
2
1
0 2 4 6 8 10 12 14
EU/EEA
EU/EEA, but
outside domestic market
Made no difference to willingness to make such investments Slightly decreased willingness to make such investments
Impact on Funds Raised and Investment Opportunities
- 45 -
6 Impact on Funds Raised and
Investment Opportunities
The AIFMD has not just resulted in operational changes. It has also affected the marketing and fundraising
environment and processes that are fundamental to the private equity industry. As shown in Chapter 5, a
large group of GPs identified the AIFMD as a factor inducing organisational changes on their business and
inhibiting the ease with which they are able to market funds to investors across the EU/EEA. In this chapter,
we explore whether this has had any further implications for GPs or LPs. From the GPs’ perspective, we
examine whether there are any observable impacts on funds raised and whether and to what extent these
are attributable to the AIFMD (Section 6.1). From the LPs’ perspective, we analyse whether the AIFMD
affected the private equity investment opportunities available to European investors (Section 6.2). Finally, we
briefly discuss some issues related to the extension of the AIFMD passport to non-EU/EEA fund managers
and the current third country regime (Section 6.3).
6.1 Impact on funds raised by the private equity industry
6.1.1 Quantitative analysis
As a starting point we analysed Invest Europe’s data on quarterly incremental funds raised by European GPs
(please see the summary in Chapter 3) to assess whether an impact due to the AIFMD could be detected.
We used both econometric methods and non-parametric methods to test the hypotheses:
Did the AIFMD lead to a significant change in the incremental fund flows?
Did the AIFMD lead to a change in fundraising outside the country (but within the EU)?
Did the AIFMD lead to a change in fundraising from outside the EEA?
The econometric methods involve panel estimations (i.e. looking across various countries and time periods).
We tested the hypotheses using both the full sample and a reduced sample of countries such as France,
Germany, Sweden and the United Kingdom where fundraising is more consistent. The AIFMD’s impact was
captured by a country-specific binary dummy variable (the variable takes the value 1 from the quarter of
AIFMD transposition to the end of the sample period, and 0 for the period before AIFMD transposition).
The transposition dates draw on the KPMG report where transposition was effective at the date of that
report’s writing,42 and for those countries with later transposition on our own research. The aim, then, was
to test if the coefficient of the AIFMD dummy is significant. If it is significant, it suggests that the AIFMD has
had a significant impact on the dependent variable. Different specifications (in levels, logs and differences) of
the incremental fund flows variable were tested. We also tested the proportion of fundraising from various
geographical sources.
For the non-parametric analysis, we considered the period immediately before and after the transposition
and aggregated those with transposition in the same quarter.43 Again, the aim was to see if there is a significant
change in the level of fundraising around immediately before or after the AIFMD. We summarise this work
below.
42 KPMG (2014) “AIFMD Transposition update Appendix 1”. 43 We tested whether there was seasonality in the data, and did not find any.
Impact on Funds Raised and Investment Opportunities
- 46 -
Table 6.1: Summary of econometric analysis of fundraising
Hypothesis tested Empirical method Dependent variable
Control
variable
used
Impact of AIFMD
AIFMD had an
impact on total level
of funds raised
Panel estimation with
country-fixed effect and
time fixed effect
Logs, levels and
differences
incremental funds
raised
The
Economic
Sentiment
Indicator
(ESI)44
No statistically
significant impact at
95 or 99 per cent
confidence levels
AIFMD had an
impact on the
proportion of
domestic, cross-
border within EU,
and outside EU
fundraising
Panel estimation with
country-fixed effect and
time-fixed effect
Logs, levels and
differences of
incremental funds
raised by domestic,
cross-border within
the EU, or outside the
EU.
ESI
No statistically
significant impact at
95 or 99 per cent
confidence levels
AIFMD had an
impact on the level
of domestic, cross-
border within EU,
and outside EU
fundraising
Panel estimation with
country-fixed effect and
time-fixed effect
Logs, levels and
differences of
incremental funds
raised by domestic,
cross-border within
the EU, or outside the
EU.
ESI
No statistically
significant impact at
95 or 99 per cent
confidence levels
AIFMD had an
impact on total level
of funds raised
Non-parametric Levels of incremental
funds raised
No statistically
significant impact at
95 or 99 per cent
confidence levels
Source: Europe Economics.
We did not find any statistically significant indication that the AIFMD has resulted in a change in the level of
fundraising in Europe or in the individual countries tested. This does not prove it had no impact — the
fundraising data are volatile, varying significantly from quarter to quarter, creating significant noise from which
it can be difficult to distinguish the impacts of particular events. In addition, the impact of the AIFMD at
transposition may have been softened by its grandfathering provisions, and the business model of private
equity, which implies a particular fundraising cycle that cannot readily be materially deviated from without
adverse consequences.
In some countries, however, there were indications that there was a temporary decline in fundraising around
the actual implementation itself (i.e. uncertainty or delays in authorisation may have led to a one-quarter
slowdown, but not to any structural change).
Focusing on the proportion of funds raised domestically and non-domestically within Europe, the annual levels
of funds raised domestically and cross-border in Europe seem to exhibit co-movement in most quarters. The
balance between the two changed in 2011 — suggesting that intra-European cross-border flows increased at
this time — but this shift predates the implementation of the AIFMD.
We also examined the balance of funds raised from within Europe and from the rest of the world. Again
there is no evident AIFMD-related effect apparent in the data.
44 The ESI is a monthly composite measure published by the European Commission. Available at:
http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm.
Impact on Funds Raised and Investment Opportunities
- 47 -
Figure 6.1: Incremental fundraising by all private equity broken down by location of LPs — Europe
(rolling 12-month data series)
Source: Invest Europe.
Since the dynamics and implications of the AIFMD may vary across Member States, we also analysed similar
data for France, Germany, Sweden and the UK. In Figure 6.2, we can see that there are clear differences
between those countries in terms of reliance on domestic funds and the extent to which GPs based in those
countries source funds from non-European investors. In particular, GPs based in France and Germany appear
to source much more funds domestically than GPs based in Sweden or the UK. The latter, on the other hand,
raise a significant proportion of their funds from outside Europe. In part, this is driven by the larger funds
being concentrated in the UK.
The AIFMD was transposed in all four countries around the same time, i.e. in the second half of 2013 (as
indicated by a darker shade in Figure 6.2). There are clear (and sometimes significant) fluctuations both in the
overall level of fundraising and the proportions of funds coming from domestic, non-domestic and non-
European investors. While it is not obvious whether these fluctuations could be attributed to the AIFMD (as
illustrated by the results of the econometric analysis above), the data do not show any increase in the relative
sourcing of funds across borders.45 In other words, despite the potential to facilitate cross-border flow of
funds, the AIFMD has not had an observable impact on the amount of funds raised non-domestically within
Europe.
45 The data we have are not divided between funds raised by fully authorised AIFMs and those GPs that qualify as sub-
threshold. However, as we have noted already, the data are very heavily influenced by the decisions of the larger
fund managers, i.e. this skew is not likely to be significant in thinking about the influence of the AIFMD in the round.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Q4 2
007
Q1 2
008
Q2 2
008
Q3 2
008
Q4 2
008
Q1 2
009
Q2 2
009
Q3 2
009
Q4 2
009
Q1 2
010
Q2 2
010
Q3 2
010
Q4 2
010
Q1 2
011
Q2 2
011
Q3 2
011
Q4 2
011
Q1 2
012
Q2 2
012
Q3 2
012
Q4 2
012
Q1 2
013
Q2 2
013
Q3 2
013
Q4 2
013
Q1 2
014
Q2 2
014
Q3 2
014
Q4 2
014
Q1 2
015
Q2 2
015
Q3 2
015
Q4 2
015
Q1 2
016
Q2 2
016
Q3 2
016
Q4 2
016
Europe - Domestic Europe - Non-Domestic Outside Europe Unknown
Impact on Funds Raised and Investment Opportunities
- 48 -
Figure 6.2: Incremental fundraising by all private equity broken down by location of LPs — France,
Germany, Sweden and the UK (rolling 12-month data)
Note: For clarity of presentation, the chart excludes capital gains as they account for a very small proportion of the overall funds.
Source: Invest Europe.
6.1.2 Qualitative analysis
As part of our qualitative analysis, we also looked at investors’ appetite to invest in private equity. According
to the survey responses:
The largest increase in terms of both the universe of LPs (i.e. the universe of investors willing to invest
in private equity) and the amount of funds raised was observed outside Europe — 52 per cent of GPs
observed an increase in the universe of non-EU LPs and 68 per cent in the amount of non-EU funds
raised. As illustrated in Figure 6.3, the proportions were slightly lower for managers with capital below
€500 million.
-
2
4
6
8
10
12
14
16
Q4 2
007
Q2 2
008
Q4 2
008
Q2 2
009
Q4 2
009
Q2 2
010
Q4 2
010
Q2 2
011
Q4 2
011
Q2 2
012
Q4 2
012
Q2 2
013
Q4 2
013
Q2 2
014
Q4 2
014
Q2 2
015
Q4 2
015
Q2 2
016
Q4 2
016
Bill
ions
France
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Q4 2
007
Q2 2
008
Q4 2
008
Q2 2
009
Q4 2
009
Q2 2
010
Q4 2
010
Q2 2
011
Q4 2
011
Q2 2
012
Q4 2
012
Q2 2
013
Q4 2
013
Q2 2
014
Q4 2
014
Q2 2
015
Q4 2
015
Q2 2
016
Q4 2
016
Bill
ions
Germany
-
1
2
3
4
5
6
7
8
Q4 2
007
Q2 2
008
Q4 2
008
Q2 2
009
Q4 2
009
Q2 2
010
Q4 2
010
Q2 2
011
Q4 2
011
Q2 2
012
Q4 2
012
Q2 2
013
Q4 2
013
Q2 2
014
Q4 2
014
Q2 2
015
Q4 2
015
Q2 2
016
Q4 2
016
Bill
ions
Sweden
Europe - Domestic Europe - Non-Domestic
-
5
10
15
20
25
30
35
40
45
Q4 2
007
Q2 2
008
Q4 2
008
Q2 2
009
Q4 2
009
Q2 2
010
Q4 2
010
Q2 2
011
Q4 2
011
Q2 2
012
Q4 2
012
Q2 2
013
Q4 2
013
Q2 2
014
Q4 2
014
Q2 2
015
Q4 2
015
Q2 2
016
Q4 2
016
Bill
ions
UK
Outside Europe Unknown
Impact on Funds Raised and Investment Opportunities
- 49 -
The most significant decrease in the availability of LPs occurred in the respective countries of AIFMD
authorisation: 14 per cent of the above-threshold GPs and 18 per cent of the sub-threshold GPs noted
that the universe of LPs decreased in their home country. In addition, 28 per cent of above-threshold
GPs and 24 per cent of sub-threshold GPs felt that the amount of funds raised in their home country had
declined.
The least change was observed in non-EU/EEA European countries. This seems particularly true for GPs
managing more than €500 million in capital.
Figure 6.3: Investors’ appetite to invest in private equity funds — above-threshold GPs (GPs) and sub-
threshold GPs (STGP)
Questions: How has the universe of Limited Partners willing to invest in private equity and venture capital changed compared to five years ago?; How has the
amount of funds raised from Limited Partners changed compared to five years ago?
Source: Europe Economics, above and below threshold GP surveys, based on minimum 22 responses from above-threshold GPs, and minimum 32
responses from sub-threshold GPs.
The factors that the GPs (both those above and below the threshold) identified as having most significantly
contributed to an increase in the allocation of LP assets to private equity are: (i) global market developments,
(ii) evolving strategies of LPs and GPs, and (iii) macro-level developments specific to the EU/EEA (see Figure
6.4).
