ESMA unveils guidelines on pay for alternative fund managers
EUROPE – The European Securities and Markets Authority (ESMA) has warned that alternative investment fund managers must introduce "sound and prudent" remuneration policies and organisational structures that avoid conflicts of interest.
In its final guideline on remuneration for alternative investment fund managers (AIFMs), the authority said stronger oversight of how fund managers were paid would ultimately improve investor protection.
The rules, which will apply to managers of hedge funds, private equity funds and real estate funds, will cover all forms of payments or benefits paid by AIFMs, including carried interest and any transfer of units or shares of AIFs.
ESMA also stressed that all remuneration should be divided into either fixed remuneration – such as payments or benefits without consideration of any performance criteria – or variable remuneration – such as additional payments or benefits depending on performance or, in certain cases, other contractual criteria.
The rules will apply to senior management, risk takers, control functions and any employee receiving a total remuneration that takes them into the same remuneration bracket.
Under ESMA's guideline, non-EU AIFMs that market funds using passport agreements to EU investors will be subject "in full" to the rules after a transitional period.
Steven Maijoor, ESMA chair, said: "These guidelines will help promote prudent risk-taking by fund managers and align the interests of fund managers and investors.
"Making sure these provisions on pay are applied in a common and consistent way is key to increasing investor protection and ensuring a level playing field in the alternative fund sector across the EU."
A recent report by Mercer concluded that asset managers were under increasing pressure to negotiate fees for hedge funds, direct private equity and infrastructure.
The consultancy also noted that, in alternative asset classes, where '2 and 20' fees were originally the norm, the industry standard had moved towards a '1.5 and 20' strategy, as supply and demand dynamics have forced managers to be more flexible when negotiating terms.
Meanwhile in France, the €10.2bn pension fund UMR said it was looking to increase its allocation to private equity, structuring deals without the help of fund managers that "traditionally require excessive management fees".
The French scheme is looking to invest as much as €10m directly in the DLJ Group, which owns hotels and cosmetic, naval construction and agriculture companies.
Philippe Rey, CIO at UMR, told IPE this structure would enable the pension fund to avoid paying all the "excessive" fees a traditional private equity fund manager would require.
National authorities must now confirm with ESMA whether they currently comply or intend to comply with the guidelines by incorporating them into their supervisory practices.
The new rules are to come into force from 22 July.