I have always thought that one of the great strengths of private equity is its immunity – in comparative terms at least – from the animal spirits that too often plague financial markets. Many investors in public markets will have entered this new year licking their wounds after a turbulent end to 2018. While private equity limited partners will have had an eye on the wild swings in the FTSE 100 or the S&P 500 (not least if their GPs had been promising that a big IPO exit was on the horizon), one imagines they were more sanguine than their public equity counterparts as they welcomed in 2019.
Many factors fed into the gyrations in public equity markets back in December, but it is indisputable that politics was at least part of the story. For all its long-term vision and its patience, even private equity does not enjoy full immunity from the implications of public policy. And, in 2019, public policy will, once again, have a big influence on investor sentiment and appetite.
The UK’s departure from the EU will dominate the first quarter, certainly in London and most likely in Brussels too (despite the best efforts of the EU’s leadership to avoid this quagmire). If the deal that Theresa May has negotiated falls in the House of Commons, then private equity firms will have to activate (or, in some cases, develop) their contingency plans to ensure that fund management, fund raising, deal sourcing and staffing can continue; if it’s passed, then, for most firms, it will be “business as usual” for another couple of years, but the clock will immediately start ticking on negotiations over the nature of the long-term EU-UK relationship. Either way, Brexit will be inescapable throughout 2019.
Away from the details of Article 50 Withdrawal Agreements, backstops and transition periods, the first quarter of 2019 will see the EU machine rushing to conclude a whole range of legislative files before the European Parliament is dissolved for elections in late May. The Parliament and Council will try to sign off new rules on sustainable finance (including new reporting requirements for private equity investors and fund managers); on the powers of the European Supervisory Authorities (including who oversees funds’ delegation arrangements, and who supervises EUVECA managers); and on the cross-border distribution of funds (which will change AIFMD rules on pre-marketing). With MEPs looking for successes on which to campaign for re-election and departing European Commissioners looking to cement their legacy with tangible legislative achievements, these final few weeks of negotiating can often deliver unexpected progress.
For the leaders of the EU’s established political groups – the centre-right, the centre-left and the liberals – that have dominated the EU institutions for a generation, this year’s elections are already causing sleepless nights. Alongside the normal worries about their own election prospects and how to secure influential positions in the new Parliament is the realisation that this year’s vote could see a significant increase in support for populist, anti-establishment parties and movements who are prepared to challenge the whole basis of the EU system.
With the centre increasingly challenged in national politics, there is good reason for the luminaries of the EPP, S&D Group and ALDE to be concerned that the European Parliament could be the next domino in line, not least because the last couple of European elections have seen a steady increase in support for anti-EU parties. Low turnouts for European elections and the perception amongst some voters that they are a “free hit” against the government of the day, providing a low risk opportunity to dabble in anti-establishment politics, only exacerbate this fear.
This matters for private equity as the MEPs elected this spring, and the European Commissioners that they will in turn approve in the autumn, are the policymakers that will review Solvency II and decide whether insurers are encouraged (or not) to invest in private equity; they will establish new rules to combat tax avoidance and decide whether certain jurisdictions should be on a blacklist; and, most importantly, they will be responsible for the review of AIFMD.
A lot of preparatory work for AIFMD II is already underway, and, during 2019, we expect to see the publication of a major EU study into the effects of the current directive and an extensive public consultation by the European Commission of its impacts. But it will be those coming into office in the second half of the year that will determine both the political direction of the new regulatory regime for private equity and its technical detail.
In 2008, the industry failed to see the risk of AIFMD but was able to salvage the situation thanks to an extensive lobbying campaign and the support of UK MEPs and Ministers. AIFMD II will be negotiated in a very different context. Brexit will not only mean that UK politicians are no longer in the room to support a fair deal for the industry, it will also intensify some of the political issues the Directive raises. It’s not hard to imagine how much more acute the debate around “third countries” will be when Europe’s biggest private equity market is now outside the EU tent rather than in it.
Even if a new regime will not enter into force for some years, the work that Invest Europe will do in 2019 to explain the benefits of private equity and its positive contribution to jobs, growth and the prosperity of the EU 27 will be vital to ensuring the best possible outcome for both LPs and GPs across Europe in the years to come.
Building relationships with new MEPs and their staff, with Commissioners and their political advisers, and with the officials drafting the technical rules, is at the heart of Invest Europe’s mission. Our presence in Brussels gives us access to and credibility with politicians and officials that is hard to reproduce.
But being on the ground in the Parliament and Commission does not, by itself, deliver influence. That rests, ultimately, on the backing that we get from our members, whether GPs, LPs or associate members. The technical support that a firm such as Debevoise provides to Invest Europe – and thereby to the whole European industry – ensures that our advocacy is evidence based, authoritative and credible.
In 2019, that will be more important than ever.
First published by Debevoise & Plimpton.