EU Fund Passport Should Be Extended

Shanny Basar

The European Union passport for marketing alternative funds should be extended to non-EU fund managers to boost investment in European infrastructure and meet the €2 trillion of capital needed by  2020.

Invest Europe, the not-for-profit trade association representing European private equity, venture capital and infrastructure funds and investors, such as pension funds, insurance companies and sovereign wealth funds, made a number of policy recommendations today to remove barriers faced by private infrastructure funds.

Michael Collins, chief executive of Invest Europe, said in a statement: “European infrastructure needs an annual investment of 3.6% of GDP to keep the economy growing, according to the European Investment Bank, but public expenditure is under strain and many banks have reined in their lending. The long-term capital and expertise provided by private infrastructure funds to invest in infrastructure is too often hampered by short-sighted policies that create instability and deter investors.”

The European Commission has estimated that €2 ($2.1) trillion of investment in infrastructure is needed by 2020 to support Europe’s economy. Private capital is needed as traditional sources of infrastructure investment such as bank lending and monoline insurers have fallen since the financial crisis.

In a report, Investing in Infrastructure, the trade group said that €7.6bn of the €26.3bn invested in European infrastructure between 2010 and 2014 came from non-EU funds. Most of these funds also attract capital from European institutional investors and provide returns to European savers added Invest Europe.

The marketing passport under the European Alternative Investment Fund Manager’s Directive, implemented in July 2013, only allows enables EU-based managers to raise capital from investors across the region. However AIFMD excludes non-EU fund managers.

The European Commission sought advice from regulators, who have concluded there are no obstacles to extending the passport to fund managers based in a group of third-country jurisdictions.

“Well-developed passporting arrangements should encourage more fund managers to operate in a wider range of jurisdictions by lowering the costs of accessing those markets,” said Invest Europe. “This, in turn, promotes competition between fund managers and increases the diversity of options from which investors can choose, assisting them both in achieving returns and in managing risk.”

Invest Europe said corporations that own and manage infrastructure are currently penalised with the risk weightings required for investment by insurance companies under the industry’s Solvency II regulation.  In addition other new regulations have required institutional investors to hold additional capital when they have exposure to private funds such as infrastructure.

“The Commission’s decision to allow infrastructure fund investments to benefit from a 30% risk weight, provided they meet the definition of an “infrastructure project entity”, is a welcome move,” added the report. “However, the treatment of infrastructure corporates is still under discussion as investments in these entities is currently considered to be outside the scope of this definition.”

Changing policies would help attract the €167 billion of capital under management held by infrastructure funds targeting Europe  according to data from the Inframation Group.

“While the new European Fund for Strategic Investment will provide some of the necessary capital, Europe’s funding needs stretch far beyond its current capacity for investment,” added Invest Europe. “However infrastructure fund investors can only help build Europe’s future prosperity within a supportive regulatory environment.”

The regulatory framework needs to take account of the long-term nature of infrastructure investments, usually between 10 or 15 years, so investors can predict costs and returns over this timeframe while assuming that regulations will not change.

“One area of particular concern is the fees and tariffs that assets may attract, which have been subject to significant revision in the past – sometimes retroactively – eroding investment returns and investor confidence in some European markets,” said Invest Europe. “In addition, many projects have suffered from lengthy implementation periods, complex tender processes and there is a lack of transparency in many member states about future infrastructure projects, making it hard for infrastructure funds to predict deal flow and attract necessary resources.”

The trade group welcomed an initiative from the European Commission and European Investment Bank to collect information on upcoming projects in member states and make data available in a centralised hub.

Catherine Mann, chief economist of the Organisation for Economic Co-operation and Development, said today in the latest Economic Outlook from the OECD that fiscal initiatives, including infrastructure spending, could catalyse private economic activity and push the global economy to the modestly higher growth rate of around 3.5% by 2018.

Mann said in the outlook: “The key is to deploy the right kind of fiscal initiatives that support demand in the short run and supply in the long run and address not just growth challenges but also inequality concerns. These include soft investments in education and R&D along with hard investment in public infrastructures.”

The OECD said that in the UK the vote to leave the European Union has reduced growth prospects and increased volatility, as reflected by the large currency depreciation.

“The latest government plans released in the Autumn Statement indicate a slower pace of fiscal consolidation and some increase in public investment,” added the OECD. “More spending on physical infrastructure and skills in regions lagging behind would raise productivity and wages, making fiscal policy more inclusive.”

The OECD said that in the US Economic growth is set to strengthen in 2017 and 2018, as an assumed fiscal stimulus boosts the economy and the effects of dollar appreciation, declines in energy investment and a substantial inventory correction abate.

“The new Administration will begin implementing its policy priorities next year and in this context the fiscal stance is projected to become more expansionary as public spending and investment rise, while taxes are cut,” added the OECD. “This will provide a boost to the economy, particularly in 2018. Action will be needed to ensure public finances are sustainable in the medium term.”

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