Just when you thought that the guards had at last wrested control of the asylum back from the inmates, here comes another proposed feature of the European Union’s proposed Directive on Alternative Investment Fund Managers that takes one’s breath away.
Not content with amendments that would all but bar non-EU funds from the European market, the Swedish presidency has announced plans to incorporate rules limiting the earnings of hedge fund managers and private equity partners similar to those mooted for bankers.
Why? Apparently the Swedes and other European governments have become convinced that in the same way that excessive remuneration and fee structures induced bankers to run unacceptable risks with their employers’ capital, the temptation of admittedly occasionally astronomical earnings may also lead hedge fund and private equity executives to take decisions that put financial stability at risk.
Never mind that meticulous examination has failed to uncover evidence that hedge funds, let alone private equity, played any role in the origins of the crisis. Mark Spinner, head of private equity at law firm Eversheds, says: “The private equity industry does not represent a systemic risk to Europe’s financial communities across Europe to the same extent (if at all) as the banking sector, since the vast majority of private equity houses invest third-party funds on behalf of sophisticated investors through a limited partnership structure.”
It won’t work anyway, says Sigma Partnership’s Joe Seet. “Any [move] to restrict hedge fund managers’ pay will be unworkable and counterproductive as most UK managers operate as limited liability partnerships,” he says. “If the mooted restrictions are included in the AIFM directive, they must fall into line with proposals coming out of the US.
“Current proposals there state that managers will need to disclose general incentive-based compensation arrangements, not the compensation packages of individual employees. They will affect non-US investment advisors who have US-based advisory clients, but any disclosures by UK managers will be meaningless as profit-sharing arrangements in LLPs are confidential.”
Alas, just because a rule is unenforceable or self-defeating may not prove a barrier to it being enacted. Gone, seemingly, are the hopes of a few weeks ago that the Swedes would insert a bit of sense into the AIFM directive. Instead, new ways are being found to damage the existing structure of the alternative fund industry, apparently for its own sake. European investors, including the pension funds that many of the continent’s governments are relying on to keep their citizens out of old-age poverty, will be the poorer for it.
But don’t expect alternative fund managers to stick around if the EU starts laying down the law on what they can and can’t earn. They may not be able to sell their products to EU-based investors from Geneva, Jersey, Connecticut or even the Cayman Islands, which has just rolled out the welcome mat to managers as well as their funds, but they can sell them everywhere else. The temptation to go and do so may be irresistible.
