| Investment Funds Lawyers
Spain: The future of Spanish private equity
Isabel RodriguezSJ BerwinMadrid
The PE industry has no doubt been and still is, affected by the world economic crisis, a situation that has been continuing for more than two years and that will determine in many aspects, the end of an era. As a consequence of this, the future of the industry is being analysed in great depth.
One of the hot issues on the table at the moment is the Alternative Investment Fund Managing (AIFM) Directive, which has created a great level of discomfort and strong response from the sector.
The Directive has been brought about with the objective of creating a more stable financial system. However as far as the private equity business is concerned these rules have been drafted with a conceptual problem which is the fact that it makes no distinction between private equity and hedge funds (industries that operate completely differently and therefore should demand different regulation).
In general terms and as a way of a summary there are several issues contained in the last draft of the directive that worry the sector in particular:
Third country regulation: the new rules should not end up restricting access to non-EU funds and imposing protective measures that could create negative reactions in other countries;
Disclosure: the current regulation imposes information obligations with no distinction whatsoever among different levels of maturity of the business and this could result in the disclosure of commercially sensitive information that could cause serious problems for certain early creation companies. Finally there is a strong opposition against a ruling that imposes disclosure obligations only to those companies owned by the private equity companies but not to all businesses, independently of the nature of their shareholders, in such a way that the new regulation will create a competitive disadvantage for the sector.
It is indeed very plausible that the regulator wishes to control systemic risk but it is critical to point out that private equity has not been one of the causes of the financial crisis but, quite the opposite, it should be perceived as part of the solution.
With this challenging opportunity in front we will see how the industry will make some adjustments in order to play its role in the most appropriate way. In this respect, efforts should be focused on increasing transparency, optimising risk management and improving alignment of interests (considering fees, costs and incentives, taking always into account the level of risk investors are facing no matter how sophisticated they are).
Despite the fact that the industry is suffering due to the economic turmoil it is also true that we are now seeing some indication of recovery. There is an increase in the number of new investments and divestments that in turn will have a direct effect on fundraising as many investors have been holding back their allocations to private equity as funds already committed to were not being invested in as expected and those that have were not being realised as predicted. Furthermore, surveys keep showing institutional investors' intentions of maintaining (when not increasing) their allocation to private equity within their portfolios.
In this new environment we are seeing some changes in trends, such as the increase in the launching of sector funds such as infrastructures, emerging markets or energy (with a particular focus on cleantech).
The economic model developed by the private equity business has been an invaluable instrument particularly in times of recession, offering an alternative financing source for the companies, supporting their managers to run business in an efficient way, increasing their growth and finally helping to create employment.
Although the way out of the recession will still take some time, private equity should not only play a major role through the recovery process but also take the opportunity to make the appropriate refitting in order to consolidate its position and get ready for the post-recession economic scenario.