Invest Week 28 November - 2 December 2016: Daily round up for 1 December
The fourth day of Invest Week on 1 December included 2 events:
‘How policy impacts Europe’s growing companies’, hosted by the Long-Term Investment and Reindustrialisation Intergroup of the European Parliament and Invest Europe
‘Asset Allocation in a Low Interest Rate Environment: Where do we stand?’, hosted by The European Capital Markets Institute (ECMI) in cooperation with PensionsEurope
EU officials discuss Europe’s long term investment challenges with major investors and companies
World-renowned investor, David Rubenstein, co-founder and co-CEO of The Carlyle Group, and Frédéric Mazzella, founder of a major European success story, the carpooling service BlaBlaCar, were special guests at this debate on Europe’s approach on how policy impacts Europe’s growing companies, hosted by Invest Europe and the European Parliament’s crossparty Long-Term Investment Intergroup. They discussed the issues with MEPs, including Burkhard Balz, Commission officials, companies and academics.
The EU urgently needs to address its long term investment funding gap, with alternative investment such as private equity and venture capital
The EU is suffering from a lack of funding for infrastructure, the energy transition and the scaling-up of start-ups.
Getting rid of regulatory barriers is a must to attract long term investment into the EU.
MEP Burkhard Balz opened by stressing that the EU urgently needs more private investment and to leverage finance to encourage start-up development. Building on this, Invest Europe CEO Michael Collins said that the US raises five times more than the EU does in venture capital and that it is important to make things easier for long term investors by getting rid of regulatory disincentives.
David Rubenstein, co-founder and co-CEO of The Carlyle Group, said that “it would be helpful if Europe had rules that make it possible for global firms to raise capital in Europe”, citing issues with private placement in some member states. He added that it would be good for Europe if it were easier to raise capital, invest capital and deliver returns to investors. Whilst conceding that “this is not easy to do”, he concluded that if this could be achieved, Europe “would be an even more significant economy in the 21st century”.
For Frédéric Mazzella, founder of the carpooling service BlaBlaCar, “growing a company in the US is like a 100 metre race while in Europe it is like running the 110 metres hurdles race” as “you have to adapt your business to different rules – different VAT, different currencies, different languages”. “Each time it is like creating a new company. I’m in favour of a more unified regulatory environment especially for digital companies that need to reach scale fast. Adapting a product to 28 markets slows us down,” he said.
Alexander Schindler, President of the European Fund and Asset Management Association, argued that Europe urgently needs to harmonise its regulatory environment and its capital markets. He cited the different information requirements of national authorities as a difficulty to be surmounted and the importance of financial education of its citizens.
Niall Bohan, the Head of Unit for the Capital Markets Union at the European Commission’s DG FISMA, said that “funding long term investment is becoming an existential crisis”. He said Europe has an “Achilles heel” in terms of meeting the demand for capital to scale up and expand small companies, which create two thirds of jobs in the EU, and referenced the Commission’s drive to create a venture capital fund of funds to draw private capital back into Europe.
How policy impacts Europe’s growing companies
on 1 December 2016
Burkhard Balz MEP, Vice-Chair of the Long Term Investment Intergroup
David Rubenstein, co-founder and co-CEO of The Carlyle Group
Frédéric Mazzella, founder of BlaBlaCar
Dr. Bert Van Roosebeke, researcher from the Centre for European Policy
Michael Collins, CEO of Invest Europe, the association for private equity, venture capital and infrastructure investors
Alexander Schindler, President of the European Fund and Asset Management Association (EFAMA)
Niall Bohan, Head of Unit for the Capital Markets Union at the European Commission’s DG FISMA
Investment industry experts discuss impact of low interest rates on pensions and insurance funds
Experts say that interest rates are making the necessary ‘search for yield’ difficult for investors
One solution is a move to riskier assets. Solvency II needs to adapt to this new reality
‘Pan European Pension Product’ initiative can offer a channel for long term investment
Dimitris Zafeiris, Head of Financial Stability at the European Insurance and Occupational Pensions Authority (EIOPA), said that a result of the low interest environment is an increasing reinvestment risk for European insurers and pension funds. EIOPA carried out a stress test for insurance in 2016, which estimated the vulnerabilities of the insurance industry; a pension fund stress test looking at impact on the ‘real economy’ will be carried out in 2017.
Reinhard Eckl, Associate Director and Deputy Head of Regulatory Strategy at Allianz, described a situation of “unprecedentedly low and negative interest rates”. Pointing out that “slightly over 50% of Eurozone sovereign debt is being traded at negative yields (and 95% for debt with maturity of two years or less), he said that this is “a very difficult environment for investors”.
He argued that the EU’s Solvency II law does not fully reflect the business model of insurers. It focuses on short term assets and market volatility but he said that as insurers are not in a position to sell assets at short notice these are not relevant tests. In the upcoming review of Solvency II in 2018, he suggested technical measures could rectify the drawback so that insurers can invest more in the long term. “Capital requirements should focus on fundamental default risk,” he suggested.
Allianz’s response to the low interest environment has been to carry out a complete redesign of its product portfolio into alternative assets (e.g. real estate, renewable energy or private equity). Policy holders can choose to have insurers manage their portfolio or to have an active role in how their money is invested.
PensionsEurope’s representative Philippe Ithurbide, Head of Global Research, Strategy and Analysis at the asset management company Amundi, assessed 25 implications of the low interest rate environment for the asset management business model. The search for yield through the shift from traditional asset classes towards riskier investments is a necessary step for pension funds as this is in line with their primary objective to be able to provide for pensions. Furthermore, in the context of the CMU, pension funds have been invited to make investments that boost jobs and growth across the EU.
Ithurbide noted that management fees have declined sharply and the problem of protecting investments and guaranteed products is “particularly acute”. One solution was to extend duration to generate returns but this increases portfolio risk; another was to invest in low quality credit which also has risk implications. The idea of a ‘risk-free asset’ needed to be examined as many were now ‘return-free assets’.
Dimitris Zafeiris shared his expectation that low interest rates were here to stay and that the search for yield would remain tough. Reinhard Eckl said that “the investment universe has to move to riskier assets” and that the European Central Bank “should develop plans for exit from quantitative easing”. He believes the European Pension Product initiative “addresses the needs of the pension gap” and “offers a channel for long term investment”.
Karel Lannoo, CEO, CEPS and General Manager, ECMI
Dimitris Zafeiris, Head of Financial Stability, EIOPA
Philippe Ithurbide, Head of Global Research, Strategy and Analysis, Amundi
Reinhard Eckl, Associate Director, Deputy Head of Regulatory Strategy, Allianz SE