The Growth of Alternative Investments
A confluence of trends is increasing investor appetite globally for alternative investments. These factors include an aging U.S. bull market, rising interest rates, geopolitical instability and an uncertain outlook for emerging markets. Alternative investments, which include non-traditional asset classes such as private equity, venture capital, agriculture, infrastructure and other real assets, can provide a hedge against volatility and a low correlation to traditional investments.
Investors across the spectrum of high net worth individuals, family offices, pension funds, sovereign wealth funds and other institutional investors are searching for portfolio diversification, higher returns and risk mitigation and so are placing an increased amount of capital with private equity firms. More than $18 billion in capital flowed into U.S.-based private equity firms in the first half of 2018, according to Preqin. A total of 152 funds achieved a final close, raising $6.3 billion.
European Investors Grow Allocations to Alternatives
This interest in alternative investments and private equity in particular is not limited to the US with similar growth rates being seen in Europe. According to the latest Context Allocator Trends Report produced by Context Capital Partners, European institutional allocators continue to invest in alternative investments in heavy numbers with 72% of European investors being optimistic about the future of the alternative asset management industry and more than half (60%) planning to increase their net positions in alternative investments by the end of 2018. In addition venture capital fundraising in Europe attracted more than $11 billion in the first half of 2018.
Broad Base of European Investors Interested in Alternatives
This interest in alternatives has extended beyond the traditional high net worth client sector and Europe’s large base of sophisticated institutional pension and insurance investors have joined the high-net worth investors in seeking fresh alternative strategies to deploy their capital.
These investors come from a variety of diverse backgrounds and economies within Europe’s markets. Those markets run the gamut from fully developed markets such as UK, Germany and the Nordics to the growth economies of Eastern and Southern Europe. Europe has a well-developed pension plan infrastructure with many public and private pension plans allocating money to alternative investments enabled by their long term investment horizon. In addition the low interest rate environment has drawn in insurance companies into infrastructure and private credit strategies.
Attracting European Investors to Grow your Firepower
However, the U.S. private equity market has become more crowded as the increased amount of capital is chasing a limited supply of U.S.-based assets. 90 percent of U.S. private equity capital is invested in US domestic assets.
Gaining incremental assets from a new investor base will increase the firepower of managers to compete for investment opportunities in this very competitive market.
Diversification of Investor Base
In addition it should be considered that having a group of European investors can mitigate investor concentration risk. Europe provides a singular opportunity to diversify an investor base as European investors won’t necessarily follow U.S. investing trends. This can help maintain assets through some challenging times. That variety of perspective can be a benefit on Limited Partner Advisory Committees (LPAC’s) when a fresh perspective can often help see a different approach to any particular challenge.
Gateway to Investing in Europe
Some managers are viewing capital raising in Europe as a prelude to investment in European assets. Gaining insight into European investment opportunities, local regulation through more time spent in Europe raising capital is an efficient way to incubate new investment strategies. More prominent U.S. based investors, including the New York State Teachers Retirement System and the Illinois Municipal Retirement Fund, are investing in Europe via private equity funds. The time is ripe for alternative managers to capitalize on the increased appetite for alternatives with diverse offerings. Pairing an existing strategy with a new investment market — such as Europe — has the potential for a strategy extension that can leverage the relatively untapped European market, attracting additional U.S. and European investors.
Platform for Global Capital Raising
Over many years Europe has developed a framework of regulation and market practice to enable the efficient and secure operation of investment funds. This framework and in particular the Alternative Investment Fund Managers Directive (AIFMD) regulation has become recognized globally by investors for its robust governance. As such, establishing a platform to attract European investors can also become the starting point for raising capital globally.
Many managers find the prospect of establishing and marketing a fund range in new locations to a set of new investors under a different set of regulations very off-putting. They worry about cost, time and being distracted away from their core investor base. However, working with the right partners and adopting a structured well planned approach can mitigate all these concerns.
Europe offers a rich variety of jurisdictions for housing an alternative investment fund. Domiciles such as Luxembourg, Ireland, Malta and the Channel Islands offer regulatory stability, tax neutrality, operational efficiency and the ability to launch new investment vehicles quickly. The streamlined regulatory regimes in these jurisdictions can cut the time to open a new investment vehicle to days, allowing fast implementation of tailored solutions to meet investor demands. The wide variety of experienced global service providers enables managers to establish funds efficiently with limited investment on the ground. Leveraging appropriate advice from service providers, managers can easily navigate the complexities of the tax options to create structures that enable compliance for the investor without becoming an impediment to fund performance.
U.S.-based fund managers seeking to raise additional capital, diversify their investor base and gain a platform for attracting global investors may achieve all these objectives, and more, by establishing funds in Europe. Europe offers numerous potential advantages from the regulatory, investor opportunity and operational perspectives. In addition, multiple jurisdictional entry points are available to meet the needs of managers with nearly any investor base and investment objective. Seize the opportunity and look at Europe whilst investor appetite is strong.
If you would like to discuss how Vistra can support your launch of funds in Europe or any one of our supported locations, please contact Malcolm Pobjoy.
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