AIFMD: How Independent Are Your Valuations?

Asset managers who this week submitted applications explaining how they are complying with the European Union's (EU) Alternative Investment Fund Managers Directive (AIFMD), and the industry at large, are eager to see what response they receive from the regulators and whether much-needed additional guidance will be forthcoming.

AIFMD, which is intended to create a harmonized, EU-wide framework for supervising risks posed by alternative investment fund managers and alternative investment funds, was published in the EU's Official Journal on July 1, 2011, transposed into UK law on July 22, 2013, and completed its transition period in EU member states this July 22. However, a number of questions about its implementation still remain, particularly regarding valuation procedures.

AIFMD requires asset managers to use independent valuations for the alternative funds they manage. They can do this in two ways: by employing the services of an external valuer or by putting in place procedures to ensure their internal valuations team is independent of the rest of the business.

At first glance, outsourcing the valuation function seems like an attractive path to compliance. However, requirements that the external valuer accepts unlimited liability for their valuations has put off pricing vendors and fund administrators who might otherwise be expected to take on the task.

In the absence of an external valuer, asset managers will have no choice but to go down the internal valuation route, creating procedures to segregate internal valuation teams from deal-making and front-office activity.

For Tier 1 institutions that already employ large valuation teams, this may not be a major overhead. However, many of those affected by AIFMD are smaller institutions and questions have been raised about how an asset manager that employs a team of 10, for example, can possibly demonstrate that internally generated valuations are independent.

It will take some time for regulators to sift through the mound of AIFMD applications they received this week. Once they have done so, many will be waiting to see what comments applicants receive, what practices are deemed acceptable and whether the regulations might be amended in some way.

Certainly, as things stand, you have to wonder whether the regulators have made the goal of independent valuations unattainable in many cases, by making it so unattractive for third parties to take on the role of external valuer.