GLOBAL/EUROPE - The Institutional Limited Partners Association (ILPA) has criticised the Alternative Investment Fund Managers (AIFM) directive for reducing European Union institutional investors' access to private equity investments.
In a letter to member of European Parliament and rapporteur for the directive, Jean Paul Gauzès, the ILPA said the current proposal would close investment opportunities in third party countries and reduce portfolio diversification to EU investors.
It said: "This lack of choice is likely to lower returns to EU investors and elevate their overall risk profile by having a more concentrated portfolio. It would, in effect, harm rather than help EU investors and create an uneven playing field vis-à‐vis their non‐EU institutional investor counterparts."
The directive - ILPA continued - could cause harm also to EU companies, which would suffer from limited access to foreign direct investment relative to the vast amounts of non-EU capital currently allocated to the region.
ILPA also highlighted the risk that a division between EU and non-EU investors developed as a result of the implementation of the directive in its current version. The letter said it would be very unlikely that global private equity funds currently domiciled outside the EU would relocate to Europe in order to benefit from the European internal market.
British Venture Capital Association chief executive Simon Walker said the third country rule - which would require AIFs not domiciled in the EU to get a European certification of compliance to the directive - as foreseen in the latest draft will impose burdensome and costly requirements on fund managers deemed to be from outside the EU without any right to passport.
He said: "The heart of the problem is that the proposed rules open Europe's alternative fund market only for EU funds and managers and have the effect of inhibiting investor access to markets of other major trading partners and emerging economies when alternative investment funds are established outside the EU and/or have a non-EU AIFM.
"In all other cases, it could potentially create a fragmented trading zone that could lead to isolation and retaliatory protectionism. This will significantly damage the returns of Europe's pension funds and institutional investors."
Gauzès was not immediately available for comment.
The trade body's initiative comes after several investors and stakeholders of the alternative investments industry openly criticised the AIFM directive since it was first announced last year.
A group of Dutch pension funds wrote to both the European Commission and Parliament calling for changes in the current version of the directive. (Global Pensions, January 11, 2009)
The UK's National Association of Pension Funds said last year the directive was in some respects "misguided" and would reduce investment returns and increase risk. (Global Pensions, September 23, 2009)
The Economic and Monetary Affairs Committee of the EP started last month their scrutiny of the latest draft, on which parliamentarians tabled a record 1,669 amendments.
Members of the EP are expected to reach an agreement on a compromise text on a second meeting scheduled for March 17.
ILPA represents over US$1trn in private equity assets managed by 220 pension funds and other institutional investors around the world.
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