EU Directive Threatens Emerging Economies
Thursday, April 22, 2010

The Emerging Markets Private Equity Association (EMPEA), has strongly advised Members of the European Parliament (MEPs) to vote with caution when adopting proposals on third country arrangements of the draft Alternative Investment Fund Managers (AIFM) Directive on April 27.

According to the EMPEA, the outcome of this vote will "seriously affect" economic development in emerging economies, and it is seeking an amendment to the directive to allow emerging market fund managers to market their funds in the EU under a regime similar to the private placement one now in place.

Citing new research data from the latest EMPEA/Coller Capital Emerging Markets Private Equity Survey, the global industry association appealed to MEPs to "strongly consider" voting against the AIFM Directive in its current form because it will cause Alternative Investment Funds (AIFs) in developing countries to lose access to funding from the EU market. The EMPEA also warns that the directive as currently drafted would cause EU investors, including EU member development banks, to be limited in their ability to promote private sector growth in the world's poorest countries.

"April 27 could well be remembered as the day Europeans undermined both their best tool for alleviating poverty in developing countries and the best chance they have of re-filling pension fund coffers depleted after the financial crisis," commented Sarah Alexander, President and CEO of the EMPEA.

The results of the survey reveal that over half of limited partners currently invested in emerging markets private equity intend to accelerate their new commitments over the next two years; and that total commitments to emerging markets private equity funds are expected to rise from 6-10% today to 11-15% in two years' time. Investors are attracted to markets with strong underlying growth rates but private equity investment is also a critical driver of economic growth and job creation in developing countries, the association says.

Since 2005, such funds have raised more than USD200bn for targeted investments into developing countries, but the AIFM Directive's current provisions would "greatly restrict the possibilities for AIFs to be marketed in member states by fund managers based in emerging markets," the EMPEA believes.

The third country and equivalency provisions contained in the draft Directive, the association says, would make it either legally impossible or cost-prohibitive for emerging markets fund managers to raise capital in various EU markets, jeopardizing their ability to raise sufficient funds for investment and therefore to be viable as going concerns.

"EMPEA's understanding is that the aim of the Directive is protection against systemic risk," the association has said. "It submits that there is no systemic risk presented by such funds, and cannot understand why the EU would seek to prohibit funds managed by Emerging Markets Fund Managers from seeking investors or making presentations in the EU. At a minimum, the managers of such funds should be in a position to lawfully respond to inquiries from EU investors."

"Therefore, on behalf of its members, EMPEA is registering its concerns about the negative impact the draft Directive will have on this important source of development capital and requests that the directive be amended to allow Emerging Market Fund Managers to market their funds in the EU under a regime similar to the private placement one now in place."

EMPEA estimates that more than 90% of its fund manager members currently either market their funds to, or have as investors, entities from within the European Union.