EU proposals aimed at curbing the level of pension fund investment in alternative asset classes, including private equity funds, is being opposed by the European Venture Capital Association (EVCA). The EVCA is unsurprisingly concerned that the proposals will severely inhibit the growth of the asset class.
The EU proposals that have been led by the Spanish delegation, are a variation on the 'prudent person principle', which is already in use in the UK, Netherlands and Scandinavia. The principle is meant to encourage managers to make investments in all asset classes so long as they hold a diversified portfolio and manage it prudently. In addition though, the new proposal recommends that there be a low cap on investments in alternative investments in order to lower exposure to an unregulated sector.
EVCA has responded to the ongoing discussions, publishing a paper setting out the association’s position. It says that the ‘prudent person rule plus’ would lead to ‘severe disturbances’ in countries that have adopted a qualitative prudent person rule. It adds that countries that do not currently apply the prudent person rule should enable investors to allocate at least 7.5 per cent to the asset class.
Simon Witney, a partner at law firm SJ Berwin, described the EU proposals as a 'worrying development', adding: “A very large proportion of investment in European private equity comes from pension funds, and many hope that the allocations of pension funds in Europe will increase further in the coming years.”
It is the possibility of a cap being put on private equity investments which is causing particular concern. A cap of 7.5 per cent for example, the average allocation of US pension funds in the asset class, would see funds in the Netherlands and Scandinavia having to divest holdings to fall into line. Witney added: “The concern is obviously that the quantitative limits will be too low, and the effect of the rule will continue to constrain optimum allocations.”
John Mackie, chief executive of the British Venture Capital Association (BVCA), expressed his concern that changes to the current system could be counter-productive. “These proposals come at a time when we are looking to continue the increase in alternative investments in Europe. They would send Europe in completely the opposite direction of trying to further the enterprise economy.”
Despite opposition from a number of states already, the EU qualified majority rules mean that a simple majority could see the Spanish proposals become law across all EU member states, although the proposals are still at an early stage.