European pension and insurance savers’ income depends on institutional investors having a full choice of fund managers. This is why the EVCA supports the proposed introduction of a third-country passport allowing non-European managers to market their funds to European investors.
The introduction of the AIFMD’s marketing passport for European alternative investment funds was a welcome development as it creates a single market for European private equity and venture capital, helping to direct investment to European companies. However, it has left non-European alternative fund managers and - by extension - Europe’s institutional investors at a disadvantage. Third-country managers are currently unable to benefit from the passport regime, and must market their funds to European investors under individual national private placement regimes (NPPRs), where they exist.
This is bad for competition and limits European institutional investors’ choice: they are unable to achieve an adequate spread of investments by manager type or geography as part of their risk diversification strategies. It also hampers their ability to select the best-in-class managers from a global pool and to gain exposure to growth economies, such as emerging markets. The result could be lower returns, adversely affecting Europe’s pension fund and insurance company savers. In addition, access to managers outside Europe helps reduce the build-up of systemic risk in the EU by spreading investment more widely. Restricting investors’ options to largely Europe-based managers increases the possibility of systemic risk.
Finally, many of these third-country fund managers actually invest in Europe to the benefit of Europe’s companies seeking capital for growth. Indeed, between 2009 and 2013, private equity and venture capital investments in Europe by third-country funds amounted to a substantial €6.1bn.
Part of the problem with the status quo is that some member states don’t have an NPPR in place. For those that do, third-country fund managers have to register with multiple authorities and comply with very different obligations in different markets. Only larger third-country funds therefore have the resources necessary to market in Europe and they are only choosing to do so in the larger states. This distorts competition and is to the detriment of investors in smaller member states.
The AIFMD has a provision to extend the passport system to third-country managers. To help inform the decision-making process on this, the European Securities and Markets Authority launched a consultation on whether this is the right course of action and on how the current passport system is functioning. As part of our work to represent the interests of the private equity industry and to engage with policymakers, Invest Europe has submitted its response to the consultation.
Europe’s investors clearly need access to funds located outside the EU and a workable marketing passport for third country managers is a good way of achieving this. But as European capital will only ever be a relatively small share of the total investment in these non-EU funds we have to ensure that any additional requirements that the EU passport introduces for these managers are proportionate and still make it an attractive marketing tool. Otherwise there’s a risk that take-up is low and that EU investors’ access to the best managers is actually reduced.
In addition, we believe the current passport procedure for EU managers needs to be looked at again, particularly to rid the system of certain protectionist measures, such as the imposition by ‘host’ governments of fees before a manager can use his passport. These fees can add up to substantial amounts and discourage cross-border marketing, contrary to our aim of creating a single market.
And finally, while the current proposals envisage a phasing out of the NPPRs, we believe these should be retained and their operation and conditions harmonised across states. In line with the objectives of removing national barriers to the flow of capital under the proposed Capital Markets Union, this would allow alternative investment fund managers that are either located outside Europe or that are below the AIFMD threshold to market on a cross-border basis. If NPPRs were scrapped, smaller managers, including many venture capital funds, which invest in early-stage, innovative companies, would struggle to raise capital from investors across Europe. The removal of NPPRs would also deny many investors the possibility of spreading their investments across fund size.
Granting a third-country passport, with retention of an improved NPPR system, is vital. It’s vital to ensuring that institutional investors can achieve returns, it’s vital to protecting the interests and returns of European savers, many of whom are relying on pension funds and insurance companies to fund their retirement, and it’s vital for the European economy that there is healthy competition amongst fund managers.