Private fund managers seek diversification to remain competitive in a complex global environment. Here are three reasons they’re considering the European market.
Private capital leaders remain optimistic about the future even though they faced multiple headwinds and increasing demands from investors and regulators throughout 2023. Many see geographic and asset diversification as the way to remain competitive in a more complex market and have set their sights on Europe[1]. There are three reasons the region attracts investors: the size of the market, its maturity, and the success of the region’s legal and regulatory framework.
Europe is a major asset management hub
The European market is the second largest asset management region after the U.S., with €19.1 trillion in net assets as of the end of 2022[2]. It’s a well-established jurisdiction for non-EU managers such as those in Asia Pacific and the U.S. for a mixture of funds including private debt, private equity, and real estate funds.
Europe is stable for fund managers
Europe is a mature market with a stable political climate, adding to its attractiveness for fund managers. The region has a skilled, advanced workforce, and excellent infrastructure and is a growing center for financial technology. In the world of alternative investment funds, it’s important to have innovative financial products, and this is reflected in legal frameworks of key locations such as Luxembourg and Ireland.
How AIFMD improved the alternative funds market
Perhaps the most important reason for considering setting up a European fund is the legal and regulatory framework under the Alternative Investment Fund Managers Directive or AIFMD. It has created a harmonized regulatory environment for fund managers and made it easier to operate across multiple jurisdictions in Europe.
CSC’s Head of Depositary in Ireland, Joe Flannery, says the implementation of AIFMD has been a success. “Just look at the increase in assets under management across Europe in the 10 years since implementation”. There’s now more than €7.1 trillion worth of assets under the AIFMD regime2. That’s a big indicator of its success.”
That success has come about for several reasons including the provision of increased investor protection, the harmonization of regulations across Europe, plus an even playing field and single market for alternative investment funds. There’s a movement toward greater transparency and so the AIFMs are obliged to disclose more information about their funds. That helps the investors make more informed decisions. Joe adds that the framework has contributed to improved risk management and enhanced market stability as well. “I think it’s a combination of those things and the perception that it’s a highly regulated product with advanced investor protection,” he noted.
What are the challenges fund managers face in navigating the European markets?
Although there are a multitude of reasons for private capital leaders to establish a European fund to expand their opportunities, the region has its challenges. Europe continues to have the reputation of being a highly regulated, complicated, and expensive market in which to operate. There’s some truth to this, especially for managers considering establishing a European fund for the first time. It’s critical to have service partners who understand the regulatory environment and how to help managers comply with regulations and meet investor requirements.
Interested in reaching European investors? Watch our webinar, as our experts discuss how to enter this dynamic market, and learn more about our solutions for fund managers here.
[1] https://www.cscglobal.com/service/resources/future-private-capital-2023/
