Friday Letter: Sweden steps up

GPs breathed a small sigh of relief this week when Sweden’s financial markets minister swatted away suggestions that private equity poses systemic risk. His comments sent some important signals as regulation of alternative fund managers is on the EU agenda as never before.  

Sweden publicly expressed its support of private equity on Thursday, the very first day it assumed presidency of the European Union.

“There is an exaggerated fear that private equity contains big systemic risk,” said finance minister Mats Odell. “Our opinion is that it does not.”

The Nordic country has said the Directive on Alternative Investment Fund Managers, which was drafted by the European Commission in May, will be top of the agenda for the Council’s first meeting in Brussels next week.

This is no coincidence. The Swedes are understood to be keen to get the directive ratified on their watch – before the rotating six-month presidency is handed over to Spain in January 2010 (the directive would not come into force until January 2011, giving affected parties a year to ready themselves). The Spanish, in tandem with France and Germany, are much less sympathetic to private equity’s defenders.

But some question whether Sweden’s ambition is realistic.  The last similar piece of financial services regulation to make its way through the European Union’s bureaucratic maze was the Markets in Financial Instruments Directive, which was picked over for four years prior to ratification. One source canvassed by PEO said Sweden’s six-month timetable represents “light-speed” compared with past precedent.

Why, in relation to the directive, does it matter that Sweden holds the presidency? The answer is that it has the power to draft a new version. Explains Andrew Wylie, an investment funds specialist at law firm Nabarro: “Sweden’s job is to chair the meetings, canvass views and then put together another draft. They hold the drafting pen and will want to use it effectively before they hand it over to the Spanish in 2010.”

Of course, Sweden cannot simply design the directive that it wants: the presidency role is supposed to be neutral and it can’t afford to polarise views to the extent that ratification by the end of the year proves impossible. Plus, the initial draft that Sweden inherits is already seen by private equity’s critics – in particular the European Parliament’s Socialist grouping – to be far too accommodating to the asset class. 

This is the reason why opponents of the directive – arguably the most vocal of which are to be found in the UK – know that they must choose their battles carefully. The worst aspects of the directive – those relating to disclosure and borrowing restrictions, for example – will be the scene of these battles. Unfavourable but less malevolent provisions will be waved through.

The scene is set for some intriguing political manoeuvring. After the Council’s deliberations, a new draft version will go before the European Parliament (now with a big centre-right majority following the European elections earlier this year) for suggested amendments. Finally, it will wing its way back to the Commission for final ratification. If Sweden gets its way, all this happens within the next six months. The race for the future of European private equity is on.   Fr