Financing new ventures and established enterprises 08

Spring 2015

Branching out: Why global choice is vital for Europe’s investors

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Why are CHOICE investors vital HELPS EUROPE FLOURISH for Europe?

European pensioners and savers depend protection. However, what has been European citizens rely on Managing over ¤12trn of on the returns made by institutional less welcome is the restriction it institutional investors to capital2, Europe’s pension investors – whether to fund their has brought in terms of choice provide them with savings funds and retirement, the purchase of a home or of fund managers; under current schemes that fund, among companies invest across a some other important purpose. Europe’s arrangements, the AIFMD hampers BY THE NUMBERS institutional investors can only grow investors’ ability to invest in non-EU other things, their retirement. range of different assets, such savings pots if they have access to a fund managers. As Europe’s population ages – as stock markets, bonds, Michael Lindauer full range of investment strategies and by 2020, one-third of private equity or infrastructure Global Co-Head of Fund Investments asset classes and a global pool of fund The result is that many European Europeans will be over the age funds. This ensures that their at Allianz Capital Partners and managers from which to select the investors – and ultimately savers of 601 – institutional investors risk is not concentrated in one Vice-Chairman, EVCA best performers. – find it increasingly difficult to will play an increasingly area and that they can achieve pick from some of the world’s >¤12trn This publication sets out why important role in helping the returns their policyholders best private equity investment Amount of capital managed choice is so vital for investors opportunities. This is why we are European pensioners to and clients demand. These by Europe’s pension funds and and the savers they represent. making the case for a regime provide for their retirement. investments generate returns insurance companies It explains why global investment that enables Europe’s institutions for European citizens by flows need to be nurtured if savers’ to pursue investments around interests are to be protected. the world to manage their risks channelling capital into Europe’s institutional investors effectively and ensure that they businesses to help them grow Dörte Höppner increasingly view private equity can achieve the returns essential and into infrastructure Chief Executive, EVCA funds and other forms of alternative to EU citizens’ pension and other projects – both of which create Types of investment as a way of boosting savings plans. further economic growth. their returns, particularly at a time European citizens institutional of persistent low interest rates. If we are to avoid disadvantaging rely on institutional investor savers, the proposed marketing investors for The combination of The EVCA represents EU and Many of these investors recognised passport for non-EU funds under quantitative easing and the non-EU-based private equity, that the Alternative Investment Fund AIFMD must be delivered quickly savings and low interest rate environment > Pension funds infrastructure funds and Managers Directive (AIFMD) was and in a form that will facilitate retirement plans that has persisted in Europe institutional investors. intended to offer them enhanced global investment. – and looks set to persist for > Insurance companies some time – requires investors > Banks to look more actively for > Endowment funds opportunities that can yield

IN SUMMARY > Family offices > Europe’s institutional investors manage capital on behalf of real returns. Together with the savers in pension funds and insurance products need to fund the retirement of > Sovereign wealth funds increasing numbers of citizens, > Funds of funds* > Private equity offers Europe’s institutions the potential for high it is becoming particularly returns. Europe’s private equity funds generate annual returns important for Europe’s averaging over 8%, a solid return in a low-yield environment institutional investors to have * Funds of funds invest in > European investors need access to a global pool of private equity a full range of choices of funds on behalf institutions fund managers to manage risk and boost returns for their savers assets in which to invest and that either do not have fund managers to use – both the resources to invest in > Between 2010 and 2014, non-EU private equity fund managers within Europe and in other funds themselves or invested ¤6bn in European companies to help them grow regions of the world. that are seeking access > Europe needs a regime that gives investors the choice of to a niche area the best-performing managers, whether or not they are based 1 European Commission, Population in Europe Ageing in Europe 2 European Commission, Building a Capital Markets Union 24 5

