Recent research by the Institutional Limited Partners Association (ILPA) has highlighted growing discontent with the implementation of the Alternative Investment Fund Managers Directive (AIFMD) within the European Union (EU). Though the legislation set out to enhance oversight and standardize regulation across the EU, a significant majority of Europe-based investors feel they have been directly disadvantaged as a result, citing reduced international competitiveness as a key concern. In November 2014, Preqin conducted similar research, surveying 260 private equity and venture capital fund managers; 27% of respondents believed regulation to be the biggest challenge they face in 2015.
Preqin’s Fund Manager Profiles online service currently tracks 1,852 private equity firms based in the EU, which together have raised a total of €442bn in capital for private equity funds over the last 10 years. A further 233 firms headquartered outside the EU express an interest in investing within the region, and will be required to submit to the reporting regulations of the AIFMD if they choose to invest. The legislation goes further than just these firms: managers that wish to market their private equity funds within the EU, even if the vehicles being marketed are not based in and do not intend to invest within the region, will also be required to submit to legislation surrounding marketing activity and the reporting of funds. Indeed, a key concern of investors within the EU is the perceived drop in the number of non-EU firms marketing funds within the region.
CVC Capital Partners, based in London, is the largest private equity firm in Europe in terms of capital raised in the last 10 years (€38.8bn). While the firm acknowledges the “heavy compliance burden” that the AIFMD will represent for firms, it does view the legislation as favourable to alternative regulations considered by member states. Forty percent of respondents to Preqin’s fund manager survey cited compliance costs as their primary concern with the AIFMD. The increased cost of conducting business within the EU has caused a number of industry commentators to predict a movement away from European activity, with fund managers preferring to target burgeoning economies in Asia and elsewhere. A particular cause of expense for fund managers operating in Europe is the uneven implementation of the directive. For the AIFMD, this has resulted in differences in reporting structures for alternative investment managers, as well as differences in approaches to issues such as reverse solicitation.
It is worth noting that the proportion of Europe-focused funds in market that are being raised by non-Europe-based fund managers remained steady at 25% between December 2013 and January 2015. There are currently 295 private equity vehicles being raised that express an interest in the EU, targeting €81.5bn in aggregate capital. There is no doubt that the AIFMD has resulted in teething problems for active investors within the EU, but the value of opportunities in the region will continue to attract capital. For policymakers, the key issue over the course of 2015 will be to ensure that EU-based investors still have access to the most lucrative investment opportunities abroad.
For further discussion and analysis on European fundraising and industry regulation, please refer to the 2015 Preqin Global Private Equity & Venture Capital Report.