AIFM Directive – a necessary pain

In November, the European Securities & Markets Assocation released its final technical advice to the European Commission which was swiftly followed by the Financial Services Authority’s first discussion paper on the implementation of the AIFMD (Alternative Investment Fund Managers Directive). Whilst well over a year remains until implementation, there is a significant amount of detail to resolve, both at an EU-wide and national level.

It is worth remembering that the main objective of the directive is to increase the transparency of AIFs and increase investor confidence. However, AIFMs should not feel that they are being picked on; this mantra is one that has been heard for many years now, especially by corporates; rather they are the next in line and, be assured, they are not the last. This dogma will eventually apply to all investor-related entities.

The instability of major financial institutions has been the main catalyst for regulatory change, however, some attempts have been made to suggest that the introduction of IFRS (International Financial Reporting Standards), and its fair value provisions in particular, have had a role in creating uncertainty. It is difficult to see how this is the case. Would this be the argument if there had been a continuing bull market? Surely it is critical to know the true worth of an entity’s assets, both from a management and investor perspective? Even more so when the entity’s overall value, as well as management remuneration, is derived from these assets. (blog continues below)

The directive requires regular valuation of assets, either by an independent valuer or by the AIFM itself, provided that the task is “functionally” independent of the AIFM. This latter option may be unavailable to many funds, but there may well be significant conflict in an “in-house” valuer who, having provided a valuation for initial investment purposes, then opines on subsequent valuations which will determine remuneration.

Costs are often quoted as a factor against independent valuation, but these reduce significantly after the initial exercise. Addressing investor concerns is worth something and it is surely right, therefore, that investors should pay that little bit extra for the confidence and transparency they desire.

The valuation of a fund’s assets has a fundamental impact on all aspects of its existence; it is only fair to all interested parties to be assured that this has been independently and consistently assessed. The directive attempts to create a level playing field as far as valuation goes. A truly independent valuation process assists this, but, more importantly, reinforces the integrity of the profession and its members.

Andrew Caldwell is a partner at BDO LLP.