Where do AIFMs fit in? In conversation with a leading investor

Private equity and ‘We also gain access to infrastructure funds are Private equity gives investments across different Managing more than ¤188bn for a number of pension funds, Dutch group PGGM has ¤9bn classified as alternative investors a spread regions of the world to take allocated to private equity. Maurice Klaver, Private Equity Investment Manager at the group, investment fund managers of investments advantage of varying explains why choosing from a global pool of managers is vital for investment success (AIFMs). They are an economic characteristics in important part of institutional by geography, different markets,’ he portfolios; over half of stage of company continues. ‘Overall, private Why do you invest in is global and covers a European institutions will development, sector equity fund investment gives private equity? wide range of sectors and increase their exposure to and risk profile our savers a premium over industries. This gives us private equity in the next public market returns and Private equity creates a broad scope of top- 12 months, according to a helps us to invest prudently diversification in PGGM’s performing funds on recent survey1. because of the diversification asset allocation and is which to base our it provides.’ Allianz has ¤8bn considered to be a stronger selection process. As Europe’s population invested in private equity, of contributor to the return of ages, and at a time of low Private equity funds also which two-thirds is with the portfolio. It allows us to How important is it for your fund interest rates, these funds provide investors with managers outside Europe. invest in a constructive that you can access non-EU offer investors the potential diversification benefits to help manner across a variety private equity fund managers? Diversification for higher returns than more spread risk. ‘Through private A broad spread of economic industries and is key to mitigating traditional types of investment equity funds we spread our The fund manager’s role is to facilitate innovation. We have to ensure that the risks associated such as bonds. In the past investments across a pool of therefore essential in helping our investments are ten years, European private privately owned companies,’ institutional investors manage What is your current spread diversified and that risk is with the portfolio equity has returned, on explains Michael Lindauer, risk on behalf of their savers of private equity fund spread. Our portfolio exposure. Therefore average, 8.44% a year – Global Co-Head of Fund by giving them access to a investments by geography consists of 60% non-EU our approach well above most other Investments at Allianz Capital broad spread of investments and manager type? managers, so it is vital that is global and forms of investment, with Partners. ‘This diversifies our by geographic location, stage we have good access to covers a wide the top quarter generating portfolio beyond stock of market development, In partnership with those managers as well. range of sectors 18.4% a year. market-listed companies. company size, sector, risk top-tier private equity fund and industries profile and investment style. managers, we invest How does the current regime globally in a large variety affect your access to private Maurice Klaver, PGGM Finally, private equity of portfolio companies, equity funds? INVESTORS IN PRIVATE EQUITY FUNDS 2014 funds are long-term investors: (% BY AMOUNT) resulting in a well-diversified they generate returns by portfolio across various We are finding that the investing in mainly SMEs to sectors, regions and responsibility for initial 0.6% 2.6% Academic institutions support growth. With funds styles, such as funds, contact in fundraising 3.5% 5.5% Banks often running for ten years secondary investments has reversed. Under 0.4% 5.9% 7.6% Capital markets or more, they are a good and co-investments the current AIFMD 4.8% Corporate investors match for long-term investors. alongside funds. arrangements, many 11.6% Endowments and As one UK local authority managers cannot 32.2% foundations manager says: Why is it important to achieve proactively send Family offices ‘Private equity is a good diversification in your portfolio information to investors. Funds of funds returns generator and has a of private equity investments? Government agencies long investment horizon, This causes delays, and Insurance companies which fits our long-term Diversification is key to some investors that don’t Other asset managers investment plan.’ mitigating the risks have large private equity 10.9% Pension funds associated with the teams may not be able Private individuals 1 Coller Capital, Global Private portfolio exposure. to access many top- 4.1% 10.3% Sovereign wealth funds Equity Barometer Therefore, our approach performing non-EU funds.

Source: EVCA, PEREP_Analytics 6 7 Worldwide private equity investments provide returns for Europe’s savers

Europe’s institutional investors can only select the best investment opportunities if they have access to a wide, global pool of fund managers. The returns generated by these investments, whether they are made in Europe or beyond, flow back to Europe’s pensioners and savers

Investing for an average of five years, private equity is patient capital. Firms engage actively with a long-term goal of creating companies that are more competitive, productive and innovative Companies

needing investment and guidance

Provide long-term capital and Private Returns from the support to help companies grow equity funds sale of portfolio

Investment flow Investment companies, based around wherever they are the world based, ultimately flow back to European Returns European citizens, citizens who benefit from Pension Insurance Banks larger savings pots who are saving funds companies or planning for retirement Select from a global pool European of private equity fund institutional managers investors 28 9 The effect of AIFMD as it stands The role of non-EU managers in Europe

