With two weeks to go until the AIFMD comes into force, albeit with certain leeways covered by the one year ‘transition period,’ it has become clear that many firms are under prepared.
In many respects this has the hallmarks of the recent Retail Distribution Review introduced by the FSA in June 2006 and which came into force on 31 December 2012. Despite giving some 6½ years notice many IFAs and other financial advisors were still caught off-guard. The introduction of AIFMD will be no different, only this time many fund management and private equity firms will be the ones in the frame.
Given the fast-approaching start date, it is perhaps surprising that the directive still seems to be causing a certain amount of confusion. Many column inches in the media have been dedicated to the perceived lack of guidance on the full requirements of compliance, but despite some of the uncertainties surrounding the fine print, one aspect around which there is absolutely no ambiguity is the requirement for the different funds to be valued on an annual basis.
For many large houses with sufficient scale to justify an in-house valuations capability this is unlikely to cause much of a headache but, for smaller funds, what are your options? Is it worth setting up an in-house function or is it best to outsource? Clearly these sorts of questions will largely boil down to an assessment of the costs involved but there are other factors to take into consideration, on being independent and the other being the requirement to establish for each fund manager appropriate and consistent valuation procedures.
Clearly a fund manager valuing his or her fund and then charging a management fee based on that valuation is no longer going to be acceptable but will investors be wholly comfortable with a fee based on an internal assessment of the funds worth? Should fees be based on the original capital employed with a bonus based on the carry realised at point of sale?
One thing that does remain true – irrespective of how fees are calculated – is that remuneration needs to be linked to performance but it is the assessment of success (or failure) that needs to be agreed by all parties and both internal and external valuations have their pros and cons. For outsourced valuations fund managers will need to be very clear about how this is being paid for, whether it is part of the management fee or a cost subsumed by the manager.
With so many factors to consider, including cost, investor preference, industry best practice, independence etc, the approach to valuation needs to be decided very carefully and more importantly very soon. With the directive coming into force next month those fund managers who have not yet thought about this requirement are cutting things very fine whether they are looking to hire an internal function or planning to outsource. You have been warned!
David Mitchell is valuations partner at BDO