For above-threshold GPs, the factor that was identified as having significantly hindered investors’ appetite
is regulatory and tax developments outside the EU/EEA and the US. Other factors that (perhaps to a smaller
9%
16%
27%
17%
4%
10%
24%
16%
5%
13%
6%
16%
23%
24%
16%
14%
25%
9%
19%
24%
35%
20%
32%
27%
39%
22%
38%
36%
26%
44%
28%
64%
41%
36%
40%
52%
43%
36%
32%
68%
48%
57%
50%
32%
31%
16%
41%
14%
11%
23%
17%
20%
10%
20%
16%
12%
9%
6%
8%
14%
8%
9%
7%
5%
7%
3%
3%
8%
6%
8%
6%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
GP
STGP
GP
STGP
GP
STGP
GP
STGP
GP
STGP
GP
STGP
GP
STGP
GP
STGP
Univ
ers
e o
f
LPs
Am
ount
of
funds
rais
ed
from
LPs
Univ
ers
e o
f
LPs
Am
ount
of
funds
rais
ed
from
LPs
Univ
ers
e o
f
LPs
Am
ount
of
funds
rais
ed
from
LPs
Univ
ers
e o
f
LPs
Am
ount
of
funds
rais
ed
from
LPs
In t
he c
ountr
y of A
IFM
D
auth
ori
sation
Els
ew
here
in t
he E
U /
EEA
Within
Euro
pe b
ut
outs
ide t
he E
U / E
EA
Outs
ide E
uro
pe
Increased significantly Increased somewhat Remained the same Decreased somewhat Decreased significantly
Impact on Funds Raised and Investment Opportunities
- 50 -
extent) reduced LPs’ willingness to invest in private equity are regulatory and tax developments in the
EU/EEA and the AIFMD itself.
For sub-threshold managers, the regulatory and tax developments outside the EU/EEA and the USA seem
to have been less relevant, but the effects of such developments in the EU/EEA and the impact of the AIFMD
were described as more significant than for above-threshold GPs. Moreover, a relatively large proportion
of sub-threshold GPs stated that macro-level developments in the EU/EEA also contributed to a decline in
LPs’ willingness to invest in private equity funds.
Figure 6.4: Drivers of investors' appetite — above-threshold GPs (GPs) and sub-threshold GPs (STGP)
Question: How, in your opinion, have the following factors contributed to any change in the willingness of investors to invest in your funds?
Source: Europe Economics, above and below threshold GP surveys, based on minimum 19 responses from above-threshold GPs, and minimum 35
responses from sub-threshold GPs.
At the same time, the interviews we conducted with GPs did not suggest there was a significant change in
investors’ willingness to invest in private equity funds that could be attributed to the AIFMD.
36%
32%
9%
19%
3%
3%
6%
12%
20%
20%
25%
41%
27%
36%
31%
4%
3%
8%
5%
13%
13%
28%
31%
24%
44%
9%
9%
27%
5%
60%
58%
44%
81%
45%
61%
48%
44%
28%
46%
16%
31%
14%
20%
14%
21%
8%
20%
12%
14%
41%
21%
30%
47%
8%
6%
16%
22%
5%
5%
5%
14%
8%
8%
12%
5%
27%
4%
19%
8%
9%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
GP
STGP
GP
STGP
GP
STGP
GP
STGP
GP
STGP
GP
STGP
GP
STGP
GP
STGP
Glo
bal
mac
ro /
mar
ket
deve
lopm
ents
Mac
ro / m
arket
deve
lopm
ents
speci
fic
to t
he
EU
/ E
EA
Regu
lato
ry a
nd
tax
deve
lopm
ents
in t
he U
SA
Regu
lato
ry a
nd
tax
deve
lopm
ents
outs
ide t
he E
U
/ EEA
and t
he
USA
Regu
lato
ry a
nd
tax
deve
lopm
ents
speci
fic
to t
he
EU
/ E
EA
(excl
udin
g th
e
AIF
MD
)T
he A
IFM
D
Evo
lvin
g in
-
house
str
ategy
or
stra
tegi
es
of
oth
er
Genera
l
Par
tners
Evo
lvin
g
stra
tegi
es
by
Lim
ited
Par
tners
inve
sted in
fund(s
)
Increased significantly Increased somewhat Remained the same Decreased somewhat Decreased significantly
Impact on Funds Raised and Investment Opportunities
- 51 -
6.2 Impact on opportunities available to European investors
6.2.1 Investor appetite
Equally many LPs stated that their willingness to invest in private equity funds has increased or remained the
same compared to five years ago. Another two LPs reported their appetite to invest in this asset class to
have somewhat declined.
Figure 6.5: Willingness to invest and investable universe — LPs
Question: We are interested in exploring your firm's appetite to invest in private equity and venture capital as an asset class within the EU/EEA. Do you consider
your business is now more or less willing to invest in private equity and venture capital funds in the EU/EEA than it was five years ago?
Source: Europe Economics, LP survey, based on 18 responses.
The main factors that contributed to LPs’ increased willingness to invest in private equity funds (see Figure
6.6) seem to be: (i) in-house developments and evolving strategy (8 out of 16 respondents), (ii) global market
developments (also 8 out of 16), (iii) European market developments (6 out of 14), and (iv) GPs’ evolving
strategies (5 out of 13). The only factor that was recognised by LPs as a significant inhibitor of their investment
appetite was the AIFMD (two respondents, in addition to three respondents who stated the AIFMD to slightly
decrease their willingness to invest in private equity). That said, the majority of LPs agreed that the AIFMD
had no impact on their willingness to invest in private equity funds.
Figure 6.6: Drivers of investment attitude — LPs
Questions: Do you consider your business is now more or less willing to invest in private equity and venture capital funds in the EU/EEA than it was five years
ago? Can you please identify how the following factors have contributed to this development?
Source: Europe Economics, LP survey, based on minimum 13 responses.
6.2.2 Availability of funds and investment opportunities
The impact of the AIFMD on the availability of European funds did not seem to be very significant: overall,
the majority of respondents did not observe any difference in the number or diversity of available EU/EEA
funds.
More concretely, for a majority of LPs involved in our fieldwork, access to private equity funds in the EU/EEA
as well as the number of EU countries in which they make such investments remained the same compared
5 3 8 2
0 2 4 6 8 10 12 14 16 18
Appetite to invest in
PE / VC within the EU / EEA
Significantly more willing to invest Somewhat more willing to invest No change Somewhat less willing to invest
3
2
1
1
5
1
5
4
2
3
4
6
3
13
14
7
9
5
7
2
5
1
4
3
3
1
2
0 2 4 6 8 10 12 14 16 18
Global macro / market developments
Macro / market developments specific to the EU / EEA
Regulatory and tax developments in the USA
Regulatory and tax developments outside the EU / EEA and the USA
Regulatory and tax developments specific to the EU / EEA…
The AIFMD
In-house developments and evolving strategy
Evolving strategies by General Partners
Significantly increased Slightly increased Made no difference Slightly decreased Significantly decreased
Impact on Funds Raised and Investment Opportunities
- 52 -
to five years ago. For some LPs (5 out of 17) access to EU/EEA private equity funds increased, but for others
(3 out of 16) the number of countries in which they make or would make private equity investments
somewhat declined. Furthermore, for 8 out of 15 LPs the cost of investing in private equity funds across the
EU/EEA increased, with another six stating that it remained the same (see Figure 6.7 below).
Figure 6.7: Availability of investment opportunities inside the EU/EEA — LPs
Question: Please indicate the extent to which the following dimensions have changed relative to five years ago.
Source: Europe Economics, LP survey, based on minimum 15 responses.
The availability of investment opportunities outside the EU/EEA showed a notably more negative pattern than
the evolution of the investable universe within the EEA (see Figure 6.8). The cost of investing in funds outside
the EU/EEA increased for half of the LPs, and stayed the same for less than a third.
Figure 6.8: Availability of investment opportunities outside the EU/EEA — LPs
Question: Please indicate the extent to which the following dimensions have changed relative to five years ago.
Source: Europe Economics, LP survey, based on minimum 14 responses.
6.2.3 Strategic allocation
Interestingly, around half (9 out of 19) of the LPs46 had increased their allocation to non-EU/EEA private
equity funds over the past five years (see Figure 6.9). In terms of their allocation to this asset class in Europe,
the views were divided with some LPs reporting an increase and some a decrease over the same period of
time. For both EU/EEA and non-EU/EEA investments, the remaining ten respondents said their exposure had
remained the same.
46 Those LPs were based in the UK (4, including 2 respondents based in the US but with offices in the UK), Germany
(3), Sweden (1), and Switzerland (1).
1
2
4
2
6
11
11
6
1
3
1
0 2 4 6 8 10 12 14 16 18
Your access to PE / VC funds inside the EU / EEA
The number of EU / EEA countries in which you make (or would be
willing to make) PE / VC investments
The cost of investing in PE / VC funds across the EU / EEA
increased significantly increased somewhat remained the same decreased somewhat
1
4
2
1
2
1
1
1
1
5
6
7
5
8
4
2
2
2
3
3
0 2 4 6 8 10 12 14 16
Your access to private equity funds outside the EU / EEA
Your access to venture capital funds outside the EU / EEA
The number of non-EU or non-EEA countries where the PE / VC
funds you invest in are located
The cost of investing in PE / VC funds across the world excluding the
EU and EEA
not applicable / don't know increased significantly increased somewhat
remained the same decreased somewhat decreased significantly
Impact on Funds Raised and Investment Opportunities
- 53 -
Figure 6.9: Strategic allocation to private equity funds — LPs
Question: Has your strategic allocation (or exposure) to private equity and venture capital funds changed compared to five years ago?
Source: Europe Economics, LP survey, based on 19 responses.
The change in allocation to private equity funds outside the EU/EEA is not necessarily (or entirely) driven by
the AIFMD: some investors stated that they had re-orientated portfolios towards the Asia-Pacific region, for
example, for macroeconomic reasons.
6.2.4 Drivers of investment universe
Generally, most of the LPs agreed that the number and diversity of investment opportunities in private equity
were not affected by any of the potential factors/circumstances outlined in the survey (Figure 6.10).
In terms of EU/EEA domiciled funds: On the one hand, some LPs (5 out of 13) felt that European
regulatory and tax developments (other than the AIFMD) reduced the number and diversity of available
EU/EEA-domiciled funds. On the other hand, factors that widened and/or increased the diversity of the
private equity universe available to LPs were in-house developments and evolving strategy (3 out of 12),
and global market developments (3 out of 12 LPs).
In terms of non-EU/EEA funds: two factors (one having a positive and one having a negative impact) seem
to have had more tangible effects.
First, the factor that increased the investable universe of non-EU/EEA funds were global market
developments (4 out of 10).
Second, the AIFMD was recognised by half of the LPs as a factor decreasing the investable universe of
non-EU/EEA private equity funds. Since these funds are not able to benefit from the AIFMD passport
and have to rely on (sometimes very complex and burdensome) NPPRs, 47 they might be less
interested in marketing in Europe when they have a sufficiently rich investor base outside Europe
where restrictions similar to the AIFMD / NPPRs do not apply. While the remaining respondents
stated that the AIFMD made no difference to them in that respect, it should be noted that the majority
of this group were based in the USA, so naturally can be expected not to be affected by the AIFMD
in terms of their access to non-EU/EEA funds (marketing non-EU funds to non-EU investors is not in
the scope of the AIFMD). If we exclude them from these considerations, the AIFMD was clearly
identified by a majority of EU-based LPs (7 out of 10) as a factor restricting the availability of
non-European funds.
47 See Section 5.3 for more details on the limitations of NPPRs.
4 5
9
10
10
0 2 4 6 8 10 12 14 16 18 20
Inside the EU / EEA
Outside the EU / EEA
Decreased Increased Remained the same
Impact on Funds Raised and Investment Opportunities
- 54 -
Figure 6.10: Drivers of investment universe — LPs
Questions: Considering the number and diversity of EU or EEA domiciled AIFs available for you to invest in, how have the following factors contributed to any
change here?; Considering now the number and diversity of non-EU domiciled AIFs available for you to invest in, how have the following factors contributed to any
changes?
