Private equity groups in Europe are gearing up for a fight against new regulations coming up for debate in the European Parliament later this year. Since some form of oversight is likely inevitable, industry lobbyists should focus their efforts on removing or watering down a few key provisions that would do the most harm if passed.
The industry-wide effort comes in response to the European Commission’s issuance in May of the “Directive on Alternative Investment Fund Managers”, which if passed would create a comprehensive regulatory framework for hedge and private equity fund managers in the European Union. The new disclosure rules would apply to leveraged fund managers with more than €100 million in assets, and more than €500 million in assets for unleveraged funds with a lock-in period of more than five years.
The British Venture Capital Association (BVCA), the European Venture Capital Association (EVCA) and the Alternative Investment Management Association (AIMA) are all preparing position papers outlining their views and recommendations, while the Association of Investment Companies (AIC) more recently responded with a position paper proposing that all EU companies trading on an EU-regulated market should be completely exempt from the scope of the directive. “If the directive is not significantly amended, investment companies will face serious problems which will compromise their ability to operate effectively,” it said.
Such groups will have to counter the efforts of Poul Nyrup Rasmussen, leader of the Party of Socialists, who has been the driving force for having a European regulation. However, the industry’s chances of carving out reasonable legislation were enhanced by recent elections which gave centre-right parties the largest bloc in the European Parliament.
The fact that these legislators are less philosophically inclined toward strong regulations will help when the measure comes up for debate later this year. But while their position is strengthened, private equity groups should not assume that through aggressive lobbying they can keep the industry out of regulation entirely.
Instead they should zero in on a few particularly harmful points in the directive, including the definition of leverage, which is considered too broad in how it designates which firms qualify for regulation as part of the assets-under-management threshold.
Another provision would limit European- and non-European-authorised managers to only being able to market to professional investors. To qualify as a professional investor, one must demonstrate that they have done a number of transactions in the relevant asset space within a certain period, but since even some of the biggest LPs don’t make a huge number of investments in any given year, this could affect even the most qualified of investors.
Finally, the directive would restrict US-based alternatives managers from raising and managing assets in the European Union. Foreigners trying to market in Europe, as the directive stands at the moment, will have to demonstrate to the relevant authorities that they are subject to the equivalent regulation in their home jurisdiction. It’s unclear right now whether US managers could demonstrate that, which could potentially cut off access for European managers to top-performing US and non-EU-based alternative investment managers.
As private equity groups have made efforts of late to engage and “speak with one voice” in Europe, the above measures would be a good place to start.