House Of Lords Eu Committee Inquiry On The European Commission

House of Lords EU Committee Inquiry on the European Commission Directive on Alternative Investments Fund Managers Response from: Church Commissioners, Esmée Fairbairn Foundation, Nuffield Foundation, Paul Hamlyn Foundation, The Henry Smith Charity, and the Wellcome Trust September 2009 1. As some of the major charitable foundations in the UK, we would like to highlight our concerns about the potential impact of the proposed EU Directive on Alternative Investment Fund Managers. Our combined investment portfolios are worth an approximate £19.5 billion, and together we spend in the region of £0.9 billion for public benefit each year. Our funding interests range from medical research and education, through to support for the Church’s ministry and to address social inequality. We are concerned that the Directive as currently drafted will significantly restrict our ability to generate funds to pursue our charitable missions and thus reduce our impact for public good. 2. We welcome the intention behind the Directive – to improve regulations and safeguard investors – and we support those provisions of the Directive that aim to ensure greater transparency and expose conflicts of interest. However, we are concerned that some provisions of the Directive will have significant unintended consequences. The following issues are of greatest concern to us: 3. Limitation of Choice of managers and funds (Article 35, 38 & 39): To maximise the returns on our investments, we must have freedom to select the best investment managers and funds, and to select the investment ideas that best meet our individual needs. 4. The Directive as currently drafted will severely restrict our access both to non-EU funds and to non-EU fund managers. This will impact access to private equity funds and to hedge funds. For example, up to 95 per cent of global hedge funds are currently either not domiciled in the EU or have non-EU managers.1 Similarly, many private equity firms are likely to be situated in the market in which they invest. We believe there is a significant risk that many of the best will stop raising capital in Europe rather than attempting to comply with onerous EU regulations. This will significantly restrict choice for European investors, limit the scope and potential return of our investment portfolio and hence reduce our charitable spend.

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Estimate by the Alternative Investment Management Association, the global hedge fund body Submission to House of Lords EU Committee inquiry on the European Commission Page 1 of 3 Directive on Alternative Investments Fund September 2009

5. Restrictions on access to international assets through limits on depositaries (Article 17): Diversification of an investment portfolio is a core principle of good portfolio management. A key area where diversification can be obtained is by investing internationally. Such a strategy can produce increased returns while reducing the risk of excessive concentration in particular countries. 6. The draft Directive will require all funds under management to have a depositary that is an EUauthorised credit institution. This will introduce significant barriers to owning international assets, and will particularly limit our access to emerging markets. Again, this will reduce the returns on our investments and therefore reduce our spend for public benefit. 7. Uncertainty on whether investment strategies involving leverage will be permitted (Articles 22-25): Many investment strategies employ leverage. From an investor’s perspective, leverage can be a useful tool to adjust the return and risk profiles of a particular investment, and allow the maximum benefit to be obtained by the investor. 8. The leverage limits proposed in the draft Directive are not adequately defined. Greater clarification is required, both about the level of the limits and the mechanisms that would be used to enforce them. This lack of clarity is destabilising and makes it likely that certain investment strategies will not be made available to European investors. As stated above, we regard this restriction of choice as likely to reduce the returns on our investments and, in turn, to reduce our spend on our charitable purposes. 9. We support measures to address systemic risk that arises through excess leverage. It seems to us, however, that systemic risk can better be addressed through a proposal that deals with leveraged organisations as a group, rather than specifically addressing investment funds. 10. In our view, the issues described above should not be dealt with by imposing restrictions, which will have the effect of reducing our freedom to invest in a way that maximises the benefit we can provide. We advocate that one of the Directive’s existing principles, transparency, should also be the approach here. Professional investors should be provided with proper information about the regulatory regime(s), depositary/custodian arrangements and use of leverage of the funds that they propose to invest in, to enable them to make a judgement on these issues as part of their investment process. 11. We note that the Swedish Presidency has released an Issues Note on 2 September 2009 which recognises some, but not all, of these concerns. 12. Maximising the returns on our investment portfolios is an essential part of delivering our Foundations’ missions, for the benefit of society. The draft Directive, while well-intentioned, threatens this goal. We encourage the Committee to take into consideration the potential impact of the Directive on all European investors as part of its inquiry.

Wellcome Trust response to European Commission Directive on Alternative Investments Fund September 2009

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Yours sincerely,

Andrew Brown Secretary to the Church Commissioners

James Brooke Turner Finance Director Nuffield Foundation

Dawn Austwick Chief Executive Esmée Fairbairn Foundation

Richard Robinson Investment Director Paul Hamlyn Foundation

Richard Hopgood Director The Henry Smith Charity

Sir Mark Walport Director Wellcome Trust

Wellcome Trust response to European Commission Directive on Alternative Investments Fund September 2009

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