Source: Europe Economics, LP survey, based on minimum 12 responses.
As illustrated in Figure 6.11 below, this was primarily attributed to the AIFMD’s rules governing the marketing
of non-EU/EEA funds (under the national private placement regimes).
Figure 6.11: Impact of various elements of AIFMD on investable universe — LPs
Question: Considering the AIFMD itself, can you identify which elements you believe have had the most effect on the total universe of private equity and venture
capital funds investable in by you?
Source: Europe Economics, LP survey, based on minimum 12 responses.
Many EU/EEA-based LPs confirmed in our interviews that they considered themselves to face a reduced
scope to invest in funds from outside the EEA. This was a particular concern with the better-performing
1
2
2
3
1
2
1
1
2
2
1
2
1
8
8
12
10
8
11
7
8
7
10
11
11
11
7
8
10
1
2
4
1
1
2
1
1
3
1
1
1
1
1
4
1
0 2 4 6 8 10 12 14
Global macro / market developments
Macro / market developments specific to the EU / EEA
Regulatory and tax developments in the USA
Regulatory and tax developments outside the EU / EEA and the USA
Regulatory and tax developments specific to the EU / EEA…
The AIFMD
In-house developments and evolving strategy
Evolving strategies by General Partners
Global macro / market developments
Macro / market developments specific to the EU / EEA
Regulatory and tax developments in the USA
Regulatory and tax developments outside the EU / EEA and the USA
Regulatory and tax developments specific to the EU / EEA…
The AIFMD
In-house developments and evolving strategy
Evolving strategies by General Partners
Num
ber
and d
ivers
ity
of EU
or
EEA
dom
icile
d A
IFs
Num
ber
and d
ivers
ity
of non-E
U
dom
icile
d A
IFs
Significantly increased Slightly increased Made no difference Slightly decreased Significantly decreased
1
1
1
9
8
9
5
11
11
10
4
2
4
1
1
1
1
5
0 2 4 6 8 10 12 14
Transparency rules governing reporting by GPs / AIFMs
Investor protection rules around depositaries
Other investor protection rules
Rules governing the marketing of AIFs
Rules on disclosure targeting asset-stripping activities
Rules affecting the comparability of performance
Treatment of co-investment vehicles
Significantly increased investable universe Slightly increased investable universe Did not affect investable universe
Slightly decreased investable universe Significantly decreased investable universe
Impact on Funds Raised and Investment Opportunities
- 55 -
funds, which tend to close their fundraising rounds more quickly.48 GPs (particularly those based outside the
EEA) may generally look to prioritise investors outside of the EEA, approaching them first. Over-subscription
by these investors can reduce what is available to market within the EU/EEA, and the absence of a third-
country passport regime along with significant differences in NPPRs (as discussed in Section 5.3) will mean
that GPs from outside the EEA will focus on a restricted set of countries, at most.
The wish set out in Recital 70 of the AIFMD is that
"This Directive should not affect the current situation, whereby a professional investor
established in the Union may invest in AIFs on its own initiative, irrespective of where
the AIFM and/or the AIF is established."
However, the reverse solicitation regime (as we discuss above, e.g. at 5.3) has its own deficiencies, and does
not fully remedy the current situation. We now turn to explore the consequences of this restricted access
to the global private equity industry for European investors.
6.2.5 Potential consequences of LPs’ restricted access to global private equity fund
(manager)s
Restrictions in access to the non-EU private equity industry may result in institutional investors being unable
to fully diversify their investments by seeking exposure to private equity funds outside Europe. This point can
be illustrated using the standard economic theory of the optimal portfolio allocation developed by Markowitz.
An optimal portfolio is defined as a combination of assets that provides a target (average) return at the lowest
possible risk (or alternatively one which provides the highest expected returns given a predetermined level
of risk). Within this framework, restricting the range of assets available to an investor will typically entail a
diversification cost. This is the case because the (optimal) portfolio constructed from a broad set of
constituents is generally superior to any (optimal) portfolio based on a narrower set of the same
constituent(s). In other words, given the same level of volatility, a diversified portfolio will have higher returns
than a restricted portfolio, or alternatively, if both portfolios generate the same returns, a restricted portfolio
will have a higher level of volatility compared to a diversified portfolio.
Figure 6.12 illustrates this diversification cost. The purple line is the efficient investment frontier given the
larger set of available assets, and the pink line is the efficient frontier given the restricted set of investable
assets. For a given level of risk, restricting the investable universe will result in a return loss equal to A-B.
48 Bain & Company, Inc. (2016) “Global Private Equity Report 2016”.
Impact on Funds Raised and Investment Opportunities
- 56 -
Figure 6.12: Diversification cost — illustration
Source: Europe Economics.
Therefore, restricted access to non-EU/EEA private equity fund (manager)s may result in EU/EEA-based LPs
incurring the diversification cost, either in terms of lower returns or higher risk. This impact might be more
tangible for LPs investing in those parts of the private equity industry which are relatively more developed
outside the EU/EEA, e.g. venture funds.
This theoretical prediction has been confirmed by past research. For example, based on an analysis of 771
mature European and North American funds, Gottschalg and Derungs (2015) argue that diversification across
multiple funds is an important tool to mitigate capital risk (i.e. the risk of losing capital). Moreover, the
research finds that “this risk mitigating impact of portfolio diversification is visible across all subsamples of
funds with different geographic focus and different fund size categories”.49
6.3 Third country regime
Another important aspect of marketing in the context of AIFMD is the potential extension of the applicability
of the AIFMD passport to non-EU AIFs and AIFMs. In the absence of such a third country passport, non-EU
AIFMs need to grapple with local NPPRs and there have been concerns about protectionist behaviour by
national competent authorities.50 As explored in more detail in section 9.5, not all NPPRs are alike and some
countries impose significantly stricter requirements as part of their NPPRs than others. This creates barriers
to (at least some) non-EU AIFMs (including sub-threshold fund managers), and thus might contribute to
slower growth of the private equity industry.
The extension of the passport to (a number of) non-EU countries was envisaged at the outset of the AIFMD,
but has not been followed through yet (despite the fact that ESMA saw no obstacles to granting passports to
fund (manager)s based in Canada, Japan, Switzerland, Guernsey and Jersey, and potentially the USA, Hong
Kong, Singapore and Australia).51
49 Gottschalg and Derungs (2015) “Size matters – small is beautiful. The Impact of Portfolio Diversification and Selection
on Risk and Return in Private Equity”. 50 Article by Lizzie Meager in the IFLR, 19th July 2016, http://www.iflr.com/Article/3571838/Fund-managers-celebrate-
AIFMD-advice.html. 51 ESMA (2016) “ESMA advises on extension of funds passport to 12 non-EU countries”,
https://www.esma.europa.eu/press-news/esma-news/esma-advises-extension-funds-passport-12-non-eu-countries.
Impact on Funds Raised and Investment Opportunities
- 57 -
Some non-EU fund managers (particularly those based in the USA) have already indicated a preference to
continue to market via the NPPRs, to avoid — amongst other reasons — being subject to dual regulation.52
This might be because they only wish to market their funds in a limited number of Member States within the
EU and the costs related to obtaining the AIFMD passport would not be justified or proportionate to the
small size of the potential investor base. In other words, they wish to avoid a regulation whose costs are
likely to be justified only if investors in many Member States were to be targeted. The AIFMD prescribes that
if passport rights are extended to non-EU countries, marketing via NPPRs would only remain available during
a three-year transitional period (if at all — some Member States might choose to close their NPPRs right
away upon the entry into force of a third country passport). After that, non-EU fund managers would either
need a passport to market AIFs in the EU (i.e. they would need to become fully AIFMD-compliant) or stop
marketing in the EU overall. Some of the interviewed GPs expressed the view that “imposing” the passport,
i.e. not giving the option to choose the NPPRs, could discourage some of them from marketing in the EU or
else impose a not insignificant cost on their operations.
52 Full AIFMD authorisation would be necessary for the passport.
Costs
- 58 -
7 Costs
7.1 Introduction
In this chapter we assess and estimate what costs the AIFMD has generated, in terms of both one-off costs
and ongoing costs. One-off costs could capture, for example, the costs of authorisation and understanding
the legislation, legal advice, adjusting internal structures and documents. Ongoing costs, on the other hand,
include the cost of complying with its continuous requirements such as depositaries and reporting. The
distinction is crucial for understanding who is likely to ultimately bear the extra costs. It is commonly assumed
that one-off costs will be largely absorbed by the directly affected stakeholders (i.e. fund managers), while
ongoing costs, which represent an increase in the operating costs of doing business, might be passed onto
consumers (i.e. investors). The extent to which this pass-through of costs occurs will be subject to negotiation
between the fund manager and its investors, and would be determined by a range of factors, including
investors’ sensitivity to price changes.
7.2 Qualitative analysis of compliance costs
Of the above-threshold GPs that responded to our survey, 78 per cent described the one-off costs of
implementing the AIFMD as significant, and another 17 per cent thought they were moderate. Ongoing costs
seem to be slightly less material, with only 35 per cent of the respondents describing them as significant, and
61 per cent as moderate.
Figure 7.1: Scale of compliance costs — above-threshold GPs
Question: Please indicate the scale of compliance costs induced by the AIFMD as a whole.
Source: Europe Economics, above-threshold GP survey, based on 23 responses.
The provisions of the AIFMD that primarily drove one-off costs were those related to: (i) authorisation and
notification (95 per cent said this was a significant or moderate driver of one-off costs), (ii) marketing (88 per
cent), and (iii) setting up the depositaries (87 per cent). On the other hand — consistent with the evidence
that a vast majority of private equity funds are not (highly) leveraged — the rules around leverage seemed to
have had the smallest impact on one-off costs.
In terms of ongoing costs, the rules around depositaries, and transparency and reporting were identified as
being the primary drivers of higher costs (95 per cent and 80 per cent respectively). The depositary costs,
even though usually no more than a few basis points for a medium-sized fund and generally passed onto
investors, were perceived by most GPs as particularly burdensome (as we discuss more fully at 5.4 above).
Other provisions driving the ongoing costs were those related to: (i) authorisation and notification (74 per
cent), and (ii) marketing (60 per cent). Again, the rules around leverage seem to have affected the ongoing
costs the least.
4%
4%
17%
61%
78%
35%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
One-off costs
Ongoing costs
Negligible or none Small or limited Moderate Significant
Costs
- 59 -
Figure 7.2: Attribution of costs to particular AIFMD provisions — above-threshold GPs
Questions: Could you roughly indicate the distribution of one-off compliance costs generated by each of the AIFMD areas? Could you roughly indicate the
distribution of ongoing compliance costs generated by each of the AIFMD areas?
Source: Europe Economics, above-threshold GP survey, based on minimum 10 responses.
The interviews with above-threshold GPs broadly supported the findings from the survey. Most of the GPs
stated that due to the AIFMD they not only incurred one-off costs, but also some ongoing costs. That said,
the ongoing costs were usually less significant, and had also been passed through (at least in part) to LPs. The
rules most often indicated as being the most burdensome were those related to: (i) initial authorisation, (ii)
depositaries, and (iii) marketing. The latter was particularly true for funds marketing across several Member
States under the respective NPPRs, i.e. for non-EU/EEA funds, sub-threshold funds and EU/EEA funds
managed by non-EU fund managers.
The largest obstacle to pan-European marketing seemed to be the (sometimes highly significant) differences
and inconsistencies between the implementation and application of the rules in each jurisdiction. This meant
that marketing across several countries involved not only the direct cost of being authorised by the home
competent authority, but also significant indirect costs associated with the need to understand and comply
with a different set of rules in each jurisdiction. The GPs often had to involve external legal or compliance
consultants and/or increase their internal compliance teams to achieve that. Moreover, the costs of complying
with the NPPR requirements differed across Member States, with some countries (such as the UK) having a
more straightforward framework whereas others (such as France, Spain) have more onerous rules or even
lack a workable regime (Italy). In particular, some of the sub-threshold fund managers indicated that — even
though they are not within the scope of most of the AIFMD rules53 — compliance with the NPPRs in certain
countries could be as extensive as the AIFMD requirements themselves.
