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

Transcription

1 Financing new ventures and established enterprises 08 Spring 2015 Branching out: Why global choice is vital for Europe s investors

2 2 3 INVESTOR CHOICE HELPS EUROPE FLOURISH Why are institutional investors vital for Europe? Michael Lindauer Global Co-Head of Fund Investments at Allianz Capital Partners and Vice-Chairman, EVCA Dörte Höppner Chief Executive, EVCA The EVCA represents EU and non-eu-based private equity, infrastructure funds and institutional investors. INSUMMARY European pensioners and savers depend on the returns made by institutional investors whether to fund their retirement, the purchase of a home or some other important purpose. Europe s institutional investors can only grow savings pots if they have access to a full range of investment strategies and asset classes and a global pool of fund managers from which to select the best performers. This publication sets out why choice is so vital for investors and the savers they represent. It explains why global investment flows need to be nurtured if savers interests are to be protected. Europe s institutional investors increasingly view private equity funds and other forms of alternative investment as a way of boosting their returns, particularly at a time of persistent low interest rates. Many of these investors recognised that the Alternative Investment Fund Managers Directive (AIFMD) was intended to offer them enhanced protection. However, what has been less welcome is the restriction it has brought in terms of choice of fund managers; under current arrangements, the AIFMD hampers investors ability to invest in non-eu private equity fund managers. The result is that many European investors and ultimately savers find it increasingly difficult to pick from some of the world s best private equity investment opportunities. This is why we are making the case for a regime that enables Europe s institutions to pursue investments around the world to manage their risks effectively and ensure that they can achieve the returns essential to EU citizens pension and other savings plans. If we are to avoid disadvantaging savers, the proposed marketing passport for non-eu funds under AIFMD must be delivered quickly and in a form that will facilitate global investment. > Europe s institutional investors manage capital on behalf of savers in pension funds and insurance products > Private equity offers Europe s institutions the potential for high returns. Europe s private equity funds generate annual returns averaging over 8%, a solid return in a low-yield environment > European investors need access to a global pool of private equity fund managers to manage risk and boost returns for their savers > Between 2010 and 2014, non-eu private equity fund managers invested 6bn in European companies to help them grow > Europe needs a regime that gives investors the choice of the best-performing managers, whether or not they are based in Europe European citizens rely on institutional investors to provide them with savings schemes that fund, among other things, their retirement. As Europe s population ages by 2020, one-third of Europeans will be over the age of 60 1 institutional investors will play an increasingly important role in helping European pensioners to provide for their retirement. European citizens rely on institutional investors for savings and retirement plans Managing over 12trn of capital 2, Europe s pension funds and insurance companies invest across a range of different assets, such as stock markets, bonds, private equity or infrastructure funds. This ensures that their risk is not concentrated in one area and that they can achieve the returns their policyholders and clients demand. These investments generate returns for European citizens by channelling capital into businesses to help them grow and into infrastructure projects both of which create further economic growth. The combination of quantitative easing and the low interest rate environment that has persisted in Europe and looks set to persist for some time requires investors to look more actively for opportunities that can yield real returns. Together with the need to fund the retirement of increasing numbers of citizens, it is becoming particularly important for Europe s institutional investors to have a full range of choices of assets in which to invest and fund managers to use both within Europe and in other regions of the world. 1 European Commission, Population Ageing in Europe 2 European Commission, Building a Capital Markets Union BY THE NUMBERS > 12trn Amount of capital managed by Europe s pension funds and insurance companies Types of institutional investor > Pension funds > Insurance companies > Banks > Endowment funds > Family offices > Sovereign wealth funds > Funds of funds* * Funds of funds invest in funds on behalf institutions that either do not have the resources to invest in funds themselves or that are seeking access to a niche area

