15 April 2014

Hedgeweek: Governance and risk management for Alternative Investment Funds

Vincent Reilly, Head of Alternative Investments and Jorge Fernandez Revilla, Director of KPMG Ireland analyse the re-shaping effects of the Alternative Investment Fund Managers Directive (AIFMD) on the AIF industry in Europe and beyond.

The measures imposed by AIFMD are designed to curb systemic risk within the industry, with wide ranging implications for the governance structure for Alternative Investment Funds (AIFs), the responsibilities for the Boards of AIFMs, and requirement to establish appropriate risk management oversight functions. The question that remains for AIFMs and AIFs is to what extent these extra regulatory compliance requirements can be turned into a real competitive advantage and deliver value to the investors in the AIFs.  

In addition to the challenges resulting from the Directive, there are also a number of potential benefits arising from the changes made to corporate governance beyond simply reducing regulatory risk from non-compliance. Additional comfort can be provided to the different stake holders (e.g., investors, potential investors, regulators, tax authorities, etc.) through compliance, helping the AIFMs to retain and attract new investors to the AIFs. There are opportunities presented by the process re-engineering that is required to help ensure compliance with the Directive and give AIFMs a chance to streamline work and decision making processes to help minimise inefficiencies, while helping reduce the risk of rogue behaviour and mismanagement. The Directive gives both the opportunity and requirement for AIFMs to hold their staff accountable for the successes and failures of the AIFs. To the extent that AIFMs are successful in marketing, their improved corporate governance, this could be preserved as a competitive advantage, impacting positively on the share price of the AIFs if listed. 

The industry expectations for the responsibilities of the board in the context of the Directive are likely to be the overall role of ensuring compliance with the Directive for their entities and reviewing the policies, processes and delegation arrangements required. The board is expected to continue in the established role of considering the investment strategy and how this is implemented through policies. There will also likely be a very clear role in supervising the newly delegated functions post due diligence, and helping ensure that the service level is maintained as well and that the AIFMs documented procedures match up with the reality of the activities at the delegate level. The practical outworking of the above is expected to be the responsibility of the service providers to the funds, but the boards will still need to have an active role in their supervision, and ultimately take ownership for compliance.  

The challenge posed to AIFMs and AIFs and to the directors sitting on their respective boards is whether they can turn what could potentially be seen as a regulatory burden increasing their total expenses ratio, into a competitive advantage that can contribute to growth ultimately to return through better risk management and general processes. What is certain is that processes and activities will be changing, making this change not only compliant but the driver of returns and competitive advantage will likely be the mark of a successful AIFM. 

Full article

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