7.3 Quantitative analysis of compliance costs
In monetary terms, the average one-off cost estimates obtained from above-threshold GPs were almost three
quarters of a million Euros, and average annual ongoing costs were slightly above one quarter of a million
53 As mentioned in Chapter 4, the rationale for excluding smaller funds from the full scope of the Directive was that
they are unlikely to have any systemic impact on the economy and complying with the same set of rules as larger
funds would not be proportionate to their size.
67%
19%
59%
61%
6%
8%
13%
29%
25%
29%
22%
44%
46%
9%
33%
60%
5%
56%
12%
17%
50%
46%
91%
67%
27%
0% 20% 40% 60% 80% 100%
Authorisation and notification
requirements
Minimum capital requirements
Marketing
Depositaries
Portfolio company disclosure
Remuneration
Leverage
Valuation requirements
Transparency and reporting
One-off
Significant driver Moderate driver
32%
13%
27%
79%
7%
8%
27%
42%
20%
33%
16%
43%
42%
20%
25%
53%
26%
67%
40%
5%
50%
58%
80%
67%
20%
0% 20% 40% 60% 80% 100%
Ongoing
Limited driver
Costs
- 60 -
Euros. As averages are sensitive to the outliers in a small sample, we also calculated the median costs, which
were close to half a million Euros and just under €200,000 for one-off and ongoing costs, respectively.
Table 7.1: Compliance costs — average and median
One-off costs Ongoing costs
Average € 738,000 € 269,000
Median € 440,000 € 183,000
Question: If you are able to, please indicate the approximate total compliance costs your firm has incurred to date with respect to the AIFMD. Please state
currency and value, distinguishing between one-off costs and ongoing costs.
Source: Europe Economics, above-threshold GP survey, based on 13 and 12 responses for one-off and ongoing costs, respectively.
The reported costs varied significantly depending on: (i) the location of the fund manager (outside or inside
the EU/EEA so outside or inside scope of the AIFMD), (ii) the amount of assets under management (which is
directly linked to the de minimis threshold), and (iii) the year of the last fundraising (before or after the entry
into force of the AIFMD). The relationship between the compliance costs and each of these criteria is broadly
consistent with the AIFMD rules and the time of its implementation. As illustrated in Table 7.2, the reported
costs were higher among EU-based managers managing and/or marketing EU-based funds. While this result
is intuitively reasonable — as they are directly within the scope of the AIFMD — we note that those managers
also tended to be larger (in terms of assets under management) than the non-EU ones. This means that not
all of the difference in costs between EU and non-EU managers is necessarily due to the AIFMD — some of
it may be due to the fact that in our sample the EU managers were on average larger than the non-EU
managers.
Table 7.2: Compliance costs by fund location
One-off
costs
Ongoing
costs Average AUM
EU AIFM managing and/or marketing EU AIF(s) € 955,000 € 367,000 € 2.0 bn
Non-EU AIFM managing and/or marketing non-EU AIF(s) € 251,000 € 74,000 € 1.6 bn
Question: If you are able to, please indicate the approximate total compliance costs your firm has incurred to date with respect to the AIFMD. Please state
currency and value, distinguishing between one-off costs and ongoing costs.
Source: Europe Economics, above-threshold GP survey, for EU AIFM managing and/or marketing EU AIF(s): based on 9 and 8 responses for one-off
and ongoing costs respectively, for non-EU AIFM managing and/or marketing non-EU AIF(s): based on 4 responses for both one-off and ongoing costs.
Furthermore, as illustrated in Table 7.3, the costs seem to be increasing with assets under management up
to the point where capital reaches €1bn threshold. These larger AIFMs may be several times larger (in assets
under management, manpower, number of locations, etc.) so some increase is unsurprising.
Table 7.3: Compliance cost by assets under management
One-off costs Ongoing costs
Up to € 500m € 114,000 € 95,000
€ 500m–€ 1bn € 430,000 € 130,000
Above € 1bn € 1,138,000 € 426,000
Question: If you are able to, please indicate the approximate total compliance costs your firm has incurred to date with respect to the AIFMD. Please state
currency and value, distinguishing between one-off costs and ongoing costs.
Source: Europe Economics, above-threshold GP survey, for up to €500m: based on 3 responses for both one-off and ongoing costs, for €500m–€1bn:
based on 3 responses for both one-off and ongoing costs, for above €1bn: based on 7 and 6 responses for one-off and ongoing costs respectively.
Finally, the costs are clearly higher for GPs raising funds in 2015 and 2016 (Table 7.4), which coincides with
the time the AIFMD was fully implemented in most countries. In this case, higher compliance costs are not
linked to the size of the GPs.
Costs
- 61 -
Table 7.4: Average compliance costs by the year of the last fundraising
One-off costs Ongoing costs
Last fundraising in years 2011-2013 € 424,000 € 102,000
Last fundraising in years 2014-2016 € 1,008,000 € 389,000
Question: If you are able to, please indicate the approximate total compliance costs your firm has incurred to date with respect to the AIFMD. Please state
currency and value, distinguishing between one-off costs and ongoing costs.
Source: Europe Economics, above-threshold GP survey, for those last fundraising in years 2011-2013: based on 6 and 5 responses for one-off and
ongoing costs respectively, for those last fundraising in years 2011-2013: based on 7 responses for both one-off and ongoing costs.
7.4 Industry-wide compliance costs
Based on the relevant survey data provided by the GPs we now estimate the overall compliance costs borne
by the private equity industry as a whole as a result of the AIFMD.
It is important to note that not all firms have incurred the full extent of compliance costs implied by the
AIFMD. There are several reasons for this, one of them being the grandfathering provisions around the
implementation of the AIFMD, which have enabled some private equity firms to defer seeking full
authorisation under the AIFMD until a new fund is raised — hence the clear correlation with the time of the
latest fundraising (see Table 7.3). Similarly, several of the GPs that we interviewed said that the compliance
costs incurred so far had been negligible but would become substantial as they prepare for the first fundraising
subsequent to the AIFMD’s implementation.
Data on the number of GPs within particular bandings of assets under management (AUM), e.g. above €500
million, came from Invest Europe’s database. Based on that database we believe that there are 188 fund
managers which are directly within the scope of the AIFMD (i.e. with AUM above €500 million).54
In addition to that, there will be a number of sub-threshold GPs which can be expected to reach the €500
million threshold or lose the grandfathering protection within the next couple of years. We estimated that
around 30 per cent of those with assets under management within the €250-500 million range already is or
would eventually become fully compliant with the AIFMD. This figure is based on our survey among sub-
threshold GPs, which shows that of the ten firms managing €250-500 million in 2015, three would go above
the €500 million threshold given their fundraising target for 2016. Therefore, we assume that 30 per cent
indicates the approximate proportion of larger sub-threshold GPs that are likely to grow quickly enough to
reach the €500 million threshold within the next couple of years. This implies that of 175 private equity firms
managing between €250 and €500 million in 2016,55 around 53 firms would eventually be subject to the full
scope of the AIFMD. Consequently, the total number of firms directly affected by the AIFMD is estimated to
be around 240.
As is normal with such fieldwork, there is an element of uncertainty associated with the costs reported by
the respondents. Therefore we developed two ways for estimating overall compliance costs:56
The first is based on the median compliance costs per GP reported in the survey by those GPs which
raised funds after 2013 (i.e. after the AIFMD was implemented). The same median costs are applied
regardless of size. The advantage of this approach is that it maximises the number of data points feeding
into the estimate of compliance costs per GP. Its main disadvantage is that it does not take into account
the size of the firm, and compliance costs generally do vary with firm size.
54 From the total of 190 fund managers with assets under management above €500 million we subtracted corporate
venture managers on the assumption that these are largely managing captive funds (i.e. and so not seeking external
capital). 55 As with the above-threshold managers, from the total of 180 firms managing between €250 and €500 million we
excluded corporate venture managers. 56 Both approaches are based on medians rather than averages as the former is usually more representative in small
samples.
Costs
- 62 -
The second basis takes the median compliance costs per GP reported by all EU-based GPs, differentiating
between GPs with AUM above €1bn and below €1bn. The median cost per GP reported by those with
AUM below €1bn was applied to smaller GPs (including, in particular, those GPs not currently covered
by the AIFMD but expected to be in scope in the coming years).
The first approach results in an estimate of total industry-wide one-off costs of around €106 million, with
ongoing costs of €60–€109 million annually. Based on the second approach, the industry-wide one-off costs
were estimated to be around €195 million, and the ongoing costs to be €95–€180 million annually. The lower
end estimates of ongoing costs are based on the costs as reported by the GPs, whereas the upper end
estimates assume that the costs reported by the GPs were in fact net of the amount passed onto investors.57
In terms of basis points, the ongoing costs calculated with the first approach (i.e. €60–€109 million) represent
around 1.3-2.3 bps of the total assets under management of affected GPs. The costs calculated with the
second approach (i.e. €95–€180 million) represent around 2.0-3.8 bps.58 It should be noted, however, that
these estimates are averages and there might be some variation in costs depending on the size of a GP. Our
estimates show that for smaller GPs, i.e. those managing close to €500 million, the ongoing costs could be
up to 11 bps.
These estimates are broadly consistent with the indicative cost figures provided by GPs in the interviews:
medium to large AIFMD-authorised firms thought that ongoing costs are in low single digit basis points. Costs
in the order of 8-10 bps were quoted by at least one smaller GP that we interviewed. Moreover, some of
the largest firms considered the costs to be lower which might suggest that indeed there is a fixed element
of the costs, which accounts for a larger proportion of capital managed by smaller GPs and a smaller
proportion of larger managers’ capital.
Moreover, as mentioned above, the interviews with the GPs suggested that not all fund managers — including
those already above the €500 million threshold — have already incurred the full cost of becoming AIFMD
compliant. Given our finding that the costs are mostly incurred when fundraising for the first time under the
AIFMD and our survey estimate that fund managers raise funds roughly every four years, we expect that
around 25 per cent of the GPs that will eventually become fully compliant with the AIFMD have not
implemented or have not felt the full impact of all the rules yet.59 While the number of firms is not necessarily
directly proportional to the costs,60 these estimates might indicate that around a quarter of the overall costs
has not yet been borne by the industry.
7.5 Fees paid by investors
GP perspective
With higher operational costs, GPs might seek to pass (at least part of) these costs onto investors by
increasing the management fees.
When asked directly about the fees, a majority (68 per cent) of our survey respondents said the fees had
remained unchanged compared to five years ago, and a significant proportion (23 per cent) stated that
57 For the distribution of costs, we used the figures provided by the GPs who also provided cost estimates, where
available. Where not available (i.e. in two instances) we assumed the distribution to be the same as the average
distribution of costs calculated for all GPs that responded to this question (i.e. a half-half split). 58 Based on Invest Europe statistics (2016), we assumed that 75 per cent of the €600bn total assets under management
by the industry is managed by above-threshold GPs; and that 12 per cent of this amount is managed by GPs with
AUM between €250 and €500 million. Therefore, the total assets under management of the affected GPs was
estimated to be roughly €471,600 million (= (75% + 12% * 30%) * 600,000). For details see Invest Europe (2016)
“2016 European Private Equity Activity. Statistics on Fundraising, Investments & Divestments”. 59 For this high-level estimate we assumed that the AIFMD was in force since 2014. 60 For example, some firms which had not yet raised funds under the AIFMD might have already incurred part of the
compliance costs relating to other AIFMD requirements or in anticipation of the upcoming fundraising.
Costs
- 63 -
the fees are now somewhat lower. Only nine per cent of the GPs that responded to our survey claimed
that the management fees are somewhat higher.
