The European private equity industry is warning that a trade war over access to capital could erupt between the United States and Europe unless key changes are made to the European alternative investments directive.
The draft directive published in April proposes measures requiring managers of funds to register, submit data, limit leverage and, critically for the private industry, makes non-EU managers meet certain requirements in order to be able to offer their funds within European member states.
“It’s crazy to start erecting what the U.S. will see as capital barriers to raising money in Europe,” said Simon Havers, chief executive of private equity firm Baird Capital Partners Europe and chairman of the British Private Equity and Venture Capital Association (BVCA).
A study of the impact of the Alternative Investment Fund Managers (AIFM) directive conducted by Charles River Associates and commissioned by the FSA found it could load one-off costs of €756m on the private equity industry — in large part from non-EU firms re-domiciling to capture European investors — alongside on-going compliance costs of €248m.
However, the belief that US private equity firms would be happy to set up in Europe in order to raise capital for their funds is misguided, given how little they actually raise in Europe, Havers said.
“They would just work a little bit harder to raise the 10% of funds they raise in Europe in the US,” he said.
The directive could see 35% fewer private equity funds available to EU investors, the FSA study said.
Havers fears far too little work has been done to engage with the US authorities and prevent tit-for-tat measures. The directive has been slammed as protectionist by policy makers and industry participants on both sides of the Atlantic.
However, Dan Waters, sector leader for asset management at the FSA, reckons there has been progress.
“We have certainly had discussions with our U.S. counterparts (to explain) that the changes that are being made in this directive will go a substantial way to mitigating their worries,” he said
Sweden holds the presidency of the EU until the end of the year and is actively working on a counter-proposal that it aims to present at the European council meeting later this month, said Bjorn Saven, the executive chairman of Swedish private equity firm IK Partners.
“If the third-country provisions are dropped then it’s possible to develop the text along other lines that might allow compromise to emerge,” Saven said.
Private equity also needs to adopt the right tone in order to win people over to its cause. “Jingoistic euro-scepticism is not right language to employ,” Lord Myners, financial secretary to the Treasury told the BVCA Summit on Wednesday.