Last week saw the launch of the European Commission's consultation on the main barriers to the cross-border distribution of investment products across the European Union. With regulatory requirements still very much impeding the flow of capital in Europe, this represents an opportune moment for market participants – including fund managers, investors and industry associations – to voice their specific concerns. There are indications that the Commission will be responsive to market feedback, indeed the length of the questionnaire suggests it has been listening to past representations, so there is some hope that this consultation will lead to greater consistency across member states, and a further step towards a true single European capital market.
Undoubtedly, the industry has been through significant regulatory change in recent years. The introduction of the Alternative Investment Fund Managers Directive (AIFMD) in 2013 brought with it, for the first time, a European-wide passport for EU private funds, with the prospect of freedom to manage and market those funds across the EU. But that passport came with significant ongoing obligations, and the costs of full AIFMD compliance are substantial. For smaller fund managers in the market, the alternative to full AIFMD compliance requires navigation of various national private placement regimes. That continues to hamper the development of a single market and means that, for smaller fund managers, the effect of AIFMD has actually been to fragment the European market.
It seems clear, therefore, that there are two easy wins for the European Commission, if it is serious about improving the flow of private equity and venture capital across borders. Sweeping away the fees and charges that member states are seemingly able to charge managers to use the passport would be the easiest (and existing national practices are already arguably illegal). The second would be to extend the passport to smaller buy-out fund managers, either by expanding and simplifying the well-meaning, but overly restrictive, EuVECA regime (which gives a passport to qualifying venture capital managers), or by creating a separate regime for them. At the moment, smaller EU-based managers are often treated less favourably than their "third country" counterparts – a state of affairs which the Commission should seek to remedy as quickly as possible (and should do so by freeing those in the EU from the barriers they currently face, rather than by imposing new burdens on foreign funds).
A bigger, more generally useful, step would be to reform the definition of "professional investor" in EU legislation so that it requires only one qualification (portfolio size or industry experience) in addition to knowledge and experience to justify treatment as a professional, rather than the current "two out of three" requirement (frequent dealing, portfolio size and industry experience) which discriminates against long term investors. There is no indication in the consultation paper that such a change may be under consideration, though some of the questions suggest that consideration may be given to creating a new general category of "high net worth investor".
For those considering participating in the consultation, please do get in touch. The deadline for submission of responses is 2 October 2016.