This year the private equity industry in Guernsey has been preoccupied to a lesser or greater degree by prospect of the European Union’s proposed Directive on Alternative Investment Fund Mana
This year the private equity industry in Guernsey has been preoccupied to a lesser or greater degree by prospect of the European Union’s proposed Directive on Alternative Investment Fund Managers. While private equity firms and their service providers have a range of issues with the first draft of the directive published in April, there is now confidence that whatever new requirements are imposed upon Guernsey by the legislation, it is a test the island is capable of passing.
One of the key aspects of the current draft of the directive to which investment firms and the associations that represent them object is the disclosure of significant holdings. This would put private equity houses at a competitive disadvantage to other types of investor that would not have to disclose their holdings, for instance if a private equity house were trying to build up a position in a company.
A second issue is that the amount of disclosure required in offering memorandums for private equity funds would be increased. This would bring no real additional value to investors, which are predominantly institutions with more than GBP10m to invest as opposed to retail investors that might need risk factors explained at great length. These institutions already appreciate that the value of investments may go down as well as up, and that liquidity issues arise from investing in private equity funds.
In any case, it may be very difficult to announce in advance what investments a new private equity fund might make, given that private equity houses are opportunistic in taking advantage of market conditions to buy assets they believe are undervalued. Increased disclosure will mean longer offering memorandums, represent an added cost burden ultimately borne by the investors, and may prevent funds being launched with the timeliness sought by their promoters. Since most investors don’t read all the documents, the only clear beneficiaries will be the lawyers that draft them.
A third issue is the requirement for private equity funds to have an EU-recognised custodian. While a custodian is customary for a fund trading in listed securities, historically private equity funds operate with a limited partnership structure and are typically closed-ended, and there’s not typically a requirement for them to have a custodian. This requirement seems symptomatic of the one-size-fits-all nature of the directive as originally drafted. What value will it add to appoint a bank as custodian, bringing an extra layer of bureaucracy and cost, when historically institutions have been quite happy to invest without that additional safeguard in place?
The European Private Equity & Venture Capital Association has urged European Parliament members to consider these and other points during their consideration of the proposed directive. While the EVCA accepts the objectives of the legislation, to control systemic risks and enhance investor protection, it believes that in order to be appropriate and fair, the rules should be based on the benefits associated with different forms of alternative investment and proportionate to the risk they present.
The Guernsey industry has had several months to reflect on the likely impact of the directive and we have no concern that there is anything in it that we can’t comply with – given our ability over the years to meet outside scrutiny and additional regulatory burdens when required – but we don’t necessarily believe the proposed legislation adds any value to limited partners of private equity funds.
Joe Truelove is head of business development for corporate clients at Kleinwort Benson in Guernsey