On 12 November, Sweden which currently holds the presidency of the European Union, put forward a compromise draft of the controversial Alternative Investment Fund Managers Directive which is intended to regulate European private equity and hedge fund managers. The revised draft contains Sweden's proposed amendments to the directive and aims to address the criticisms made of the draft directive since it was published in April.
Although many of Sweden's compromise proposals have been welcomed by fund managers, the revised draft incorporates a new annex on remuneration policies which has caused further controversy. These remuneration proposals are intended to be similar to those which will apply to bankers' remuneration. They include general requirements designed to ensure that remuneration policies are in line with the manager's and the fund's business strategy, that the policies are consistent with sound risk management principles and that they include measures to avoid conflicts of interest.
However, there are more controversial aspects concerning deferring employees' variable remuneration, under which at least 40% of the variable component of remuneration will have to be deferred for at least three years, and, where the variable remuneration component is a "particularly high amount", at least 60% will need to be deferred. The variable remuneration, including the deferred portion, will only be paid if "justified" according to the performance of the business unit, the fund and the individual concerned, and only if "sustainable" in relation to the manager's financial situation.
The assessment of performance is to be judged over a number of years to ensure that it is based on long term performance and that the payment of performance-based components of remuneration is spread over the business cycle of the fund being managed.
Managers significant in terms of their size or complexity, or significant in terms of the size or complexity of the funds they manage, will need to establish an independent remuneration committee, which will be responsible for remuneration decisions.
The UK private equity industry has criticised these proposals. The British Private Equity and Venture Capital Association has pointed out that the standard model for private equity involves only paying carried interest after far longer periods of time have elapsed than the deferral periods contained in the draft directive, and only after actual cash has been returned to investors. They therefore do not consider that the proposals are appropriate to the private equity industry.
UK hedge fund managers have also expressed their concerns. The Alternative Investment Management Association has stated that remuneration policies which may be applicable to banks are inappropriate to the asset management industry. Hedge fund managers argue that measures designed to curb bonuses awarded in banks, where the bonus culture is viewed by many as having contributed to excessive risk-taking, cannot be justified in the same way in relation to the activities of hedge fund managers. They contend that hedge funds, unlike many banks, are not generally seen as having caused the financial crisis and have not received government support. Hedge fund managers also argue that these proposals are unnecessary because their remuneration is already closely aligned with investors' interests, and point out that, if these proposals are adopted, a large number of managers could leave the EU and relocate to jurisdictions such as Switzerland.
This issue will clearly be one on which fund managers will now focus as the draft directive progresses through the EU legislative process.
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