In terms of how the additional costs are being distributed among GPs and LPs, the responses from GPs
ranged from zero (indicating that the entire costs are borne by the GPs themselves) to 85 per cent
(indicating that most of the cost is being passed onto investors) with the average (and median) being
around 50 per cent (i.e. half-half split of the cost).
Clearly, the factors contributing to higher fees might not be limited to the AIFMD. According to those GPs
for whom the fees increased, the change can be attributed to the AIFMD but also to global macro / market
developments, and — to a lesser extent — to regulatory and tax developments both in the EU/EEA and in
the US.
Figure 7.3: Factors contributing to the changing level of management fees — above-threshold GPs
Question: How have the following factors contributed to the changing level of these fees?
Source: Europe Economics, above-threshold GP survey, based on minimum 8 responses.
LP perspective
We asked LPs a similar question to see how they perceive the level of fees.
Almost half of the respondents (7 out of 15) agreed that the fees are about the same as they were five
years ago; a third stated that the fees are slightly lower; and only three LPs said they are slightly or
significantly higher.
At the same time, when asked how the increased costs in the private equity industry had been divided
between GPs and LPs, 9 out of 11 LPs indicated that more than half of the additional costs is passed onto
LPs rather than borne by the GPs, with the average (and median) distribution of costs of three to one
suggesting that LPs bear three times as much of the costs as GPs.
In terms of drivers of the changing level of fees, LPs indicated a broader range of factors than GPs (see Figure
6.7). The most commonly identified factors increasing upward pressure on fees were the AIFMD, and
regulatory and tax developments specific to the EU/EEA.
1
1
1
1
1
1
5
6
8
8
7
7
7
6
4
4
1
3
3
1
2
0 2 4 6 8 10 12
Global macro / market developments
Macro / market developments specific to the EU / EEA
Regulatory and tax developments specific to the EU / EEA (excluding
the AIFMD)
The AIFMD
Regulatory and tax developments in the USA
Regulatory and tax developments outside the EU / EEA and the USA
Evolving in-house strategy or strategies of other General Partners
Evolving strategies by Limited Partners invested in fund(s)
Significantly increased upward pressure on fees Slightly increased upward pressure on fees
Made no difference Slightly increased downward pressure on fees
Significantly increased downward pressure on fees
Costs
- 64 -
Figure 7.4: Factors contributing to the changing level of management fees — LPs
Question: Are the management fees charged by General Partners in the EU/EEA higher or lower than they were five years ago?; How have the following factors
contributed to this?
Source: Europe Economics, LP survey, based on minimum 10 responses.
2
2
1
1
4
4
1
2
5
7
9
6
6
7
7
5
2
2
1
3
2
1
1
1
1
0 2 4 6 8 10 12
Global macro / market developments
Macro / market developments specific to the EU / EEA
Regulatory and tax developments in the USA
Regulatory and tax developments outside the EU / EEA and the USA
Regulatory and tax developments specific to the EU / EEA (excluding
the AIFMD)
The AIFMD
In-house developments
Evolving strategies by General Partners invested in
Slightly increased upward pressure on fees Made no difference
Slightly increased downward pressure on fees Significantly increased downward pressure on fees
Benefits and Wider Impacts
- 65 -
8 Benefits and Wider Impacts
8.1 Introduction
In this chapter, we transition from the analysis of the direct and tangible operational and cost impacts of the
AIFMD to a discussion regarding the potential benefits of the Directive, including the two areas it was
designed to improve, i.e. investor protection and financial stability.
In order to complete an economic impact assessment, we also need to consider the wider impacts the AIFMD
has had. We focus on the following areas: the development of the private equity industry itself, the AIFMD’s
macroeconomic effects, and then any unintended consequences.
8.2 Benefits
8.2.1 Investor protection
LPs generally recognised that various AIFMD rules, at least to some extent, contributed to an improvement
in investor protection. In particular, the rules around transparency and reporting by GPs were identified as
having the biggest impact: 12 out of 15 LPs indicated that those had strengthened investor protection.
Moreover, 9 out of 13 stated that the rules around leverage contributed to that aim, and 6 out of 13 viewed
the depositary rules as another contributing factor. The rules around remuneration were considered to be
the least relevant in this respect, with more than half of the LPs indicating that the rules made no difference.
Figure 8.1: Impact of AIFMD rules on investor protection — LPs
Question: There are various elements within the AIFMD designed to increase investor protection. Considering the rules in the following areas of the AIFMD —
where you have a view — how, if at all, have these affected your perceptions of investor protection? If you wish to expand upon your views, please use the
comments box below.
Source: Europe Economics, LP survey, based on minimum 13 responses.
In line with the conclusion set out above, LPs felt that investor protection had improved predominantly
thanks to: (i) the increased amount of information available, (ii) easier access to information, and (iii) easier
determination of a GP’s regulatory status.
On the other hand, other mechanisms through which the AIFMD might have strengthened investor
protection were not recognised as significant factors. In particular, many of the LPs did not think that the
AIFMD affected investor protection by reducing the need for their own due diligence, improving
comparability of GPs’ performances or the alignment of incentives between GPs and LPs. Interestingly, around
a quarter of the respondents thought of those three factors as not applicable or not being induced by the
8
4
7
3
4
5
1
3
2
3
4
8
1
1
1
0 2 4 6 8 10 12 14 16
Rules around remuneration
Rules around leverage
Rules around depositaries
Rules around transparency and reporting by GPs
Has made no difference Minor improvement in investor protection
Moderate improvement in investor protection Critical improvement in investor protection
Benefits and Wider Impacts
- 66 -
AIFMD. Moreover, a majority did not agree that regulating the private equity industry in general had any
significant consequences for investor protection.
Figure 8.2: AIFMD effects contributing to investor protection — LPs
Question: To what extent did the following effects contribute to improving investor protection?
Source: Europe Economics, LP survey, based on minimum 13 responses.
A majority of the LPs we interviewed did note that the costs increased slightly but in general not sufficiently
to be an important factor in their investment decisions. The interviewed GPs also indicated that many
investors — mostly those from outside the EU — were not familiar with the Directive. Among those who
were familiar, for most investors the information about the GP’s compliance with the AIFMD seemed to be
not much more than a formality.
That said, a few GPs indicated that some investors do appear to value the fact that the GP is regulated, and
therefore has certain investor protection measures in place. But as we have already described, e.g. with
respect to depositaries at 5.4, LPs generally do not seem to value the additional protections gained over the
cost of acquiring them.
8.2.2 Financial stability
The main motivation of the AIFMD was and is to enhance the stability of the financial system. We now
therefore investigate the AIFMD’s contribution to financial stability. First we describe the extent to which (if
at all) the private equity industry contributed to the origination, amplification or spread of risk in the financial
system (i.e. systemic risk) before the implementation of the AIFMD, and then we discuss how the AIFMD has
affected this.
How do we define systemic risk?
Prior to identifying the possible scale of systemic risk, it is necessary to consider the ‘system’ that is a concern
— and hence what the risks could be. At the broadest level, one can think of the financial system (or even
the economy) as a whole, and the retention of confidence in it. More narrowly, one could consider the
payments system and the acceptance of retail and wholesale deposits (i.e. the traditional role of credit
institutions, and the retention of confidence in it by its customers). We can assess private equity within this
context.
2
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6
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10
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More information available
Easier access to information
Reduced need for investors own due diligence
Easier comparability of GPs' performance
Aligned incentives between GPs and investors
Easier determination of a GP's regulatory status
Regulating the PE and VC sector in general
not applicable / AIFMD did not have such effect did not have a significant impact
slightly contributed to investor protection significantly contributed to investor protection
Benefits and Wider Impacts
- 67 -
The financial crisis prompted academics to further develop their thinking around systemic risk and financial
stability. Taylor (2009) identified the following qualifying criteria for posing a systemic risk:61
There must be a risk of a large triggering shock (such as a failure of a firm or firms). This could be due
to the size of a firm or the extent of its interconnectedness with the rest of the financial system.
Interconnectedness is a fundamental characteristic of the financial system, in the sense of both
intra-financial system links and connections to the ‘real world’. Interconnections with the broader
economy might lead to propagating the shock outside the financial system.
There must be a risk of the shock propagating through the financial system via contagion.
The financial disruption must affect the broader economy, i.e. taking the broadest definitional approach
to the appropriate ‘system’ described above. This relates again to the degree of interconnectedness and
the degree of substitutability, i.e. the ability of other firms or entities to provide the financial services
previously supplied by a failed capital markets participant. Substitutability can also be thought of from the
perspective of real users (e.g. If a fund manager wishes to raise private equity, would the failure of another
AIFM affect its ability to do so? If yes, it is a signal that this particular AIFM is systemic).
Drawing on the above definitions of systemic risk we can derive the following drivers.
Figure 8.3: Drivers of systemic risk
Source: Europe Economics.
There is of course overlap between these categories, particularly between substitutability and
interconnectedness; nevertheless, it provides a useful way of structuring the following narrative.
Financial stability risk in private equity
Scale and substitutability: There is a degree of segmentation in the private equity arena but even the
largest AIFMs in a given segment do not account for a dominant part of the market, i.e. the failure of
even the most important GP would not materially impair the choice and scale of capital available for
financing the real economy. The largest GPs on a global scale may be managing as much as $100 billion
in private equity assets, i.e. only a few per cent of the global total.62 Furthermore, there are no significant
financial links directly between GPs (although there can be co-investment by GPs in portfolio businesses).
Maturity transformation: In the traditional private equity model, AIFMs, and the AIFs that they manage,
are not involved in maturity or liquidity transformation in the way that banks and some other financial
institutions are (NB we are not addressing the mechanics of private debt funds here, this has been outside
61 Taylor, J.B. (2009) “Defining Systemic Risk Operationally”, in Scott & Taylor (ed.) (2009), “Ending Government
Bailouts as we know them”. 62 For example, The Blackstone Group’s private equity business claims to manage $100 billion (i.e. about €90 billion),
(https://www.blackstone.com/the-firm/asset-management/private-equity). The Carlyle Group has about $53 billion
in its corporate private equity business (https://www.carlyle.com/our-business/corporate-private-equity). KKR has
$130 billion in AUM (i.e. about €115 billion), but some of this does not relate to private equity
(http://www.kkr.com/kkr-today). These three businesses were identified in Preqin’s (2017) “Special Report: The
Private Equity Top 100” as having raised the most capital in the past decade
(https://www.preqin.com/docs/reports/Preqin-Special-Report-The-Private-Equity-Top-100-February-2017.pdf). By
comparison, the largest asset managers of open-ended funds can have €2–4 trillion under management.
• Firm size
• Concentration
• Maturity transformation and credit provision
• Scope for market disruption
Scale and substitutability
• Direct connections to banks and the macroeconomy
• Counterparty risk, equity risk and leverage
• Indirect connections to banks and the macroeconomy
Interconnectedness
Benefits and Wider Impacts
- 68 -
the scope of our research). LPs commit to provide capital to a (typically) closed-ended fund over a period
of several years. This capital is then put to work in portfolio investments also typically of several years’
duration. Once invested, such capital is not subject to immediate withdrawal. Instead, the redemption of
capital (and any profits made on it) is at (or towards) the end of an AIF’s span, but this is known in
advance and is at a value determined by investment performance. Whilst the investments made are clearly
illiquid, the nature of the redemption rights means there is no meaningful bankruptcy risk to the GP
(although poor investment performance is likely to curtail a GP’s future activities).
Loan origination: We found no evidence of loans being made from pure private equity-focused funds (i.e.
where an AIFM has a credit fund it is legally and functionally separate from its private equity funds — we
discuss such funds briefly below).
Leverage — fund level: As we have described in Section 5.9 above, the use of leverage within private
equity funds is relatively rare and, even where present, at a relatively low level. Furthermore, there is
little or no cross-collateralisation between portfolio companies and the AIF, which means that the failure
of a portfolio company should not have knock-on effects on the fund (and definitely not on other portfolio
companies). To the extent that cross-collateralisation is in place, it is secured against undrawn
commitments from investors. Negative externalities arising from “fire sales” are unlikely given the
heterogeneity of the assets that private equity funds are invested in.
