Brexit threatens derailing of AIFMD review

Private equity managers fear the UK will miss being able to provide input for the inevitable follow-up of AIFMD.

By Charles Gubert

Private equity fundraising may sound like the easiest job in the world nowadays, but there is a distinct nervousness within the industry, not least because of the potential fall-out from unpredictable political events.

For UK-based general partners (GPs) attending Super Return in Berlin last week, the omnipresent risk of Brexit continues to be a nuisance to the extent that one droll manager questioned whether his flight this time next year to Tegel Airport would be grounded if the UK-EU conscious uncoupling turned acrimonious.

Brexit is causing a lot of upheaval among private equity managers, many of whom are unsure as to whether they invest heavily in building an onshore EU subsidiary or take a leap of faith and keep their businesses wedded to the UK.  The mood at Super Return about Brexit was mixed, with many clearly frustrated by the lack of progress being made in the negotiations to date. Some report the UK is valiantly trying to persuade managers to hold off relocating until the last minute in case a decent deal actually materialises.

One major fear – at least among the continental private equity industry – is that the UK’s sound judgement and expertise will be seriously missed in the drafting of future regulations, most notably the inevitable follow-up to the Alternative Investment Fund Managers Directive (AIFMD).

Michael Collins, chief executive officer at Invest Europe, acknowledged that a number of AIFMD’s core principles were vulnerable, given the UK’s non-participation in the on-going review of the legislation.

“An AIFMD with no UK input could jeopardise reverse solicitation or national private placement regimes (NPPRs), the latter of which could cause problems for third-country managers with EU investors,” he said. Ditching NPPR would certainly force third-country managers– potentially including UK managers – to park themselves firmly inside the EU, although it is a strategy which risks spectacularly backfiring, not least if foreign firms simply turn their back on the Single Market.

The same applies to delegation, a notable sore point for Ireland and Luxembourg where such activities are very profitable for some of their local providers. “The European Securities and Markets Authority (ESMA) has made clear it does not want third-country managers setting up tiny entities within the EU. In other words, they do not want a structure comprising two men and the dog delegating activities back to London,” said Collins.