AIFMD – One Year Update

AIFMD – Year One Update

The Alternative Investment Fund Management Directive (“AIFMD” or the “Directive”) became effective on July 23rd, 2013. Alternative Investment Fund Managers (“Managers”) of hedge funds, private equity funds, funds of funds and real estate funds had until July 22nd of this year to get authorization to market their product in the European Union (“EU”). The Directive’s genesis, created in the aftermath of the 2008 financial crisis, was a direct response to alternative investment products’ lack of transparency, liquidity and regulation. The regulators sought to subject the industry to uniform standards and create a level playing field for cross-border marketing of funds in the EU. The end goal – to dramatically increase investor protection and confidence in the industry.

AIFMD requirements include separation of risk and portfolio management, additional reporting requirements, valuation independence standards, the appointment of a depository and remuneration controls, among others. The breadth of these requirements and the cost to implement them are key challenges for Managers, and early indications show that most Managers were not ready for or in compliance with AIFMD as of July 22nd, 2014.

Surveys performed just prior to the July 22nd deadline showed that less than one-third of Managers globally were already compliant with AIFMD while a further 10% had applied but were still waiting on approval. For now, it seems that Managers are looking around to see what the rest of the industry is doing and waiting to see how the regulatory framework develops in practice. As a result, many Managers waited until the very last minute to meet the July 22nd deadline, creating a huge backlog of applications with the relevant authorities.

In the United States, the majority of Managers believe AIFMD will have a negative impact on the industry and only 18% of US Managers were AIFMD compliant in June 2014. The biggest concerns quoted were both (a) the costs related to becoming compliant to the Directive and (b) general concerns related to risks arising from uncertainty and lack of guidance on the Directive. Many US firms indicated they will not actively market their funds in the EU, or simply wait for EU investors to approach them with requests to manage their funds. However, firms with more than $1 billion AUM are more likely to actively market as they tend to have a more international client base. Industry insiders say this could lead to more consolidation in the industry instead of more transparent competition, resulting in higher fees for investors.

While foregoing marketing in the EU and waiting for investors to come to them may be the easy route for Managers, insiders believe that AIFMD may ultimately be good for the industry and that compliance with it may prove to be a certain gold standard. Firms regulated by AIFMD may be the preferred investment managers to large institutional investors such as endowments and pension funds who are typically more conservative in nature and put more emphasis on infrastructure, transparency and reporting. As a result, such investors may shun firms that do not have the same checks and balances in place as those that are AIFMD compliant. As one example, AIFMD requires managers to perform valuation independent from the portfolio management function. Managers have two options in complying with this requirement. First, they can perform this task internally, by instituting certain necessary procedures and controls to ensure that the valuation team is strictly independent from the rest of the firm. Second, they can utilize the services of an external valuer who can perform the valuation function independently from the Manager. These types of internal and external controls allow institutional investors to be comfortable with the high standards of practice deployed by Managers compliant with AIFMD.

Houlihan Capital

Houlihan Capital can provide critical valuation information to Investment Companies by providing independent valuations, which can supply the necessary support and documentation to stand up to AIFMD, FASB and other regulatory scrutiny. Houlihan Capital has a history of working closely with clients’ management, regulators, auditors, legal counsel, and investors on financial reporting and tax compliance matters. For more information on independent third party valuation services, please or contact Paul Clark ( at 312‐450‐8656.

Houlihan Capital is a leading, solutions-driven valuation, financial advisory, and boutique investment banking firm committed to delivering superior client value and thought leadership in an ever-changing landscape. The firm has extensive experience in providing fairness and solvency opinions, and objective, independent, and defensible opinions of value that meet accounting and regulatory requirements. Our clients include some of the largest asset managers, private equity funds, hedge funds, fund administrators, and both public and private operating companies, who benefit from our comprehensive valuation and financial advisory services. Houlihan Capital is a Financial Industry Regulatory Authority (FINRA) and SIPC member, and is SOC-compliant. In short:  Value. Added.

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