A Healthy Review for Private Equity Funds in the ESMA Annual Statistical Report on EU AIFs

28 January 2020

The European Securities and Markets Authority (ESMA) published its Annual Statistical Report on EU Alternative Investment Funds (AIFs) on 10 January 2020 (the “Report”). The Report confirms that the AIF market, including the private equity segment, has been thriving.

ESMA’s analysis suggests that the net asset value (NAV) of all AIFs in 2018 amounted to €5.8 trillion, an 11% increase from 2017 and representing 40% of the EU’s funds industry, compared with one third in 2017. The Report breaks down the industry into five broad categories: Funds of Funds, Real Estate, Hedge Funds, Private Equity Funds and “Other” Funds, and reviews each category’s contribution to the total. The disproportionately large “Other” category – accounting for 61% of the total – makes proper analysis difficult, but the Report does indicate healthy growth in private equity as well as other alternative fund types and suggests that UK-based managers continue to dominate the private equity and hedge fund markets.

For funds that classify themselves within ESMA’s “Private Equity” category, NAV increased 66% from its 2017 total, reaching €352 billion. This, in no small part, was due to the rise of private equity NAV managed from the UK which, despite Brexit uncertainty, more than doubled and, at €166 billion, accounted for almost half of the EEA’s overall private equity NAV in 2018. Although the Report does not specify what proportion of this increase is due to increased valuation, it notes that the overall EEA AIF increase in NAV to €5.8 trillion is only partially due to increased valuation, with much of it coming from new AIFs entering the market.

Notwithstanding this apparent growth, it seems likely that the Report significantly underestimates the size of the European private equity AIF universe.  Only 6% of overall EEA AIF assets are categorised as private equity, and the Report notes that this could be for definitional reasons. Private equity Funds are only indirectly defined within the AIFMD and this lack of clarity is compounded by ESMA’s sub-categories, which only specifically cover “venture capital”, “growth capital” and “mezzanine capital”, with a fourth catch-all category.

That may in part explain why 61% of the more than 30,000 AIFs that were reported on in 2018 were classified in the “Other” category. While 70% of these “Other AIFs” were open-ended funds, meaning that they are unlikely to be following a private equity strategy, many of the remaining 30% may be buyout or other private equity-style funds.

As expected, professional investors are the predominant investor, yet retail investor share is significant at 16% of total NAV, with most retail participation in fund of funds and real estate funds – private equity funds reported 5% retail investors. Private equity funds also reported high access to marketing on a passport basis (60% of total NAV), with one fifth marketing on the basis of national private placement.

The Report also addresses one potential issue that AIFs may face in the coming years, which is likely to indicate a focus for regulators: there are, the Report says, signs of potential liquidity mismatch, particularly for Real Estate funds. There is a concern that some open-ended funds may not be able to meet redemption requests, given the inherent illiquidity in their assets. Although not an issue for most private equity funds, liquidity matching is clearly an area that will command some attention in the AIF world in the near future.