Geithner, ILPA express concerns about EU directive

Both the US Treasury and the Institutional Limited Partners Association have written to a key European Commission official about the potential negative impacts of proposed EU regulations on private equity managers both in the US and Europe.

US Treasury Secretary Timothy Geithner has warned the European Commission about the potential impact of the Directive on Alternative Investment Fund Managers on cross-border investment.

UK financial services minister Paul Myners said in a speech Wednesday that proposed EU regulations concerning private equity are protectionist, and revealed that Geithner had written a letter to Michel Barnier, the European commissioner for the internal market, expressing his concerns about certain aspects of the proposals.

Tim Geithner

Geithner was referring to portions of the “Directive on Alternative Investment Fund Managers” that would make it more difficult for EU limited partners to invest with non-EU fund managers. The proposals would require foreigners trying to market in Europe to demonstrate to the relevant authorities that they are subject to “equivalent” regulation in their home jurisdiction.

Absent stricter rules in the US, such as leverage caps, it is unclear whether US managers would be able to to clear this hurdle. The provision was taken out while Sweden held the European Council presidency, but the Spanish president reinstated it upon taking office.

US Treasury officials have been holding talks with their counterparts in the European Commission and governments in the EU about the proposals since late last year.

Meanwhile, the Institutional Limited Partners Association (ILPA) – whose roughly 220 members control the vast majority of commitments to private equity funds across the world – has also written to Barnier, warning that the diminished access to capital for EU companies will harm European private equity.

“There exists a real concern that the proposal will effectively close Europe off from the capital solutions currently available through managers and institutions that comprise the global private equity industry,” the group wrote. “This outcome would reduce the overall competitiveness of the European private equity industry and put EU companies at a disadvantage relative to their global peers.”

ILPA also expressed concern about the likelihood of a division developing between EU and non-EU investors, as well as the loss of competitiveness for private equity-backed companies that have to disclose sensitive information.

The UK’s House of Lords wrote to Myners in December to express its view that the directive’s marketing restrictions are “protectionist”, and would also prohibit many foreign managers from raising and marketing funds in the EU. More recently the House of Lords called on the British government to reject the directive in its current form due to its “one-size-fits-all approach” to regulation, and stressed the need to ensure any European legislation was matched by comparable regulation in the US.

The UK has been at the forefront in fighting against many burdensome aspects of the directive, as British managers account for 60 percent of all European private equity activity.