3 24 5 Where do AIFMs fit in? Private equity and infrastructure funds are classified as alternative investment fund managers (AIFMs). They are an important part of institutional portfolios; over half of European institutions will increase their exposure to private equity in the next 12 months, according to a recent survey 1. As Europe s population ages, and at a time of low interest rates, these funds offer investors the potential for higher returns than more traditional types of investment such as bonds. In the past ten years, European private equity has returned, on average, 8.44% a year well above most other forms of investment, with the top quarter generating 18.4% a year. INVESTORS IN PRIVATE EQUITY FUNDS 2014 (% BY AMOUNT) 4.1% 10.3% Private equity gives investors a spread of investments by geography, stage of company development, sector and risk profile Private equity funds also provide investors with diversification benefits to help spread risk. Through private equity funds we spread our investments across a pool of privately owned companies, explains Michael Lindauer, Global Co-Head of Fund Investments at Allianz Capital Partners. This diversifies our portfolio beyond stock market-listed companies. 0.6% 2.6% Academic institutions 3.5% 5.5% 0.4% 5.9% Banks 7.6% Capital markets 4.8% Corporate investors 11.6% Endowments and 32.2% foundations 10.9% Family offices Funds of funds Government agencies Insurance companies Other asset managers Pension funds Private individuals Sovereign wealth funds We also gain access to investments across different regions of the world to take advantage of varying economic characteristics in different markets, he continues. Overall, private equity fund investment gives our savers a premium over public market returns and helps us to invest prudently because of the diversification it provides. Allianz has 8bn invested in private equity, of which two-thirds is with managers outside Europe. A broad spread The fund manager s role is therefore essential in helping institutional investors manage risk on behalf of their savers by giving them access to a broad spread of investments by geographic location, stage of market development, company size, sector, risk profile and investment style. Finally, private equity funds are long-term investors: they generate returns by investing in mainly SMEs to support growth. With funds often running for ten years or more, they are a good match for long-term investors. As one UK local authority pension fund manager says: Private equity is a good returns generator and has a long investment horizon, which fits our long-term investment plan. 1 Coller Capital, Global Private Equity Barometer In conversation with a leading investor Managing more than 188bn for a number of pension funds, Dutch group PGGM has 9bn allocated to private equity. Maurice Klaver, Private Equity Investment Manager at the group, explains why choosing from a global pool of managers is vital for investment success Why do you invest in private equity? Private equity creates diversification in PGGM s asset allocation and is considered to be a stronger contributor to the return of the portfolio. It allows us to invest in a constructive manner across a variety of economic industries and to facilitate innovation. What is your current spread of private equity fund investments by geography and manager type? In partnership with top-tier private equity fund managers, we invest globally in a large variety of portfolio companies, resulting in a well-diversified portfolio across various sectors, regions and styles, such as funds, secondary investments and co-investments alongside funds. Why is it important to achieve diversification in your portfolio of private equity investments? Diversification is key to mitigating the risks associated with the portfolio exposure. Therefore, our approach is global and covers a wide range of sectors and industries. This gives us a broad scope of topperforming funds on which to base our selection process. How important is it for your fund that you can access non-eu private equity fund managers? We have to ensure that our investments are diversified and that risk is spread. Our portfolio consists of 60% non-eu managers, so it is vital that we have good access to those managers as well. How does the current regime affect your access to private equity funds? We are finding that the responsibility for initial contact in fundraising has reversed. Under the current AIFMD arrangements, many managers cannot proactively send information to investors. This causes delays, and some investors that don t have large private equity teams may not be able to access many topperforming non-eu funds. Diversification is key to mitigating the risks associated with the portfolio exposure. Therefore our approach is global and covers a wide range of sectors and industries Maurice Klaver, PGGM Source: EVCA, PEREP_Analytics

4 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 Investment flow Provide long-term capital and support to help companies grow Select from a global pool of private equity fund managers European citizens who are saving or planning for retirement Pension funds Private equity funds based around the world Insurance companies European institutional investors Banks Returns Returns from the sale of portfolio companies, wherever they are based, ultimately flow back to European citizens, who benefit from larger savings pots