Leverage — portfolio company level: The use of leverage within portfolio companies is a feature of private
equity; indeed, it is a defining feature of leveraged buyout (LBO) activity. The level of debt in private
equity portfolio companies tends to be high because an acquisition has occurred, i.e. the debt within each
portfolio company is providing much of the finance to fund a change in ownership. As part of private
equity’s hands-on approach, a lot of attention is consequently paid to governance in the acquired company
and enhanced cash flow management, i.e. there is a disciplining effect on management. One corollary is
that, when the nature of equity is different (e.g. when the form that equity takes intrinsically involves a
more intimate relationship between shareholders and management, as is the case, for example, with
private equity as opposed to listed shares) then theory predicts that the economically efficient level of
leverage will be higher than when, for example, there are listed shares. There is some evidence that the
consequent default rates are below those in analogous corporate settings, but this remains an area subject
to definitive results.63
Interconnectivity: LBOs provide a connection to the banking system should the portfolio company default
(i.e. should the company which was acquired in the LBO default). The leverage in such portfolio
businesses can expose banks to potential losses, and the level of debt used in deals tends to be
pro-cyclical, which could lead to some clustering of re-negotiation needs. This could amplify market
reactions.64 However, as we have described at 5.9, there is generally no recourse to the AIF or AIFM in
the case of such a default.
Collateralised Loan Obligations (CLOs): Such debt may also be used in writing CLOs, increasing
interconnectivity in the system. This is partly dependent on the extent to which CLOs are comprised of
LBO-originated debt. It has been suggested that arbitrage-CLOs contain more such debt.65 However, the
primary originators of the debt and the decision-makers around any collateralized instruments are the
banks — as is the case when debt capital is provided to fund acquisitions of listed companies and unlisted
companies without private equity backing. It is the banks and some specialist financial institutions that
create these connections with more opaque, derivative instruments. It is unclear why this should be used
to justify prudential regulation for the private equity sector, and not for, for example, large acquisitive
corporates or other debt issuers.
63 A 2010 study by Jason Thomas for the Private Equity Council indicated that default rates in private equity companies
were notably below the rate seen in their non-private equity backed peers. See Jason Thomas (2010) “The Credit
Performance of Private Equity-Backed Companies in the 'Great Recession' of 2008–2009”. 64 Bank of England (2013) “Private equity and financial stability” Quarterly Bulletin. 65 Bank of England (2013) “Private equity and financial stability” Quarterly Bulletin.
Benefits and Wider Impacts
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AIFMs can also be managers of credit-focused (i.e. private debt) funds. These are typically discrete funds
dedicated to providing loans to corporates.66 Investors view such private debt funds as a separate asset
class from private equity within the alternative investment universe, and one that has grown subsequent
to the credit crunch. That said, some of these funds do focus only on those corporates that already have
a private equity investor (not necessarily arranged by the GP in question; indeed, this was precluded in
some cases). We note that such funds, in Europe at least, look to be mainly run by a minority of the
largest GPs (whether focused on Europe or where Europe is one region amongst several in a credit
fund’s scope). These credit-focused funds may well be leveraged, in order to achieve enhanced returns.
This means that banks are providing capital to enable competitors to themselves. It also means that there
may be some degree of maturity transformation here, dependent on the terms of the loans to and from
these private debt funds, and that there is increased connectivity with the banking system.
The above evidence does not support the construct implicit in the AIFMD that private equity is meaningfully
to be considered as shadow banking when discussing systemic risk. There is no clear pathway from a private
equity AIF to a non-negligible systemic risk that is attributable to the GP managing it. Furthermore, equity
can be characterised as offering the best trade-off between risk-sharing and financial stability because
payments by liability holders can be adjusted as needed, unlike for fixed income securities or loans, and is less
vulnerable to redenomination risk.67 This would suggest that equity capital providers should be seen as
contributing to financial stability rather than undermining it.
Indeed, the de Larosière and Turner Reviews concluded that, whilst hedge funds contributed to disorderly
deleveraging during the financial instability in 2008-09, private equity did not play a major role in the
emergence of the crisis.68 There is no evidence that private equity was responsible either for the onset or
severity of the crisis. This means that the prudential aspects of the AIFMD applied to private equity fund
managers are neither relevant nor effective.
How has the AIFMD affected this?
Given the above analysis, it is apparent that the AIFMD has not made (even, could not make) any measurable
difference in lowering the systemic risk associated with private equity. In terms of the detailed measures
relevant in this context, in-fund leverage is atypical in the private equity industry, albeit not unheard of (see
5.9 above) and its use does not appear to have changed post-AIFMD. The Annex 4 reporting to supervisors
does not appear to be intensively examined or utilised at present, i.e. it does not currently contribute to
effective oversight of the sector / financial stability.
Whilst our analysis of fundraising by AIFMs (please see Section 3.2.1 above) indicates that cross-border
channels have been particularly resilient in private equity since the onset of the financial crisis, there is no
indication that the AIFMD, and the passport it offers, have contributed towards this.
66 The AIFMs that engaged with credit activities all maintained them in discrete funds. Preqin noted in 2014 that the
majority (78 per cent) of investors preferred this approach and given target returns below private equity levels this
is understandable. See Preqin (2014) “Private Debt: The New Alternative”. 67 Bank of England (2015) "A European Capital Markets Union: implications for growth and stability" Financial Stability
Paper 33. 68 “The High-Level Group on Financial Supervision in the EU” chaired by Jacques de Larosière (February 2009), and
“The Turner Review, A Regulatory Response to the Global Banking Crisis” (March 2009).
Benefits and Wider Impacts
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8.3 Wider impacts
8.3.1 Development of the private equity industry
About one third of the LPs in our survey suggested that there had been a moderate relocation of AIFs and
AIFMs into the EU/EEA. On the other hand, a few LPs had observed a moderate relocation out of Europe. A
small degree of on-shoring into the EU/EEA does therefore seem a plausible consequence of the AIFMD.
A non-negligible minority of above-threshold GPs in our survey (6 out of 16) considered that differences in
AIFMD implementation had been sufficient to encourage the relocation of some AIFMs or AIFs within the
EU/EEA. The trend in relocation preference (at least prior to the Brexit referendum) was towards the UK,
and also Ireland and Luxembourg. The countries within the EU/EEA seeing an outflow were variously
identified as Germany, the Nordic states and the Central and Eastern European region.
A substantial minority of LPs was in agreement, confirming that there had been a moderate relocation to a
small number of Member States, such as the UK and Luxembourg. This suggests a slight increase in the
concentration of AIFs/AIFMs in certain European countries, at least in part driven by the AIFMD.
Figure 8.4: Views around relocation of AIFs and AIFMs — LPs
Question: Have you observed any change in the location of AIFs and/or AIFMs compared to five years ago? (1) EU/EEA versus non-EU/non-EEA, (2) Within the
EU/EEA.
Source: Europe Economics. LP survey, based on 14 responses regarding “EU/EEA versus non-EU/non-EEA”, and 11 responses regarding “Within the
EU/EEA”.
In addition, we have identified a number of ways in which the AIFMD can have a greater relative cost impact
on AIFMs at or around the de minimis threshold compared to those with €10s of billions in assets under
management. For example, the operational separation necessary to maintain in-house valuation is more
achievable in a very large fund manager than at a smaller one. Larger funds can generally deal better with
additional administrative and compliance requirements, without distracting investment professionals unduly
from the critical tasks of researching investment opportunities and contributing to the growth in value of
their portfolio companies. Several GPs and LPs noted in the interviews that smaller (and potentially more
innovative) AIFMs might try to intentionally avoid growing above the threshold just to avoid the AIFMD
requirements and that, in some cases, larger GPs had acquired smaller GPs motivated by this. In this way, the
AIFMD can be seen as retarding the development of the private equity industry within the EU/EEA.
8.3.2 Macroeconomic impacts of the AIFMD
Frontier Economics (2013) examined the economic impact of private equity firms and indicated that they
contribute to the economy in the following ways.69
69 Frontier Economic (2013) “Exploring the impact of private equity on economic growth in Europe”, a report prepared
for the EVCA, May 2013.
2 5 7Relocation of AIFs /AIFMs:
EU/EEA vs non-EU/non-EEA
Moderate relocation of AIFs/AIFMs out of the EU/EEA No change Moderate relocation of AIFs/AIFMs into the EU/EEA
6 5Relocation of AIFs /AIFMs:
within the EU / EEA
No change Moderate relocation of AIFs/AIFMs within the EU/EEA to a small number of MS
Benefits and Wider Impacts
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Innovation — On average, private equity backed companies are more focused in their innovation efforts
and deploy better management of innovation processes than their peers.
Productivity — Private equity firms increase productivity in two ways: 1) innovation can lead to higher
productivity, and 2) private equity firms increase the finance available for capital investments, supporting
companies through a period of commercial or financial distress, and increase the operating performance
of portfolio companies thanks to managerial support.
Competitiveness — Higher competitiveness of private equity backed companies follows from better
productivity but also from making funding available for risky but potentially lucrative new business
opportunities.
Given that the private equity industry indeed has a significant and beneficial role in the EU economy,
introducing barriers and restrictions to its natural growth could have negative consequences at the
macroeconomic level in terms of reduced innovativeness and competitiveness of the EU compared to the
rest of the world. However, since our fieldwork shows that the AIFMD is perceived more as additional
administrative burden rather than a significant driver of change in business strategies, we have not been able
to isolate the macroeconomic impacts of the AIFMD on innovation, productivity and competitiveness in
quantitative terms.
Overall Evaluation using the European Commission’s Criteria
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9 Overall Evaluation using the
European Commission’s Criteria
9.1 Introduction
In the previous chapters we have examined the impact that the AIFMD was expected (or could reasonably
be expected) to have and described the actual economic effects it has had, and may be considered likely to
have on an ongoing basis. We now re-examine these findings against the European Commission’s own criteria
for the conduct of an ex post assessment of its policy measures.70
9.2 Relevance of the AIFMD
This part of the assessment considers whether the legislation is still relevant given the current needs and
problems in society. The analysis could aim to answer the following questions.
To what extent is the intervention still relevant?
To what extent have the original objectives proven to have been appropriate for the intervention in
question?
How well do the (original) objectives (still) correspond to the needs within the EU?
The original objectives of the AIFMD do not seem to be well-justified. First, in most areas of the AIFMD only
a minority of investors said the Directive materially improved investor protection, suggesting that at least
some of the measures imposed by the Directive were not necessary in the first place (e.g. those around
remuneration). Second, there is no evidence suggesting that AIFMs spread or amplify risk though the financial
system. Therefore, it appears that the original objectives of the AIFMD were not relevant for the private
equity industry.
9.3 Effectiveness of the AIFMD
The effectiveness analysis focuses on how successful the legislation has been in achieving its objectives. In
particular, it could focus on the following questions.
To what extent have the objectives been achieved?
What have been the (quantitative and qualitative) effects of the policy intervention?
To what extent do the observed effects correspond to the objectives?
To what extent can these changes/effects be credited to the policy intervention?
What factors influenced the achievements observed?
The effectiveness of the AIFMD seems to be limited. Whereas the AIFMD has been successful to some extent
at increasing the level of investor protection (e.g. by increasing the amount of easily accessible information
and facilitating the access to such information), its effectiveness at meeting the overarching objectives, such
as creating a harmonised and stringent regulatory and supervisory framework for all AIFMs within the EU,
has been restricted. While the private equity industry is now fully regulated, there is no evidence suggesting
that the industry’s contribution to systemic risk is any different now than in the past. Finally, it seems that
70 See European Commission’s guidance on the evaluation criteria http://ec.europa.eu/smart-
regulation/guidelines/tool_42_en.htm.
