09 September 2016

Preparing for tougher global private equity regulation

Welcome to the 700th edition of Private Equity Comment, our weekly look at topical legal issues for the European venture capital and private equity community. Since May 2000, the King & Wood Mallesons private equity team (previously known as SJ Berwin in Europe) has been keeping Private Equity Comment subscribers up to date, and offering our views on important developments. 

To mark this milestone we are delighted that Michael Collins, Invest Europe’s Public Affairs Director and, from next month, its new Chief Executive, has written this special edition, giving his views on the post-Brexit future for European private equity regulation. 

Thank you to all our loyal readers. 

Preparing for tougher global private equity regulation

No-one in private equity – wherever they are located – has been able to avoid the impact of financial market regulation over the last decade. Fund managers have been faced with new rules governing their marketing and their remuneration; investors have been forced to re-evaluate the risk of their private equity portfolios and to hold more capital against them. And – although proportionate and well-targeted regulation should be welcomed – the whole industry has had to deal with an overarching scepticism, and at times even hostility, towards the financial services sector which has been reflected in the language used by politicians and campaigning groups and has at times called into question the industry's very right to be heard.

Navigating this turbulence has not been easy, but throughout these difficult times the industry has been able to draw on significant expertise from its advisers and advocates. In the 16 years since the first edition of Private Equity Comment was published both King & Wood Mallesons and Invest Europe have adapted in line with the industry's needs, changing not only their respective brands but expanding their reach, developing new knowledge and finding new ways to be relevant to the industry we both serve.

That industry has had to get to grips with European regulation that has made marketing more complex, that has challenged established remuneration practices, and that has demanded greater transparency before supervisors and other stakeholders. We have all had to adapt to the challenges that the Alternative Investment Fund Managers Directive (AIFMD) has generated, learning a new language of Brussels negotiation and finding new ways to carry out private equity's essential business: channelling capital from investors to those businesses that can benefit from the active engagement of a fund manager.

The regulatory train that we have been riding has no final destination; there will be no point at which we will be able to disembark, relax, and simply be left to get on with the business of investing capital and building strong businesses. Even if the UK had voted differently on 23 June there would be new challenges for the industry to face and new political storms to navigate. The emergence over the last few years of such a strong concern over corporate tax practices – captured by the OECD's Base Erosion and Profit Shifting (BEPS) package of measures – demonstrates this well. This action has been spurred not only by a desire in finance ministries to maximise tax revenue for reasons of deficit reduction but also by politicians' awareness of, and need to respond to, growing public anger at tax practices that to the average voter seem unduly complex and inherently suspicious. Leaks by whistleblowers and activists of millions of pages of documents will continue to generate regulatory responses. Even though relatively few people will read or be able to understand them, these documents can dominate the news cycle and motivate an entire political movement in a matter of hours.

Our ambition cannot be to try to stop these cycles, but to adapt to them and to mitigate their impacts on us. As an industry we have one essential strength that we can draw on whenever the latest bout of political turbulence hits: private equity's fundamental role supporting businesses with the capital and expertise they need to grow gives us legitimacy.

Years of effort, by Invest Europe and others, to educate policymakers about private equity means that the industry is increasingly seen as a catalyst for innovation, investment and economic growth. The publication of the European Commission's Action Plan for a Capital Markets Union last year demonstrated this with helpful concrete action now starting to flow. Measures to make it easier for insurers to invest in infrastructure funds; proposals to amend EuVECA so that more venture and growth capital funds can raise capital across Europe; and a willingness to tackle the protectionist barriers that Member States have in place are all signs that the Commission sees the benefits private equity can bring.

The UK's decision to leave the EU of course changes things. It generates its own set of fiendishly complex issues that need to be solved and changes the negotiating dynamics in Brussels on the 'business as usual' issues (as AIFMD is reviewed next year I would much rather the UK was an active, influential participant in the debate). But I am confident that the industry will adapt to this new challenge, as it has to the others that have come its way since 2009. King & Wood Mallesons will continue to be an authoritative source of counsel across the industry, and one of its strongest and best-known advocates. At Invest Europe we will continue to represent all of our members, regardless of their location, and make the case for the active, long term investment that is at the heart of this industry.


Michael Collins
Deputy Chief Executive and Director of Public Affairs
Invest Europe


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