EU plan could restrict ability of LGPS schemes to invest in private equity and hedge funds

The ability of local government pension schemes to invest in private equity and hedge funds and other types of alternative investment fund could be significantly restricted under a proposed EU directive.

According to Andrew Bradshaw, partner at pensions law firm Sackers, under the Alternative Investment Fund Managers (AIFM) Directive:

• Pension funds could effectively be banned from investing in funds which do not have EU authorised fund managers and which would not therefore meet the requirements of the AIFM Directive.
• EU-based funds will be subjected to increased disclosure and transparency requirements.
• The scope of the funds intended to be caught by the AIFM is not clear – it could include any collective investment scheme (i.e. it may not simply cover hedge funds and private equity funds).
• There will not necessarily be an exemption for current investment holdings once any transitional period has elapsed – this means that pension funds could effectively be forced to sell any fund holdings that are non AIFM compliant.

The European Commission and Parliament are currently attempting to hammer out a compromise with a view to the directive being adopted in the Autumn.

Bradshaw said: “Hopefully some of the more draconian provisions will be removed or watered down, although there is no guarantee of that.

“We would expect those funds with a significant proportion of their assets referable to EU investors to find a way to comply with the directive. This could however involve re-structuring costs, which would in all likelihood be passed on to investors, and potential changes to investment strategy. There is also a concern that those non AIFM compliant funds with a small proportion of EU investors may decide to pull out of the EU.”