By: Nick Curwen
In 2009, the private equity industry opposed the EU Alternative Investment Fund Managers Directive (AIFMD), deriding the rules as an encroachment on its ability to conduct business.
Since the institutionalization of the underlying private equity investor base, the industry’s opposition to AIFMD has faded. In today’s low interest-rate and unstable geopolitical environment, investors have moved to private equity; they now appreciate the client protections and transparency benefits that AIFMD provides.
As competition to attract limited partner (LP) capital grows, many private equity managers consider AIFMD a useful fundraising tool and have re-domiciled their funds from offshore centres (e.g. the Cayman Islands) into leading onshore hubs (e.g. Luxembourg).
AIFMD has aligned the requirements of clients and the behaviour of private equity managers. Fund governance has been dramatically enhanced through the obligation that private equity firms (and other AIFMs) appoint an independent depositary to monitor cash flows, verify asset ownership, and ensure overall regulatory compliance at managers and their fund administrators.
Increased regulation means increased reporting obligations. Private equity firms that distribute inside the EU must submit an Annex IV, which contains risk data, portfolio information, and client details.
Other regulations (e.g. Solvency II) require managers to supply insurance clients with granular portfolio information for risk-weighted capital purposes, while Dodd-Frank’s Form PF in the U.S. contains an entirely different set of reporting metrics and calculations.
Managers are also expected to tailor reports to institutional clients to supplement standardized templates.
While these documents provide transparency advantages to clients, it’s hard for private equity firms to manage the data - managers must source and aggregate data from multiple counterparties and vendors, and then consolidate it into reports that are often not harmonized, which causes duplication.
To deliver the necessary information to clients and regulators, managers must improve their technology systems or delegate to third parties.
Service providers spend resources and capital on augmenting technology systems designed to provide efficiencies in data collection processes. Automated technologies seamlessly aggregate vast quantities of data and turn it in to reports. This is essential for private equity to manage the needs of an increasingly tech-aware client base that expects more regularized reporting in accessible, digital formats.
Institutionalization has forced private equity managers to accept AIFMD depositary and reporting requirements. Managers and service providers must have the right technologies to collect the data needed to meet the growing disclosure demands.
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