European Investors Give Thumbs Up to Private Markets Legislation

The European Union’s legislative attempts to leverage private markets to drive economic growth look set to boost the asset class in the region, according to our third annual State Street 2024 Private Market Study.

Respondents to the study largely expected the EU’s European Long Term Investment Fund (ELTIF) and the UK’s Long Term Asset Fund (LTAF) to be successful in boosting investment in domestic infrastructure and industries, and bring new investors into the space.

We polled nearly 500 senior private markets and C-suite executives at investment institutions on various elements of their private markets outlook, including expectations of the impacts of policy and regulatory developments.

In Europe, three quarters  (75 percent) of the respondents said both ELTIF and LTAF would be successful in “their governments’ desired impact on private markets investing in the regions they relate to,”  with nearly a fifth (19 percent) of these respondents saying they thought the changes would be “very successful.”

In Ireland, this is particularly significant, as the country is a major hub for the administration of private markets funds that are domiciled and distributed across Europe and globally. Of the nearly $78 billion* of committed capital in private markets funds administered in Ireland by State Street alone, over $74 billion* is held by funds domiciled elsewhere in the world, primarily the US, the UK, Luxembourg and the Cayman Islands.

Investors from other parts of the world also saw potential for both pieces of legislation, with approximately two thirds of Asian (64 percent) respondents predicting they would be successful and more than half (56 percent) of North Americans saying the same.

Both sets of laws are aimed at boosting capital markets investment in long-term assets that the EU and UK governments believe are important to their jurisdictions’ economic growth and security, including national infrastructure projects, key industries such as technology, defence and green energy, as well as housebuilding projects.

In part, they aim to achieve this by creating vehicles that enable more individual and defined contribution (DC) investors into the asset classes, despite the illiquid nature of their underlying holdings.

The EU’s “ELTIF 2” regulation came into force at the beginning of this year and broadened the original ELTIF legislation, enabling products to be marketed to retail investors at lower investment thresholds and requiring them to invest in a wider range of holdings beyond the EU private assets that are its core investments.

LTAF is a relatively new development, the first fund was  authorised by the UK’s Financial Conduct Authority just last year. But it has a similar scope to ELTIF, although LTAF’s are required to have a certain percentage of their holdings in UK private assets.

Around half (49 percent) of both European and global respondents saw “strong demand” for private markets assets from retail and DC investors, although 54 percent globally and 48 percent in Europe said there need to be more suitable products to facilitate this.

Institutions also saw benefits to their organisations from European private markets product reform. Nearly a third (31 percent) of European respondents saw ELTIF and LTAF as having a positive impact on their portfolio returns, compared to just 8 percent who saw the developments as negative (the rest saw no revenue impact or didn’t know). This was a more positive sentiment than other regions with around a quarter (24 percent) of global respondents responding positively.

Among respondents from asset managers and other profit-making businesses (as opposed to pension funds and other non-profit asset owners), exactly a quarter saw positive revenue implications from ELTIF and LTAF. That figure rose to 30 percent when only European respondents were counted.

A significant number of respondents expected to see the shift towards more retail investment in private markets to occur quickly. Although exactly half of European respondents expected the majority of private markets investments to continue to come from traditional institutional fundraising in two to three years’ time, approximately a third (32 percent) saw it coming more or less equally from traditional and retail fund-like vehicles such as ELTIF or LTAF, and 17 percent saw the bulk of flows coming from retail. Globally and in the other regions, the numbers were similar.

“The survey responses align with the trends we've observed when engaging with our clients in Ireland. Private markets are seeing a confluence of positive impacts. Investors are increasingly keen to take advantage of the returns, income streams and diversification the asset class can confer, while governments are keen to encourage this growth through policy and regulation. Our research shows the extent to which both parties are on the same page.

" As this asset class grows and takes a greater role in the portfolios of investors who require more liquidity and frequent information than traditional institutions,  it is essential for asset managers to work with partners such as State Street who have a strong track record in centralising servicing from Ireland in addition to working with complex product strategies with multiple domiciles ."  Terri Dempsey, CEO and Country Head at State Street Ireland

While investors in Europe have  mixed opinions on the speed of travel, when it comes to seeing the results of ELTIFs and LTAFs, they are united in expecting these products to make a significant impact on the continents’ investment landscape.

Get more insights from the study and receive the first report in the 2024 Private Markets Outlook series.

Stats Sources:

*Internal accounting records (Infodata), as of May 1, 2024