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What do the European election results mean for private equity?

04 Jun 2019

The rise of populism across Europe was one of the biggest stories ahead of this May’s European Parliament elections. With the centre-right and centre-left parties losing their majority and the anti-EU parties keen to exercise their influence, what can private equity expect from this new political landscape?

Over the last five years, hot issues like austerity and the European migration crisis stoked the fires of populism in countries across the continent. Despite this rising tide, European institutions were able to successfully deliver projects to promote jobs, growth and more efficient financial markets. One major achievement was the launch of the Capital Markets Union (CMU) project to help companies access more diverse sources of funding, which contained a number of helpful initiatives for European private equity.

In the last European Parliament elections in 2014, Eurosceptic parties won 20% of seats. Today, that share has grown, with populist parties securing 23% of seats in the elections – 28% if hard-left parties critical of the European Union are included. While the result indicates a louder anti-EU voice, it also means that the majority of European Parliamentarians are still pro-Europe and want cooperation to continue. While the far right can claim clear victories in some European member states, Liberal parties and the Greens also made gains, underlining the polarisation of politics across Europe.

The result is that Parliament is now more fragmented. The centre-right European People’s Party (EPP) and the centre-left Progressive Alliance of Socialists and Democrats (S&D) fell short of the seats needed to form the centrist ‘grand coalition’ that has been the backbone of the Parliament for the last 30 years. To secure a majority, these parties will now have to create more alliances. This backing is likely to come from the centre rather than the far right. The strengthened Alliance of Liberals and Democrats for Europe group (ALDE) secured 15% of the seats in Parliament, emerging as a new kingmaker in European politics. This could be a positive outcome for private equity as ALDE has historically been engaged and receptive to our industry’s messages.

However, the new balance of power in the European Parliament could make coalitions more fragile and result in more polarised opinions. For instance, climate change and sustainable finance are likely to be high on the agenda, in no small part due to the surge in support for the European Green Party, which picked up over 9% of the seats available. But there will likely be divisions on how to roll out the Commission action plan on financing sustainable growth as some – even within one political group – might be convinced that the agenda goes too far in its legislative proposals for financial services, while others believe it does not go far enough. Consensus will require more effort, and it may take more time and effort to pass certain legislation. Political pacts could be formed on a case-by-case basis, rather than being stable long-term alliances.

Over the last five years, EU policymakers brought in regulation designed to facilitate investment rather than obstruct it, and we hope that new policymakers will take the same approach. Naturally, every well-meant rule change comes with the potential for unintended consequences and administrative burdens. Invest Europe will continue to highlight these to policymakers on behalf of our members.

We anticipate that next year’s Alternative Investment Fund Managers’ Directive review will focus on targeted revisions, rather than wholesale changes. Yet much will depend on the election of a new European Commission President and the formation of a new Commission, a process which has become more complex with the fragmentation of Parliament. Similarly, while we expect development of the CMU project to continue, it remains to be seen whether venture capital and private equity will continue to occupy such a central role.

New European officials will be keen to manage the challenges of international trade barriers and Brexit. While the United Kingdom was obliged to participate in this year’s European elections, its MEPs – who have previously been a helpful voice in Parliament for private equity – may not have much time to be involved in EU politics before the country formally leaves the bloc. Policymakers will need to consider the United Kingdom’s future as a third country, as well as what that will mean for existing third-country relationships more broadly (U.S., Switzerland, Japan, etc.). On this topic, Invest Europe will be fully engaged to explain our industry’s structure and role, while also advising our members on how to prepare for changes ahead.

It is clear there will be many shifts in European institutions following these elections. For example, we anticipate significant turnover in Parliament’s Economic and Monetary Affairs Committee (ECON), whose decisions are pivotal to our industry. Therefore, we are preparing to engage and inform all these policymakers about how private equity operates and the benefits it brings to investors and the economy. We are producing dedicated briefing materials to tell private equity’s story and we will meet many incoming policymakers over the coming months to explain it to them in person.

We are committed to informing policymakers and contributing to discussions that shape the rules for the industry so that private equity can continue to do what it does best – backing European companies that need funding and expertise, while delivering returns to investors on behalf of European citizens.

Anna Lekston, Public Affairs Director, Invest Europe

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