Research

EMPEA respects ESMA’s mission to gather input on the key issues that will determine the orientation of ESMA’s opinion to the European Parliament. EMPEA is mindful of ESMA’s responsibility to submit an opinion to the European Commission on the following matters by 22 July 2015: 1) the functioning of the EU passport under the AIFMD; and 2) the functioning of the marketing of non-EU AIFs by EU AIFMs in the EU and the management and/or marketing of AIFs by non-EU AIFMs in the EU (under the national private placement regimes); and 3) whether the current passporting regime should be extended to the management and/or marketing of AIFs by non-EU AIFMs and to the marketing of non-EU AIFs by EU AIFMs.

EMPEA has focused this submission on point 3. Our GP members with direct experience of points 1 and 2 note their strong agreement with EVCA’s submission on these points. We stand ready to provide whatever further contribution to this work the Commission might find helpful, including attending meetings and contributing further materials in writing.

Executive Summary

EMPEA Members have observed that the prompt expansion of a robust passporting system, implemented in a practical and common-sense manner, allowing them to work closely with the regulatory regime of one EU Member State of Reference before raising capital across the EU would be optimal.

Opportunity: Some of our members have experienced significant difficulties with current national private placement regimes (“NPPRs”) and question whether the changes which were made to a number of European NPPRs as a result of the AIFMD might have actually worked against the interests of investors in the affected countries, as they have decreased investor choice (though discouraging non-EU GPs from marketing their funds in Europe) without meaningfully increasing investor protection. EMPEA Members from both the LP and GP communities generally regard the proposed extension of the passport to non-EU AIFMs as an opportunity to remedy this situation and, specifically, to ensure that the passport system works in the interests of the EU without impeding access to global private capital and the economic benefits it brings.

Impact on Investor Choice: EMPEA Members have observed that EU investment institutions are experiencing limited investor choice and access to high quality investment options in emerging markets as non-AIFMs severely limit their efforts to raise capital in Europe and concentrate their efforts elsewhere. This is not only the case for the strongest performing and established GPs who have the greatest choice as to whether and where to raise capital, but also for younger, high performing GPs offering high quality investments in emerging markets. The consequence is a limitation on the EU investment institutions’ ability to diversify their investment portfolios by accessing emerging market investment opportunities and obtain their target returns. This, in turn, impacts both risk and return expectations over the near, medium and long terms with the final result limiting not only returns to, for example, occupational pension holders, but also the ability of EU development finance institutions to deploy development funds consistent with their mandates. Taxpayer-funded development finance institutions are expected to focus funds on socially beneficial investments that are profitable and therefore, scalable and sustainable to address poverty eradication and economic development in emerging markets. Foregone development opportunity is not recoverable and, once private capital exits, new collaborative opportunities take time and resources to pursue. EMPEA Members have also questioned why there is no distinction between “professional qualified investors” (whose capital fuels the private capital industry) and “retail investors” (whose capital does not). Retail investors do not typically invest in capital funds. The members see this as one example of how the AIFMD does not take into account the difference between private capital investing funded by “professional qualified investors” and other forms of investing funded by retail investors.

Impact on Competition and WTO Compliance: EMPEA Members note that the extension of the passport to non-EU AIFMs could improve the situation by increasing competition and investor choice, particularly if it is introduced in an efficient, common-sense way. Certain EMPEA Members also express concerns that the AIFMD is being applied in a manner that gives rise to WTO issues under the EU’s obligations for financial services under the General Agreement on Trade in Services (“GATS”), both as to market access and possible licensing, among other issues:

• Experience with current NPPRs: For non-EU AIFMs from emerging markets the current NPPR has proven onerous and burdensome with the result that in practice non-EU AIFMs are generally limited to only the largest AIFMs and EU Member States. As a result, the AIFMD has limited competition and investor choice in the EU. Among concerns expressed are the legal uncertainty created by the AIFMD’s mechanism for selecting the Member State of Reference and the absence of clear grandfathering and transition rules. Without clear grandfathering and transition rules EU Member States can further restrict or even eliminate private placement regimes. In addition some Member States have delayed and incomplete transposition to the AIFMD and there are Member States where no formal memorandum of understanding is yet in place between such Member State and the legal domicile of a nonEU AIFM and there appears to be little willingness to enter into one.
• Cost and resource commitment: The already non-harmonious and ambiguous NPPRs give rise to costs that are amplified when considering the wide variety and changeability of existing and new “fee” structures imposed by multiple Member States on a single fund. Advisory and support costs such as legal and compliance do not decrease and fall disproportionately on the smaller non-EU AIFMs. Even after incurring substantial costs in an effort to comply, there is often surprising uncertainty about whether the non-EU AIFM has, in fact, complied because some regulators are unfamiliar with the new AIFMD rules and are reluctant to interpret them. While some larger AIFMs may take the view that this is simply a cost of doing business, it raises a spectre of being a market barrier and is inconsistent with the EU’s obligations under the GATS. These costs also raise questions of the potential for unintended discrimination against newer AIFMs from emerging markets, which do not have long-standing investor relationships within the EU and precludes them from becoming better known and playing on a level field.
• Asymmetrical impact with regulatory regimes in other countries: Other countries’ regulatory regimes do not disadvantage or delay the offering of EU-based AIFs in the same way as the AIFMD impacts non-EU AIFs. Generally, EU funds experience a freedom to solicit investments in non-EU countries and this has an asymmetrical impact on the financial service provider of the non-EU countries, for example the costs mentioned above and requirement for the use of depositories (which are not required in the non-EU jurisdictions), and raises questions of whether the EU intends to create additional restrictions, requirements and fees to create a market access barrier.

In summary, EMPEA adds its support to EVCA to encourage ESMA to issue positive advice on enhancing and modifying the existing passporting system based on the experience of current participants and expanding the application of the enhanced passporting system to non-EU AIFMs and AIFs. EMPEA believes that such advice is consistent with removing obstacles to investor protection; contributes to smooth, efficient and harmonious EU-wide market operations and continues to fulfill the EU’s commitment to free trade in services while benefiting the economies of the EU member states and Europe as a whole.