Overall Evaluation using the European Commission’s Criteria
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although some stakeholders do see an improvement in the field of harmonisation, a vast majority still points
out significant differences in the implementation and application of the AIFMD across Member States.
9.4 Efficiency of the AIFMD
The efficiency analysis compares the resources used to implement the legislation with the impacts it induced
(either positive or negative). The relevant questions here could be as follows.
To what extent has the intervention been cost effective?
To what extent are the costs involved justified, given the changes/effects which have been achieved?
To what extent are the costs proportionate to the benefits achieved? What factors are influencing any
particular discrepancies?
The benefits of the AIFMD (including, for example, increased investor protection, the availability of a passport
or better structured marketing process) have been achieved only to a certain extent but at a relatively high
cost. In absolute terms the costs per AIFM do not appear to be prohibitively high. However, with only a small
number of market participants recognising some (usually limited) benefits of the legislation, the intervention
does not appear to be cost effective.
9.5 Coherence of the AIFMD
The coherence criterion is intended to capture how well the legislation in question works with other actions.
In particular, it should consider the following questions.
To what extent is the intervention coherent internally?
To what extent is the intervention coherent with wider EU policy?
To what extent is the intervention coherent with international obligations?
9.5.1 Internal coherence of the AIFMD
Although the AIFMD is a minimum harmonisation instrument, there are significant differences in its national
implementation across the EU, affecting fund managers’ marketing activities under both the AIFMD passport
and the national private placement regimes. In addition, AIFs remain subject to national rules, and ambiguities
in the Level 1 text (e.g. regarding leverage or asset-stripping rules) have facilitated diverse regulatory and
supervisory interpretations across Member States. The most material differences identified in our research
relate to the following.
The interpretation of what constitutes marketing and pre-marketing. In addition to creating (legal)
uncertainty, this has two main effects: 1) it builds in additional legal and compliance cost in order to
understand and comply with the local interpretation; 2) it makes some countries less attractive in terms
of seeking investors because costs need to be incurred even before investor appetite is certain. Such
effects are likely to be strongest in Member States with more restrictive rules, and without a large
institutional investor base or track record of investing in private equity.
The interpretation of reverse solicitation. As indicated by our fieldwork, the interpretation is more
flexible in countries such as the UK but very rigid in others like France. In the case of the latter group,
AIFMs, in order to avoid regulatory risk, can act upon only those reverse enquiries that satisfy all the
necessary conditions. This implies that the marketing strategies of some GPs have been restricted only
to active marketing, which falls under the AIFMD.
The accessibility and attractiveness of the local NPPR. The NPPR in the UK is perceived as the most
accessible, at least by third country AIFMs, without any gold-plating requirements and with a responsive
and knowledgeable NCA, e.g. there is no post-submission approval waiting period to commence
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marketing. Ireland, Luxembourg and the Netherlands were generally also seen as offering attractive
NPPRs. Germany and Denmark are seen as less appealing, e.g. both require “depositary-lite” and involve
waiting times of at least two months. Some further Member States were variously considered as very
challenging (France, Spain) or even impossible (Italy, where Article 42 will not be implemented). We note
that the NPPR requirements for sub-thresholds are not always the same as those for third country
entities. Indeed, certain Member States do not allow non-domestic sub-threshold fund managers to
market in their jurisdiction. The majority of the comparative views we received on NPPRs came from
third-country AIFMs though it is worth noting that the observations from sub-threshold EU fund
managers shared the consensus view.
The application of host fees to the passport. Some NCAs charge one-off and/or ongoing fees for the
authorisation/notification and monitoring of non-domestic funds. Many of the interviewed GPs indicated
that it is not clear what the fees are really for. Whilst larger fund managers, generally speaking, considered
that the fees were set at an “annoyance” level rather than one that materially affected decision-making,
less large AIFMs may be more affected especially given that these fees need to be paid on top of the fees
due to their “home” regulator. Certainly such fees do not encourage marketing to smaller Member States
imposing fees but lacking a substantive institutional investor base.
Annex 4 reporting requirements. It seems that many Member States adjust the ESMA template for Annex
4 reporting to their own needs. As a result, AIFMs operating in more than one Member State need to
adjust their reporting to each jurisdiction separately.
The above differences are driven partly by divergent local legislation that was unaffected by the AIFMD (i.e.
local selling rules) and partly by divergent stances to transposition adopted by the national competent
authorities. There is a clear understanding that some authorities, such as the UK’s Financial Conduct
Authority, bring much more experience and superior responsiveness than others.
The GPs most affected by these differences are of course those managers that cannot currently benefit from
the passport and need to rely on the NPPRs for their marketing activities in the EU. This includes GPs that
are constituted outside the EU/EEA, EU GPs with non-EU funds and those sub-threshold fund managers not
able to solely rely on either their local market or reverse solicitation (e.g. because of insufficient investor
appetite or a small investor base in their home country). In all of these cases, the ability to operate across
several Member States might be restricted or costly.
As such, the AIFMD has not helped remedy the fragmentation of the venture capital market. While this was
not an explicit objective of the Directive, it aimed “to provide for an internal market for AIFMs and a
harmonised and stringent regulatory and supervisory framework for the activities within the Union of all
AIFMs”, which could have been expected to facilitate cross-border operations for venture capital fund
managers as well. For sub-threshold managers who cannot benefit from the AIFMD passport (unless they
decide to opt in, which would be a costly and burdensome exercise), the passport offered by the EuVECA
Regulation71 is only a partial remedy. About 80 fund managers have registered over 100 funds under the
EuVECA Regulation72; this indicates that the Regulation has value and some of the sub-threshold managers
participating in our fieldwork did indeed note it had helped provide them with additional cross-border access.
71 The EuVECA (European Venture Capital Funds) Regulation allows venture capital fund managers to market their
qualifying funds across the EU to professional investors and investors with a minimum commitment of €100,000
without imposing as strict requirements as the AIFMD does. The intention of the Regulation is “to make it easier
and more attractive for investors to invest in unlisted SMEs”. It should also be noted that the European institutions
have recently agreed to amend the EuVECA Regulation in a way that: (1) “extends the range of managers eligible to
market and manage EuVECA”, (2) “expands the ability of EuVECA funds to invest in small mid-caps and SMEs listed
on SME growth markets”, and (3) “decreases the costs by explicitly prohibiting fees imposed by competent
authorities of host Member States where no supervisory activity is performed”. See: European Commission’s Press
release from 30 May 2017, “Capital Markets Union: EU agrees to more support for venture capital and social
enterprises”, http://europa.eu/rapid/press-release_IP-17-1477_en.htm. 72 This is based on analysis of ESMA’s EuVECA database, as of March 2017.
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However, various sub-threshold managers that we interviewed expressed concern around the narrowness
of the definitions and qualifying requirements of the Regulation, noting that — particularly in less well-
developed markets — it was difficult to focus on venture capital in isolation. As a result, there is likely to be
a significant number of sub-threshold GPs that cannot afford obtaining the AIFMD passport and also do not
qualify for the EuVECA passport, thus being left at a competitive disadvantage.
9.5.2 Coherence with other EU or national regulation
Our work has not identified material divergence from other EU or national regulation. Our survey
respondents (both LPs and GPs) were asked to identify such divergences, and did not identify anything of
substance. We also interviewed several lawyers, each a specialist in the private equity field, with the same
result.
9.5.3 Coherence with EU policy goals
The EU has a goal to perfect its Capital Markets Union. Whilst the AIFMD passport should help the cross-
border distribution of capital within the EU/EEA, it is not clear that it has had that effect. In addition, the
absence of a passport for non-venture capital sub-threshold managers, coupled with the costs of the NPPR
set-up, suggest that the AIFMD has not helped reduce fragmentation amongst smaller funds and investors.73
9.5.4 Coherence with international obligations and standards
The AIFMD stands out internationally as the piece of EU law regulating the alternative investment (fund
management) sector in a comprehensive way. As such, there is no genuine international norm for it to diverge
from. Even so, institutional investors did believe it compared unfavourably to the SEC’s more focused and
targeted initiatives in the USA. For example, the main focus of one set of SEC rules is to oblige detailed
disclosure of fees and expenses by GPs. Based on the interviews with industry representatives we believe
that the LPs favoured this approach for two reasons.
First, it was targeted regulation and as such did not result in unnecessary administrative burdens being
placed upon GPs, and likely passed through to LPs either through higher management fees or reduced
returns.
Second, disclosure of fees and expenses was broadly regarded by LPs as an area where they considered
themselves less able to secure a good outcome independently of such an intervention.
Some LPs felt that the AIFMD rules could potentially be used to generate a similar result, but were not
currently being interpreted in a way that would support sufficiently detailed disclosure of fees and expenses.
Marketing and fundraising activities — at least for most funds — take place within a global context. The vast
majority of GPs in the interviews did not believe the AIFMD has had any positive regulatory badging effects
to date. This was not a unanimous view, however. A few firms did believe that it had been useful in attracting
investors either from outside the EU through such a badging effect or from within the EU (e.g. through
equivalent badging effects, or, by providing reassurance to investors through compliance with the controlled
transaction regulations, i.e. the asset-stripping rules).
73 As mentioned above, this was not an explicit objective of the Directive, which aimed “to provide for an internal
market for AIFMs and a harmonised and stringent regulatory and supervisory framework for the activities within the
Union of all AIFMs”. This could have been expected to facilitate cross-border operations for smaller fund managers
as well and therefore alleviate the fragmentation in this segment of the market.
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9.6 EU added-value of the AIFMD
The EU added-value analysis looks for impacts and changes which could be attributed to the legislation in
question. In a way, this criterion relies on the findings related to the previous four criteria. The questions
which might be relevant here are as follows.
What is the additional value resulting from the EU intervention(s), compared to what could be achieved
by Member States at national and/or regional levels?
To what extent do the issues addressed by the intervention continue to require action at EU level?
What would be the most likely consequences of stopping or withdrawing the existing EU intervention?
The main added value of the AIFMD is the availability of an internal market passport and reducing the barriers
for an AIFM to market and operate across the EU. However, factors such as the notable differences in
implementation of the Directive as well as varying levels of experience and responsiveness from national
competent authorities mean that the value of the passport is below its full potential. The legislation could be
improved in that respect by a more harmonised and unambiguous implementation.
In other respects of the framework, however, there would unlikely be any material consequences of further
amending/limiting the scope of — or even withdrawing — the AIFMD as the premises of the Directive (i.e.
insufficient investor protection and amplifying systemic risk) are not sufficiently justified, i.e. there does not
seem to be an obvious need to regulate the private equity industry (see Section 9.2).
Conclusions
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10 Conclusions
10.1 Introduction
In this chapter we draw together our analysis of the AIFMD, summarising how the different constituents of
the private equity industry have been affected. In doing so, we have focused on the impacts of the AIFMD on
GPs (distinguishing between above and sub-threshold fund managers, and — to the extent relevant — third
country managers), LPs, and the wider economy.
It should be noted, however, that it is impossible at this stage to assess with certainty the full impact of the
AIFMD on the private equity industry. Reasons for this include the fact that the third country regime is still
evolving and that not all fund managers who eventually will be within the full scope of the Directive have
already implemented/applied all of the AIFMD rules (e.g. fund managers who were subject to the
grandfathering provisions and fund managers who have not yet raised funds under the AIFMD and therefore
may not have been faced yet with all AIFMD-related costs).
While, as in any evaluation, there are many subtleties in the way that the AIFMD has affected various
stakeholders and the wider economy, the high-level conclusion that can be drawn from our research is that
the Directive induced some not insignificant changes in the private equity industry but at a relatively high
cost. In addition to the pure operational and cost effects, changes in the industry can be linked to benefits
(along the objectives behind the AIFMD) and unintended consequences which might retard the growth of the
industry. Moreover, not all of the main goals of the Directive have been achieved, at least in the case of
private equity. Most notably, given the lack of evidence demonstrating a clear connection between private
equity and (higher) systemic risk, the AIFMD has had very little effect on improving financial stability.
