Hedge funds and private equity could face more than €3bn in costs and investors could see fund choice shrink by up to 40% due to proposed new EU rules, a Financial Services Authority report said.
The analysis of the impact of the Alternative Investment Fund Managers (AIFM) directive conducted by Charles River Associates and commissioned by the FSA found that it could load one-off costs of up to €3.2bn on the affected parts of the funds industry.
The draft directive proposes measures requiring managers of funds to register, submit data, limit leverage and for non-EU managers to meet certain requirements to offer funds within European member states.
The costs arising from the proposed directive stem from the one-size-fits-all nature of the legislation, said Dan Waters, sector leader for asset management at the FSA.
“We see those one-off costs, they are very significant and we do not think they can be justified,” Waters told Reuters in a telephone interview.
Hedge funds would bear the brunt of the costs, shouldering €1.4bn in additional costs in order to comply with the new directive. Private equity firms could see one-off costs of up to €756m and bear the largest ongoing compliance costs — €248m — the study found.
The European Commission has proposed a draft law to regulate managers of alternative investment funds after policymakers across Europe criticised hedge funds and private equity for contributing to the financial crisis.
One of the most strident voices in Europe in favour of strict regulation of hedge funds and private equity has been European Party of Socialists leader, Poul Nyrup Rasmussen.
“I think the FSA would do better assessing the losses to the economy and society due to the antics of hedge funds and private equity during and before the financial crisis,” Rasmussen said.
Pension funds should look for better ways to invest wage-earners’ money than in unregulated funds, he added.
“The notion of a one-off cost to private equity and venture capital combined of €800m and ongoing costs of €280m is simply shocking,” said Simon Walker, chief executive of the British Private Equity and Venture Capital Association.
The cost burden would make Europe an unattractive place for private equity and venture capital and would drive investments elsewhere, Walker said.
Britain and other EU member states have been working on highlighting the differences between fund types covered by the directive, including hedge funds, private equity, real estate and investment trusts, FSA’s Waters said.
If funds choose not to fulfil the requirements and costs to re-domicile within the EU, the number of hedge funds available to European investors could shrink by 40%, while the number of private equity funds could fall by 35%, the study found.
But activity by member states to address the shortcomings of the directive is yielding results, Waters said.
“There have been intensive sessions led very capably by the Swedes going line by line through this directive. We have seen a lot of evidence of important beneficial changes being made and we expect a new draft directive to emerge fairly soon that will show significant improvements,” said Waters.
The costs associated with the directive are expected to come down significantly if the directive is correctly formulated, Waters said.