The introduction of the However, the current regime, Alternative Investment Fund which lacks an equivalent Managers Directive’s (AIFMD) scheme for non-EU managers, marketing passport for is placing European savers at Private equity managers and funds based outside Europe make an important, EU-based alternative a disadvantage. The current positive contribution to our economy: they offer Europe’s institutional investors investment funds and regime is placing the potential for constructing well-diversified portfolios and for high returns (which managers was a welcome With limited access to non-EU European savers ultimately flow back to European savers), and many also recycle this European development – it creates managers, European at a disadvantage capital to invest in European companies. a single market for institutions face restricted European private equity, choices in private equity Between 2010 and 2014, non-EU private equity managers invested a total of helping to direct investment and other alternative ¤6bn in European businesses, providing funding and support for growth – including to Europe’s companies. investments. This impairs their international expansion – as well as creating jobs. Examples include Spotify, ability to select the best-in- SoundCloud, Alexander Mann and Swift Worldwide Resources. If policies in the class managers from a countries without NPPRs or EU are designed to help European companies thrive – making it an attractive worldwide pool and to gain that have a small pool of environment in which to do business and invest – further global capital will flow exposure to growth economies. institutional capital are at a into the region. What is AIFMD? distinct disadvantage,’ says Under the current regime, David Lindstrom, Managing non-EU managers and EU Director, Alternative Implemented in managers of funds that are Investments at MetLife. ALL PRIVATE EQUITY: July 2013, the AIFMD located outside the EU must GEOGRAPHIC INVESTMENT FLOWS 2010–2014 creates a harmonised apply to individual member Europe’s investors are regulatory framework states under their national concerned about the effect for managing and private placement regimes on investment portfolios and marketing private equity, (NPPRs) – where they exist returns. ‘It could be more infrastructure and other – before they can approach difficult for us to find smaller alternative investments an EU investor. funds that would not market ¤6.0bn in the EU. themselves in Europe,’ said a Non-European private equity firms investing This requires them to register Swedish public pension fund in portfolio companies in Europe It allows managers based with multiple authorities with manager in a recent EVCA in the EU to market very different obligations in survey. ‘It could be more their funds to European different markets. Only larger difficult to get access to the institutional investors third-country funds and best fund managers – which ¤51.3bn through a passport system. managers are therefore likely don’t need to take new Cross-border investments within Europe to have the resources investors – because we While AIFMD has a provision necessary to market in Europe, are European.’ to extend the passport to and they are only choosing to ¤144.1bn third-country managers do so in the larger states. In Lindstrom agrees: ‘The best Domestic investments (those based outside addition, some member states non-EU fund managers will in European countries the EU), this is under do not have NPPRs in place, have no difficulty raising the consideration by the making it difficult for investors capital they need elsewhere in European Securities and to invest in non-EU managers. the world, and the risk is that ¤12.4bn Markets Authority (ESMA), they see the complexity of the which will issue its opinion This distorts competition, NPPR regimes as a burden European private equity firms investing in in July 2015. reduces investor choice and is they don’t need. That would portfolio companies outside Europe ultimately detrimental to leave European investors with investors and the clients they second-tier managers from represent. ‘Investors in which to select.’ Source: EVCA, PEREP_Analytics 210 11

The need for equal access A selection of European institutional

Europe’s institutional investors need to select the best and investors most appropriate investments from a global, diversified pool Policy action of managers in order to fund If the regime is The EVCA represents the interests of over 100 investor members, such as points retirement and other forms of pension funds, insurance companies and funds of funds. Here is a selection saving for European citizens. too restrictive or burdensome for > Create a third- Private equity and non-EU funds, country regime that infrastructure funds are an many of the best- allows European important source of the performing managers investors access to returns these institutions seek. will opt to raise their non-EU managers However, the current capital elsewhere arrangements under the Extend the marketing AIFMD restrict investor choice passport to third- in their endeavour to build country fund globally diversified portfolios managers, on the – including best-in-class fund proviso that the managers – for the benefit requirements are not of their savers. Additionally, if the regime overly restrictive or requires that all of a third- burdensome and take What is needed is a third- country manager’s activities account of the fact country regime that offers are compliant with the AIFMD, that EU investors European investors access regardless of where those provide only a small to the best-performing activities take place, managers proportion of the managers. The proposal to may need to set up a Europe- capital that these extend the passport system only fund. This makes it a managers raise. to non-EU (third-country) viable option for only the managers is welcomed as a largest fund managers. > Retain national means of achieving this. private placement Investors in private equity regimes to enable However, it must be designed funds are professional, smaller non-EU and implemented in a sophisticated and experienced managers to market proportionate way that in making decisions about to European investors reflects the fact that European where to invest their investors will only represent a savers’ capital. However, these small amount of the capital should be reviewed raised by non-EU fund If we are to create an to ensure that there is managers. If the regime is too environment in which Europe’s harmonisation across restrictive or burdensome for savers benefit from the member states, in line non-EU funds, many of the highest-possible returns, with removing national best-performing managers barriers to choice must be barriers to the flow of will opt to raise their capital removed, giving European capital under the elsewhere, leaving European institutions easy access to proposed Capital investors to choose from the world’s best-performing Markets Union. second-tier managers. fund managers. 08 European Private Equity and Association The EVCA is the voice of European private equity. Our membership covers all private equity activity, from early-stage venture capital through to large private equity firms and funds investing in infrastructure. Our members also include institutional investors, such as pension funds and insurance companies, which are a key source of long-term financing in Europe and which invest in private equity, venture capital and infrastructure funds. We represent 650 member firms and 500 affiliate members. The EVCA shapes the future direction of the industry, while promoting it to stakeholders such as entrepreneurs, business owners and employee representatives. We explain private equity to the public and help shape public policy, so that our members can conduct their business effectively. The EVCA is the guardian of the industry’s professional standards, demanding accountability, good governance and transparency from our members and spreading best practice through our training courses. We have the facts when it comes to European private equity, thanks to our trusted and authoritative research and analysis. The EVCA has 25 dedicated staff working in Brussels to make sure that our industry is understood and heard.

Dörte Höppner Chief Executive, EVCA Tel +32 2 715 00 28 Michael Collins Deputy Chief Executive and Public Affairs Director, EVCA Tel +32 2 290 07 83

To find out more about the EVCA and its members, visit www.evca.eu European Transparency Register: 60975211600-74