Some RE fund managers are behind the curve on AIFMD and have underestimated the cumulative effect it could have on their businesses, says Ian Laming
We have all heard the glib comments from real estate managers on the EU's Alternative Investment Fund Managers Directive (AIFMD): "It's not till late 2013"; "We've already got FSA-compliant systems and processes"; "Nothing to do until Level 2 is agreed - right?"
Wrong. It was never that simple. AIFMD is a piece of European regulation: highly prescriptive, covering an extremely broad slew of product, manager, pay, jurisdiction and governance issues. It goes way beyond anything the UK's FSA has proposed with its principles-based approach.
Many real estate managers seem to assume that AIFMD will affect things at the margin, that "it's really for the hedge funds", or that the nasty bits of the Directive will be negotiated away. This convenient assumption seriously underestimates how deeply the EU's bureaucrats and politicians have sunk their teeth into the hind quarters of the entire alternatives community. The comments from Michel Barnier, the EU's Commissioner responsible for internal markets, on the AIFMD are more than a shot across the bow - right or wrong, they are warning us that the next shot will be below the waterline unless things change.
To their credit, the hedge funds saw this juggernaut coming a long time ago. That makes sense - they've been in the crosshairs of the regulators since 2008. Their Cayman Islands-domiciled offshore vehicles are front and centre in the cross-Atlantic tug-of-war on marketing, and the AIFMD introduces confusion for their fund governance structures. Speak to the hedge fund community and they have clear action plans and contingency plans for the AIFMD. The real estate managers yet again look way behind the curve when compared with their hedge fund cousins.
To be fair, the smart real estate managers have been planning solutions for the AIFMD since last summer as well. They've had consultants do ‘gap analysis' audits to show where the AIFMD will require changes. KPMG's gloriously named Kfirst Complexity Meter analysis may sound like something out of a quantum physics textbook, but audits like these are essential to help managers navigate the myriad of changes and have a credible action plan to gain a licence. Rather than putting everything off until "the big issues are resolved", the smart managers rapidly got to grips with the magnitude of changes and have already allocated the resources required to address the workload. Like the hedge funds, they are also investigating extensive outsourcing to spread the load and address some of the segregation issues raised by the AIFMD.
The current chatter focuses on depositary banks, fund leverage and third-country access. Don't get me wrong; these are big issues for alternatives managers. The ‘custodian fee factor' could, on some estimates, cost investors between 100-150bps a year; and without clear cooperation agreements it may not be possible to market non European Union-based funds to EU investors even via reverse solicitation or private placement. But the chatter misses a broader point. Even if these big issues go away entirely (unlikely), does the average real estate manager fully appreciate that the Directive will force between 30-50 ‘lowest common denominator' changes that cumulatively make for huge, possibly seismic, shifts in how funds and managers will be run?
For the unprepared managers, the year-end will bring some daunting questions. Where are their AIFMD-compliant apportionment policies for segregation of responsibilities? How independent are their fund directors? Can managers demonstrate documented independent valuation policies? How are they going to hold external valuers to strict (and uncapped) liability? What documentation demonstrates to their new depositary/custodian bank that they are a ‘safe risk', so they can avoid large, crippling fees? Are compensation policies aligned with the AIFMD's rules? Where are the fund risk profiles, the fund stress tests and the fund liquidity management policies? There are at least another 20-30 questions that managers will need to answer. Mention such questions at this year's Christmas parties and you may get some furrowed brows as managers realise how much work needs to be done before they are in a position to be granted a licence.
The Directive is only part of the problem. There are other headwinds to navigate this year and next: Solvency II and FATCA to name two; and the elephant in the room is fundraising. As these headwinds combine, some real estate managers will hit the wall, especially if managers' 2012 plans to raise new funds are scuppered, just as their compliance team drops the bomb about the extent of the AIFMD changes and costs. If that happens, consolidation or retrenchment will be the name of the game. For some it will simply be game over.
The AIFMD train left the station in early 2009 and has been gathering speed ever since. As the fundraising merry-go-round starts in earnest, fund investors would be wise to ask potential managers how they are resourced for all these changes, because when AIFMD reality hits the real estate industry at the end of this year, there could be some noteworthy casualties.
Ian Laming is chief operating officer at Tristan Capital Partners