Investment managers are failing to perceive the risks associated with the European Union’s Alternative Investment Fund Manager’s directive, according to a report by BDO.
In a survey which asked investment managers in the UK to identify their top risks, only three per cent of respondents cited the AIFM directive as a key risk for 2010 due to the implementation timescales.
AIFIM is likely to be a major distraction for firms in the run up to its implementation in 2012. Analysts are concerned that the regulations are going to be so stringent on alternative investment fund managers—more so than in the US and Asia—that fund managers in those countries will be less willing to provide access to European institutional investors.
“While the new directive is designed to assist EU passporting of alternative funds – including hedge funds, private equity and real estate funds – it could deter overseas managers from providing access to funds based in the Cayman Islands and Asia,” says Neil Fung-On, head of funds at BDO.
When asked about their growth prospects, two-thirds of firms said that their strategy was focused on organic growth over the next 12 months. Over a quarter said that they planned to maintain their current financial position whilst fewer than three per cent said they planned to contract.
Fewer than three per cent of firms said they planned to grow by acquisition.
“We believe that the continuing lack of liquidity amongst mid-market firms is restraining their ability to grow by acquisition. This is reinforced by the high level of respondents citing lack of investors as a key risk. Another, lesser factor is that whilst some firms may wish to expand their funds under management, they do not want the ‘baggage’ that an acquisition brings,” says Fung-On.
Declining revenues have been the main impact of the crisis. Like many sectors, the main impact of the financial crisis over the last year has been a decline in revenues, with 48 per cent of respondents citing this. Eighteen per cent of respondents mentioned that a fall in their funds under management was the main impact and 15 per cent stated increased regulation.
A lack of investors was seen as a key risk by 42 per cent of respondents, followed by continuing market volatility. Many investment managers have failed to predict both the severe downturn and the rebound. As a result, numerous funds in 2009 underperformed the standard benchmarks this year.
Talent retention was rated by ten per cent of respondents as a key risk. The issue with talent has several dimensions with mid-tier firms being squeezed from several directions. Many portfolio managers’ compensation schemes have lost their value whilst the new 50 per cent tax rate implemented to reduce the UK’s substantial deficit is making the UK a less attractive proposition to fleet-of-foot talent. And large firms are still reportedly to be heavily recruiting.
The good news is that 50 per cent of respondents said they are ready to deal with their top risk, with a further 47 per cent saying their plans are in progress. Just three per cent of companies said they are not ready to deal with these challenges.
“For those organisations that have not yet put a plan in place for managing risk, we cannot emphasise enough how important it is to do this,” adds Fung-On. “Effective risk management strategies can spell the difference between winners and losers in ever-competitive financial markets, especially as 2010 will continue to present a challenging scenario for investment managers.”