Defective directive

 
Steve Dinneen
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As controversial EU rules on alternative funds were finally agreed in Brussels yesterday, fears are mounting that they will cripple the private equity industry

THE private equity industry yesterday railed against an EU directive which will subject alternative investment funds to draconian new rules.

While the compromise deal won’t be as bad for hedge funds as originally feared, the spotlight turned yesterday on private equity firms, which now appear to have been one of the great losers from the agreement.

New rules against “asset stripping” will be imposed on the industry, limiting the selling of assets immediately after a takeover, a development which many believe will simply discourage investment and make it harder for private equity to improve the performance of weak firms. Funds will also have to inform employees of portfolio companies of their plans.

The head of the British Venture Capital Association (BVCA) warned the directive, which will also impose restrictions on remuneration and tough new capital requirements, risks undermining the economic recovery.

The Alternative Investment Fund Managers (AIFM) directive will also force hedge funds and private equity houses to comply with a costly registration regime before they can market funds in the EU.

Simon Walker slammed the “defective directive”, saying Brussels should instead be fostering the industry as a means of shoring up the economy.

He said the new rules are “an act of folly akin to a drowning man waving away a rescue boat because he did not like the colour”.

A compromise deal struck means companies that have completed the registration process will be allowed to market their funds across Europe, rather than having to apply to each individual country, as France was pushing for.

Walker said: “This remains a defective directive. The EU has taken a hostile interest in the wrong industry at the wrong time and for the wrong reasons. No serious analyst has concluded that private equity, let alone venture capital, caused the crisis or served to enhance it. These regulations will needlessly increase costs.”

The directive is expected to be approved by the European Parliament next month. The final draft was bogged down for months as EU governments and the European Parliament fail to agree on a common text, with the UK’s laissez-faire attitude clashing with France’s approach.

London scored a partial victory, with the legislation allowing non-European domiciled funds – including most UK funds, which are based offshore for tax purposes – to apply for a “passport” allowing them the same pan-European marketing rights as their EU-based counterparts.