US Election: Why it matters to Europe

When it comes to private equity, seismic changes in the US reverberate across the Atlantic, write Laura Charkin and Simon Witney

There is no doubting the importance of the United States for the European private equity industry. US money fuelled the industry in its early days and, according to EVCA figures, still accounted for 20 percent of all funds raised for European private equity investment in 2011. Indeed, for many GPs, North American investors make up the lion’s share of their investor base. So the appetite of US investors to invest in Europe, and in the asset class more generally, remains critical to the European industry.

In terms of recent changes affecting this appetite, the Volcker rule, which effectively prohibits banks from investing in private equity funds, is hugely significant. That change is yet to become fully effective, but its impact will reverberate around the world as banks seek to divest their holdings in private equity and cancel future allocations. In the short term that will drive secondary deals; longer term, it seems likely to dent the volume of capital available to private equity worldwide.

So it’s clear that the outcome of the US election – and indeed any change to the US political landscape, with the potential consequences for new legislation and regulation – has great significance on this side of the Atlantic.

The new ‘FATCA’ rules are perhaps the most notorious recent example of the global impact that the US legislators can have when tackling perceived issues at home. Aimed at improving international tax compliance, the rules are intended to force disclosure of the US beneficial owners behind foreign entities, by imposing a 30 percent withholding tax on certain US source payments to foreign entities that do not comply with extensive disclosure requirements.

These rules are having a huge impact in Europe, as they essentially require new relationships of disclosure and reporting between foreign entities and the US tax authority. The US needs the co-operation of other jurisdictions to implement this system successfully outside the US, and is doing so via a system of ‘intergovernmental agreements (“IGAs”).

The press releases announcing these IGAs demonstrate the US’s desire not just to extend the scope of their own reporting systems outside the US, but also to influence reporting standards worldwide; they talk about the US and the FATCA partner jurisdictions becoming “partners in countering offshore tax evasion and improving international tax compliance”. The ultimate aim is to “work towards … a more global system to most effectively combat tax evasion while minimising compliance burdens”. 

In addition to FATCA, there’s also the requirement for many non-US firms to register (or to file for an exemption from registration) with the SEC; the national and state ‘pay to play’ rules, which have to be navigated by those fundraising in the US; and requirements for many funds to register with the US Commodity Futures Trading Commission.

It’s very hard to predict what the consequences of the election will be for private equity, whatever the outcome. But any President with a fresh mandate – whether Democrat or Republican – could well be a catalyst for more change, and that is likely to have an impact beyond US shores. So non-US investors need to keep a very close eye on what happens in the months after the election, and be prepared to react quickly and with one voice should the need arise. 

Laura Charkin and Simon Witney are partners at law firm SJ Berwin