5 28 9 The effect of AIFMD as it stands The role of non-eu managers in Europe The introduction of the Alternative Investment Fund Managers Directive s (AIFMD) marketing passport for EU-based alternative investment funds and managers was a welcome development it creates a single market for European private equity, helping to direct investment to Europe s companies. What is AIFMD? Implemented in July 2013, the AIFMD creates a harmonised regulatory framework for managing and marketing private equity, infrastructure and other alternative investments in the EU. It allows managers based in the EU to market their funds to European institutional investors through a passport system. While AIFMD has a provision to extend the passport to third-country managers (those based outside the EU), this is under consideration by the European Securities and Markets Authority (ESMA), which will issue its opinion in July However, the current regime, which lacks an equivalent scheme for non-eu managers, is placing European savers at a disadvantage. With limited access to non-eu managers, European institutions face restricted choices in private equity and other alternative investments. This impairs their ability to select the best-inclass managers from a worldwide pool and to gain exposure to growth economies. Under the current regime, non-eu managers and EU managers of funds that are located outside the EU must apply to individual member states under their national private placement regimes (NPPRs) where they exist before they can approach an EU investor. This requires them to register with multiple authorities with very different obligations in different markets. Only larger third-country funds and managers are therefore likely to have the resources necessary to market in Europe, and they are only choosing to do so in the larger states. In addition, some member states do not have NPPRs in place, making it difficult for investors to invest in non-eu managers. This distorts competition, reduces investor choice and is ultimately detrimental to investors and the clients they represent. Investors in The current regime is placing European savers at a disadvantage countries without NPPRs or that have a small pool of institutional capital are at a distinct disadvantage, says David Lindstrom, Managing Director, Alternative Investments at MetLife. Europe s investors are concerned about the effect on investment portfolios and returns. It could be more difficult for us to find smaller funds that would not market themselves in Europe, said a Swedish public pension fund manager in a recent EVCA survey. It could be more difficult to get access to the best fund managers which don t need to take new investors because we are European. Lindstrom agrees: The best non-eu fund managers will have no difficulty raising the capital they need elsewhere in the world, and the risk is that they see the complexity of the NPPR regimes as a burden they don t need. That would leave European investors with second-tier managers from which to select. Private equity managers and funds based outside Europe make an important, positive contribution to our economy: they offer Europe s institutional investors the potential for constructing well-diversified portfolios and for high returns (which ultimately flow back to European savers), and many also recycle this European capital to invest in European companies. Between 2010 and 2014, non-eu private equity managers invested a total of 6bn in European businesses, providing funding and support for growth including international expansion as well as creating jobs. Examples include Spotify, SoundCloud, Alexander Mann and Swift Worldwide Resources. If policies in the EU are designed to help European companies thrive making it an attractive environment in which to do business and invest further global capital will flow into the region. ALL PRIVATE EQUITY: GEOGRAPHIC INVESTMENT FLOWS bn 6.0bn Non-European private equity firms investing in portfolio companies in Europe European private equity firms investing in portfolio companies outside Europe 51.3bn Cross-border investments within Europe 144.1bn Domestic investments in European countries Source: EVCA, PEREP_Analytics

6 The need for equal access Policy action points > Create a thirdcountry regime that allows European investors access to non-eu managers Extend the marketing passport to thirdcountry fund managers, on the proviso that the requirements are not overly restrictive or burdensome and take account of the fact that EU investors provide only a small proportion of the capital that these managers raise. > Retain national private placement regimes to enable smaller non-eu managers to market to European investors However, these should be reviewed to ensure that there is harmonisation across member states, in line with removing national barriers to the flow of capital under the proposed Capital Markets Union. Europe s institutional investors need to select the best and most appropriate investments from a global, diversified pool of managers in order to fund retirement and other forms of saving for European citizens. Private equity and infrastructure funds are an important source of the returns these institutions seek. However, the current arrangements under the AIFMD restrict investor choice in their endeavour to build globally diversified portfolios including best-in-class fund managers for the benefit of their savers. What is needed is a thirdcountry regime that offers European investors access to the best-performing managers. The proposal to extend the passport system to non-eu (third-country) managers is welcomed as a means of achieving this. However, it must be designed and implemented in a proportionate way that reflects the fact that European investors will only represent a small amount of the capital raised by non-eu fund managers. If the regime is too restrictive or burdensome for non-eu funds, many of the best-performing managers will opt to raise their capital elsewhere, leaving European investors to choose from second-tier managers. If the regime is too restrictive or burdensome for non-eu funds, many of the bestperforming managers will opt to raise their capital elsewhere Additionally, if the regime requires that all of a thirdcountry manager s activities are compliant with the AIFMD, regardless of where those activities take place, managers may need to set up a Europeonly fund. This makes it a viable option for only the largest fund managers. Investors in private equity funds are professional, sophisticated and experienced in making decisions about where to invest their savers capital. If we are to create an environment in which Europe s savers benefit from the highest-possible returns, barriers to choice must be removed, giving European institutions easy access to the world s best-performing fund managers. A selection of European institutional investors The EVCA represents the interests of over 100 investor members, such as pension funds, insurance companies and funds of funds. Here is a selection

7 European Private Equity and Venture Capital 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. 08 Dörte Höppner Chief Executive, EVCA Tel Michael Collins Deputy Chief Executive and Public Affairs Director, EVCA Tel To find out more about the EVCA and its members, visit European Transparency Register: