In a recent webinar hosted by Real Deals in association with TMF, a panel of experts shared their thoughts on the evolution of the European LP base, how regulation had reshaped the landscape and what this meant for managers and investors targeting the region.

ON THE PANEL:

Peter Flynn chief executive and founder, Candela Capital

Anja Grenner head of sales, Funds Services Luxembourg, TMF Group

Manfred Dietrich head of investment funds and asset management, Norton Rose Fulbright

Click here to listen to the full discussion

Over the last three decades the European investor universe has evolved from local pockets of LPs supporting domestic managers into a diverse mix of investors with different objectives, priorities, and manager selection criteria.

How, then, should GPs approach this diverse set of potential investors, and how can managers direct their fundraising efforts to the pockets of investors where their offering is most likely to gain traction?

In a recent Real Deals webinar, hosted in association with TMF, a panel of fund experts discussed the reasons behind the transformation of the LP universe and what this meant for managers. Here are some of the highlights:

The evolution of the European LP base

Candela Capital’s Peter Flynn said that although the US LP community had been “light years” ahead of their European counterparts 20 years ago, the gap had “very significantly narrowed”.

“The most sophisticated European investors are as sensitive to latest areas of added value as their US counterparts. It’s probably fair to say that the US market is still a bit deeper in terms of opportunities, and the number of both GPs and LPs, but Europe has very significantly closed that gap,” Flynn said. He added that in some areas, such as assessing managers against ESG criteria, Europe was leading global markets.

TMF Group’s Anja Grenner said that European institutions had undertaken a significant shift in their asset allocations during the last two decades, and had embraced higher yielding alternative assets. This meant Europe presented attractive pools of capital for managers globally. 

The mechanics of running European funds

Grenner explained that the mechanics for raising capital from European investors had evolved, with the introduction of the alternative investment fund managers directive (AIFMD) by the EU contributing to that.

AIFMD’s implementation from 2013 onwards ushered in a period where service providers started to broaden out their offerings to include depositary and fund manager services alongside administration work.

Managers raising capital in Europe, therefore, needed to be aware of the regulatory requirements for administration, depositary and alternative investment fund manager (AIFM) services, and options to bundle these services together into a single “one-stop shop” solution versus separating out these functions.

AIFMD: help or hindrance?

Although the introduction of AIFMD saw the formation of the fundraising passport, which allowed managers to raise capital from all countries in the EU, Flynn argued that AIFMD had been a “barrier” for third-country managers trying to raise capital from European LPs and “added costs”.

“There are methods whereby the best managers, and the best overseas managers, can get access to European investors, but essentially it has been a drag and it’s added inefficiency,” Flynn said.

Norton Rose Fulbright’s Manfred Dietrich, however, said that given the fact that when AIFMD was implemented it was a “new directive in a new field” it had functioned “quite well”.

Dietrich said the EU had learned from the implementation of the UCITS directive in the 1980s (which allowed for the sale of cross-Europe mutual funds) and that AIFMD had proven “a relatively good framework from the beginning”.

Grenner added that although AIFMD had not being “the most beloved piece of legislation when it was introduced”, the directive had its merits and had supported “a certain harmonisation” in Europe around processes and controls. She said the AIFMD II, the next iteration of the directive, was looking at ways to achieve harmonisation on an even deeper basis.

What institutional investors want to see

In answer to an audience question, asking if AIFMD-lite managers who were below the threshold were at any disadvantage when approaching European institutions, Dietrich said that on the whole, European institutions did not face any hurdles when it came to backing managers who were below the threshold requiring a full AIFMD licence.

“In general, it should not be a problem. In my experience bigger institutions and the development banks have not raised any concerns,” Dietrich said.

Grenner added that when working with sub-threshold funds, the regulators had still ensured that these funds were closely monitored. “We have a couple of these sub-threshold funds that we work with. There is no official AIFMD, but the regulators have pretty much made sure that what an AIFM actually performs from a risk, portfolio management services and risk control function is then also put on the shoulders of the general partners,” Grenner said. “It is not the case anymore that just because a fund is sub-threshold it isn’t doing what AIFM would do. It has just shifted to another entity that is performing the same services as the AIFM.”