10.2 Impact on GPs
The AIFMD targets EU-based private equity fund managers with more than €500 million in AUM and, indeed,
GPs above this threshold are the group most significantly affected by the AIFMD. That said, sub-threshold
GPs and third-country fund managers insofar as they market to EU investors were also affected by the
Directive in an indirect way. We consider the most important impacts to be as follows.
Above-threshold GPs
Marketing and fundraising. Many GPs believe that the AIFMD made the marketing process in the EU/EEA
harder, slower and more costly (even though globally funding rounds have been closing more rapidly).
The increase in both time and cost was (at least partially) attributed to the vast differences in how the
AIFMD was implemented across Europe. In spite of the above, whilst in our fieldwork GPs broadly
confirmed that the authorisation and marketing requirements were burdensome and discouraging them
from operating on a pan-European scale, only very few claimed that the requirements affected their
marketing strategies in a significant way. In our econometric analysis we did not find any statistically
significant indication that the AIFMD has resulted in a change in the level of fundraising in Europe or in
individual Member States. In some countries, however, there were indications that there was a temporary
decline in fundraising around the actual implementation itself (i.e. uncertainty or delays in authorisation
may have led to a one-quarter slowdown, but not to any structural change). On the other hand, our
survey showed that at least a minority of GPs observed a decline in the universe of LPs (14 per cent
regarding the LPs in their home country, and 20 per cent regarding LPs elsewhere in the EU/EEA) and in
the amount of funds raised (23 per cent and 20 per cent regarding LPs in their home country and
elsewhere in the EU/EEA respectively).
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Increased operating costs. We estimate that the total one-off industry-wide costs would amount to
between €106-195 million, with an industry-wide annual ongoing cost estimated to be between €60 and
€180 million, i.e. around 1.3–3.8 bps of the total assets under management of all the GPs that will
ultimately be within the scope of the AIFMD. The costs reported by our respondents appeared to be
correlated with the time of the latest fundraising suggesting that grandfathering provisions around the
implementation of the AIFMD have enabled some private equity firms to defer seeking full authorisation
under the AIFMD until a new fund is raised. Furthermore, given that not all fund managers will already
have fundraised under the AIFMD, it is likely that not all firms have incurred the full extent of the
compliance costs implied by the AIFMD. We estimated that around a quarter of the total number of
AIFMs would still need to become fully AIFMD-compliant in order to raise funds in the coming years.
Whilst some GPs did see benefits resulting from the application of the Directive’s provisions (e.g. they
welcomed the opportunity to update and refresh their policies and the associated increased attention of
front-office staff to these policies), this has come at a high cost. The most material drivers of these
increased costs are: (i) the authorisation process (one-off costs), (ii) the marketing rules (generating both
one-off and ongoing costs), (iii) the depositary requirement (ongoing costs, albeit with some scope to
recharge to LPs), and (iv) the minimum capital requirements (an opportunity cost triggered by diverting
resources from more productive activities, such as funding additional research into investment
opportunities). One cause for the high operational cost burden is the lack of recognition in the AIFMD’s
rules of the (specificities of the) private equity business model and the way in which private equity firms
are structured. This is amplified by:
an insufficient recognition by policymakers of the differences between private equity and other
alternative investment funds such as hedge funds, and the inadequate tailoring of rules to the former
(e.g. reporting deadlines are appropriate to liquid investments but not illiquid ones), or to the true
nature of private equity more generally (e.g. the “asset-stripping” and leverage rules have not
noticeably affected the activities of private equity firms, but have still managed to increase compliance
costs),
the implementation of the AIFMD with significant variation between Member States (e.g. supervisory
reporting does not always follow the ESMA template), and
the lack of experience in regulation or supervision of alternative investment fund managers, including
private equity, among many national competent authorities resulting in a less pragmatic approach in
interpreting the AIFMD (e.g. making the authorisation process unnecessarily onerous).
Sub-threshold and third country GPs
Marketing and fundraising. Similarly to above-threshold GPs, many sub-threshold GPs believe that the
AIFMD made the marketing process in the EU/EEA harder, slower and more costly. The increase in both
time and cost was (at least partially) attributed to the differences in the NPPRs and several particularly
onerous requirements comprising these regimes in some Member States. This is especially relevant for
those fund managers who cannot currently benefit from the internal market passport and can only rely
on the NPPRs for their marketing activities. In addition to sub-threshold fund managers, this includes: i)
EU above-threshold fund managers to the extent that they want to market non-EU funds, and ii) non-EU
fund managers. As such, the inconsistencies in the NPPRs also created a barrier for non-EU managers to
market their funds in the EU, and effectively discriminated against non-European GPs. GPs marketing
under the NPPRs noted that in some jurisdictions the NPPR requirements were almost equally restrictive
as the requirements to obtain the AIFMD passport. Indeed, despite the intention of the European
Commission to keep firms managing less than €500 million in closed-ended, unleveraged funds outside
the scope of (most of) the AIFMD rules, some Member States designed their NPPRs in a way that forces
all fund managers to comply with equally rigorous rules if they want to gain access to investors in those
Member States.
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Increased operating costs. We suspect that the operating costs for sub-threshold managers (and third
country managers) have also increased. Although they do not have to comply with the AIFMD in full, the
marketing rules, especially in relation to the NPPRs, have affected their activities and inevitably created
some costs. However, we do not have quantitative data to estimate the actual costs.
Conclusion
Overall, GPs have seen little or no benefit from the AIFMD. Of course, regulation need not directly benefit
the regulated parties but the AIFMD was intended to lead to a deeper, more connected pan-EU market for
private equity, and it has not delivered this.
10.3 Impact on LPs
Overall, most LPs do not seem to have very strong views on the changes the AIFMD induced — either
positive or negative. This is particularly true for non-EU/EEA investors, who — as the interviews with private
equity representatives suggested — are often not aware of the existence of the Directive. This is somewhat
understandable given that non-EU/EEA investors are not directly affected by the Directive and its marketing
rules, but it also points to the fact that the AIFMD has not increased investor confidence in EU/EEA funds
outside Europe.
Willingness to invest in private equity. Except for a small number of investors who stated that the AIFMD
decreased their willingness to invest in private equity (mainly because of the marketing rules), the
Directive has generally not materially changed investors’ appetite to invest in the asset class.
Management fees. Almost half of the LP respondents agreed that the fees were about the same as five
years ago, a third stated that the fees were slightly lower, and only a fifth of LPs said they were higher.
When asked about how the increased costs had been divided between GPs and LPs, a majority of LPs
indicated that more than half of the additional costs is passed onto LPs, with the average (and median)
distribution of costs of three to one. The AIFMD, alongside other regulatory and tax developments in
the EU/EEA, were identified as the main drivers of the change in management fees.
Investor protection. LPs recognise that the AIFMD has slightly improved investor protection, mostly due
to the rules around depositaries and transparency (specifically reporting by GPs to LPs). These have led
to an increased amount of information being available and easier access to such information, and have
made it easier for LPs to determine a GP’s regulatory status. The pass-through of costs onto LPs (e.g.
depositary fees, as described at 5.4) is seen as more consequential than the gain in investor protection.
Investable universe. The AIFMD (primarily due to the marketing rules) has restricted the investable
universe of non-EU/EEA funds. Since the best-performing funds tend to close more quickly, GPs based
outside Europe may look to prioritise non-European investors to secure commitments first.
Over-subscription by these investors can reduce what is available to market within the EU/EEA, and the
absence of a well-functioning third country regime might mean that GPs from outside the EU/EEA focus
on a restricted set of countries, at most. These limitations in investable universe might also inhibit
investors’ ability to diversify risk.
10.4 Impact on the wider economy
10.4.1 Development of the private equity industry
The private equity industry’s development in Europe has likely been disrupted and retarded by the AIFMD.
We have identified a number of ways in which the AIFMD can have a greater relative cost impact on AIFMs
at or around the qualifying threshold compared to those AIFMs with tens of billions of euros in assets under
management. As a result — and as recognised by several GPs and LPs in our interviews — smaller (and
Conclusions
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potentially more innovative) AIFMs might try to intentionally avoid growing above the threshold or agree to
be acquired by larger GPs just to avoid the AIFMD requirements.
10.4.2 Financial stability
The main motivation of the AIFMD is to enhance the stability of the financial system. However, we find no
evidence that private equity was responsible either for the onset or the severity of the recent financial crisis.
More generally, the arguments indicating that the private equity industry does not have strong links with
systemic risk are as follows.
Even the largest AIFMs in a given segment do not account for a dominant part of the market, i.e. the failure
of even the most important GP would not materially impair the choice and scale of capital available for
financing the real economy.
In the private equity model AIFMs are not involved in maturity or liquidity transformation in the way that
banks and some other financial institutions are.
We found no evidence of loans being made from pure private equity-focused funds.
While private equity AIFs are generally not leveraged, the use of leverage in portfolio company structures
is a feature of private equity, especially of leveraged buyout (LBO) activity. As such, LBOs provide a
connection to the banking system should the LBO vehicle (i.e. the company that was the subject of the
LBO) default. However, the debt in private equity portfolio companies — which typically reduces over
time — is used to fund a change in ownership. As part of private equity’s hands-on approach, a lot of
attention is consequently paid to governance in the acquired company and enhanced cash flow
management, i.e. private equity debt has a disciplining effect on management.
Whilst debt within portfolio companies may also be used in writing Collateralised Loan Obligations
(CLOs), increasing interconnectivity in the system, the primary originators of debt and the
decision-makers around any collateralized instruments are the banks — as is the case when debt capital
is provided to fund acquisitions of listed companies or unlisted companies without private equity backing.
It is the banks and some specialist financial institutions that create these connections with more opaque,
derivative instruments. It is unclear why this should be used to justify prudential regulation for the private
equity sector, and not, for example, for large acquisitive corporates or other debt issuers.
The above evidence does not support the construct implicit in the AIFMD that private equity is meaningfully
to be considered as shadow banking when discussing systemic risk. This means that the prudential aspects of
the AIFMD applied to private equity fund managers are neither relevant nor effective.
10.4.3 Macroeconomic impact on performance in Europe
The private equity industry plays a beneficial role in the EU economy. Introducing barriers and restrictions
to its natural growth would have negative consequences on the macroeconomic level, such as reduced
innovativeness and competitiveness of the EU compared to the rest of the world.
Also the extension of the (applicability of the) AIFMD passport to non-European AIFs and AIFMs plays an
important role. In the absence of a third country passport, non-EU AIFMs need to grapple with local NPPRs
and there have been concerns about protectionist behaviour by national competent authorities.74 Very strict
requirements imposed by some supervisors as part of their NPPRs might create a barrier to (at least some)
non-European AIFMs, and therefore disrupt the flows of capital between EU/EEA and non-EU/EEA countries.
In spite of the difficulties linked to the NPPRs, some non-European GPs (particularly those based in the USA)
indicated a preference to continue to market in the EU via the NPPRs over applying for the AIFMD passport
74 Article by Lizzie Meager in the IFLR, 19th July 2016, http://www.iflr.com/Article/3571838/Fund-managers-celebrate-
AIFMD-advice.html.
Conclusions
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(e.g. because they are already subject to regulation in their home countries (and want to avoid dual regulation)
or because they wish to market their funds only in a limited number of Member States which would not
justify the cost of complying with the AIFMD as a whole). If passport rights are extended beyond the EU (and
the NPPRs are subsequently discontinued, as the AIFMD prescribes), non-EU fund managers would need to
become fully AIFMD-compliant in order to be able to market in the EU; alternatively, some may decide to
stop marketing in the EU altogether. Some of the interviewed GPs expressed the view that “imposing” the
passport, i.e. not giving the option to choose the NPPRs, could impose a not insignificant cost on their
operations or else even discourage some of them from marketing in the EU altogether.