Travers Smith's Alternative Insights: What's in store for 2024?

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A regular briefing for the alternative asset management industry.

If it seems that regulators are constantly writing new rules that affect European alternative asset managers, that's because they are. Or, at least, they have been for the last few years. 2023 was no exception.

First the good news: the coming year will see fewer new rules being written – in part, because the European Commission will be on an election hiatus. But that doesn't mean there will be any let up for firms. 2024 is the year when some recently finalised rules will start to bite, and when preparations should begin in earnest for others.

Our annual round up of what to expect in the year ahead – Insights '24 – was published this week. It's our take on the key legal, tax and regulatory issues that alternative asset managers should have on their agenda for 2024.

The pace and scale of regulatory change in the EU has been particularly noteworthy in recent years – one consequence of which is that UK and EU laws are starting to diverge quite sharply.

One important area of divergence is on ESG regulation. The EU's Sustainable Finance Disclosure Regulation (SFDR), which was first implemented in 2021, is still causing headaches for private equity firms, and further change could be on the way. Significant extensions to the (already overly complicated) reporting templates have recently been mooted. It is not yet known when, or even whether, the changes will be made – but firms reporting under Article 8 or Article 9, or in the process of launching funds with such a categorisation, will need to keep a close eye on that this year. More fundamental changes to the SFDR are also in the works, but these are some years away.

Sustainability teams should also take note of the new EU Taxonomy "screening criteria", which came into force at the beginning of the year, and the guidance published in December. Taxonomy reporting is still a minority sport for alternative asset managers – but as Taxonomy alignment scores become more prevalent in corporate reporting, asset managers will also be expected to report them to LPs.

And ESG specialists will also be busy dealing with the biggest change to corporate reporting in at least a generation: the EU's Corporate Sustainability Reporting Directive (CSRD). Although the first wave of the CSRD will largely miss the private markets, the second wave – with sustainability reports due in 2026 – will catch many firms and their large EU portfolio companies.

Compliance with the CSRD requires a lot more than just additional corporate reporting. That is the end result, but the process to identify the data required – not just from a company's own operations, but also from its "value chain" – is complex and time-consuming. Now is a good time to begin the scoping exercise.

The UK already requires asset managers with assets under management (AUM) of £5 billion or more to report using the TCFD template on climate-related risks and opportunities, but 2024 is the year when the rubber hits the road for most private fund sponsors: firms with between £5 billion and £50 billion under management will have to issue their first mandatory TCFD reports this year, covering 2023. (Check if you are covered using our app.)

Legal and compliance teams will continue to have their hands full this year, although at least the EU's flood of new rules may turn into a slow and steady trickle.

Meanwhile, the UK's more general sustainability disclosure rules for asset managers, and a separate labelling regime, were unveiled at the end of last year, as were proposed rules on diversity and inclusion (D&I). Firms will need to review these, but – like some other recent and planned UK initiatives – the impact on smaller alternative asset managers, and in particular those who do not target retail investors, will be relatively minor. Some UK firms will want to access the voluntary sustainability labels, but many will not have that option – at least not yet – because their (post-Brexit) structure means that their manager is in the EU. And the more demanding aspects of the D&I rules will only apply to UK firms with more than 250 employees.

Otherwise, the UK has chosen to focus its rulemaking on consumer protection; indeed, some initiatives have been positively helpful to the alternatives sector – for example, efforts to unlock more pension fund capital for private funds, and a planned consultation on the UK's version of the Alternative Investment Fund Managers Directive (AIFMD). On the other hand, the sector will want to keep a close eye on the FCA's impending review of valuations and more recent scrutiny of market abuse controls (foreshadowed by an FCA portfolio letter last year).

The EU's reforms have also delivered some positive, or at least neutral, outcomes. As we reported earlier this month, changes to the ELTIF regime will be somewhat helpful for managers who want to access individual investors in the EU, and agreed reforms to the AIFMD were relatively benign for most firms – and certainly could have been more disruptive. That said, there are more dramatic consequences for loan origination funds. For the first time, direct lending funds will be covered by pan-EU rules, including restrictions on leverage and new risk retention requirements. Preparing for those new rules – expected to be in force from 2026 – will be on the list for private debt funds this year and next. The EU's AI Act, and operational resilience regulations in the EU and UK, should also be watched closely.

Meanwhile, most European firms will escape the more dramatic consequences of the substantial changes to the Private Fund Adviser rules in the US, but non-US firms with US-domiciled funds will have work through the consequences of those reforms. The changes became effective in November 2023, and will be implemented in stages this year and next – subject to an outstanding legal challenge, the timing of which is currently uncertain.

So, legal and compliance teams will continue to have their hands full this year, although at least the EU's flood of new rules may turn into a slow and steady trickle.

Of course, the most interesting – and perhaps the most worrisome – developments this year will follow from the results of an unprecedented number of elections around the world. If there is an incoming Labour administration in the UK, following an election that looks set for late autumn, there are likely to be changes to the taxation of carried interest in Britain; on the other hand, the EU election could see a shift to the right, with hard-to-predict consequences for the direction of future regulation. And, of course, then there is the US ….