EVCA conference: clear and present danger ahead

Emanuel Eftimiu
11 March 2010

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The EVCA conference examines the state of private equity and highlights the threat posed by the AIFM directive. Emanuel Eftimiu reports from Geneva

The mood at this year's EVCA Investors Forum in Geneva was certainly in line with the currently often coined term "cautious optimism". On the back of one of the worst years for private equity in recent memory, industry professionals are certainly trying to look at the situation with a glass half-full rather than half-empty mentality. John Hess of Altius Associates put it in a nutshell with a Churchill quote: "If you're going through hell, keep going".

Panelists and speakers highlighted the obvious, but after the worst financial crisis in over a decade, it's good to be reminded that private equity is a long-term asset class after all, and that returns have consistently outperformed the equity or bond market benchmarks over a ten year period. While such statements are a truism for many, one should not forget the significance of market psychology. In fact, a cynic might have thought that reiterating the importance of being consistent, of sticking to one's strategy, of seeing things through, was simply aimed at easing many of the audience members' minds.

Notably, the general outlook for the industry was more optimistic than a year ago – true, not a difficult feat- but there was also a certain realism that should bode well. Stefan Hepp of SCM Strategic Capital Management highlighted the fact that for the near future there is less LP money available, but given the lower valuations and the expected fund size reductions, this is certainly enough to cater to the industry's needs.

At the same time, some GPs will not be able to raise a next fund as LPs will be more selective with their reduced funds, and may reassess their allocations and exit funds that don't fit their criteria any longer. In the long run, such a shake-out will certainly benefit the industry and would further reaffirm the industry's claim of having its own natural selection process that rewards 'good' players and punishes the 'bad' ones. After all, this is what industry voices have always highlighted when private equity has come under scrutiny, especially with regards to regulation.

Speaking of which, no industry event these days manages to get around the dreaded topic of regulation and the AIFM directive. At this year's EVCA conference though, there was a clear sense of urgency regarding the directive. Unnoticed by many industry professionals, the directive has been on a fast track and has now reached a critical point in Brussels. Worryingly enough for private equity, the latest draft still includes so-called "third country" elements, which in essence opens Europe's alternative fund market only to EU funds and managers, therefore inhibiting European LPs from investing in funds established outside the EU. This somewhat protectionist stance has the potential to cause a transatlantic rift, as it discriminates against US groups, a fact highlighted by US Treasury secretary Tim Geithner's letter to Michel Barnier, Europe's internal market commissioner.

The weight of the matter was highlighted once more by EVCA Chairman Richard Wilson at the end of the two-day conference, as he urged present LPs for a final push in lobbying local politicians. After all, the long term prospects of the industry seem to be less impacted by last year's blip in performance and more by regulation that would completely redraw the playing field.