AIFMD: a new regulatory world for private equity firms 


Financier Worldwide Magazine

September 2014 Issue

September 2014 Issue

Governments around the globe have enacted a wave of new financial regulations in an effort to address drivers of the great financial crisis that began in 2008. One set of new regulations that will have a significant impact on private equity (PE) fund managers is the Alternative Investment Fund Managers Directive (AIFMD). PE fund managers who either manage funds in Europe or have investors in the European Union may fall within the purview of AIFMD. These managers will need to comply with a wide range of new regulatory requirements that are unlike anything that PE managers are accustomed to or are fully prepared to deal with at this time.

Recently, the transition relief period ended for AIFMD. The directive is now fully in effect and the clock has started ticking for alternative investment managers who fall under the scope of the directive to be in full compliance with these sweeping regulations.

How will AIFMD impact PE fund managers?

Due to the fact that until recently alternative investment fund managers and PE funds were very lightly regulated, we have found that many PE fund managers are struggling to understand how AIFMD will affect the way they conduct business. Currently, we have observed that many PE fund managers are not well prepared for implementing AIFMD from operational, strategic or risk management perspectives.

Specifically, this directive will have a significant impact on PE fund managers in the following areas: transparency and reporting; remuneration; depositary; and risk management.

Transparency and reporting. Under AIFMD there are reporting requirements to regulators (on a quarterly basis for funds with AUM over €1.5bn) as well as annual disclosure requirements to investors. The types of information that will need to be reported or disclosed include information about valuations, investment types, concentration risks, and risk management stress test results.

Remuneration. The directive imposes reporting requirements on remuneration of senior management – those principals who have a material impact on the risk profile of the PE fund. The requirements may impact carried interest and variable remuneration arrangements that the PE manager has with many of its employees or partners of the firm. In addition, both fixed as well as variable remuneration for senior employees, including carried interest, will need to be disclosed in the annual report for the fund required under the directive.

Depositary. AIFMD requires that PE fund managers appoint an ‘appropriate’ depositary. This depositary must be able to assume liability for potential loss of assets that are under custody. In addition, the depositary is required to play an oversight role in monitoring cash flows. The directive requires that suitable policies and procedures be in place so that the depositary receives all appropriate information and so that there are escalation procedures in place should they be needed.

Risk management. Currently, most PE funds have little to no formal risk management in place; therefore, the risk management requirements under AIFMD arguably may be the most challenging for PE fund managers to meet. Specifically, the directive requires that PE fund managers have functional and hierarchical separation of the risk management and portfolio management functions. PE managers must have appropriate, documented and updated due diligence policies and procedures. In addition, managers must have adequate systems to identify, measure and monitor all relevant and major risks associated with the PE fund manager’s strategy and to which a fund may be exposed.

There is no question that AIFMD will have a material impact on the way PE fund managers approach their business. Even those managers that fall below the AUM threshold that requires full compliance with the directive will still be subject to requirements that include registration with regulators, certain investment reporting obligations and notification of investment strategies.

We believe regulations such as AIFMD are just part of a larger global regulatory and secular trend towards more risk-based regulations and further investor demands for more robust risk management and risk transparency from their fund managers. We believe that one of the most important takeaways that PE managers should keep in mind – regardless of whether or not they currently fall under the scope of the directive – is that the requirements under AIFMD will likely become the de facto standard by which many investors evaluate a PE fund manager before deciding to invest with a fund.


Samuel K. Won is the founder and managing director of Global Risk Management Advisors, Inc. He can be contacted on +1 (212) 230 1610 or by email:

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