EMIR (the European Market Infrastructure Regulation) was adopted in 2012 as a response to the financial crisis to better manage and monitor the derivatives and related risks. However, in recent years, the EU Commission carried out an important assessment of EMIR to see whether it would be possible to amend it and to potentially simplify it, while maintaining enough degree of security around financial derivatives. The objective was to amend some provisions to eliminate disproportionate costs and burdens on certain derivative counterparties without compromising global aim of this regulation.
On 4th May 2017, the EU Commission proposed a regulation (the so-called “EMIR refit” – Regulatory Fitness and Performance program) to address these issues (e.g. disproportionate compliance costs, transparency, insufficient access to clearing for some counterparties, …).
White smoke from Brussels on EMIR refit ?
Private Equity Funds (PE) fold under the weight of cash
The PE’s have piled up lots of cash over the last months and years for different reasons. After a fantastic decade of growth and success, they realize that (according to a BAIN & CO study) the assets and targets remain rather expensive, time to recover or to generate return may be longer than in the past (or returns lower in same period) and competition fiercer than before. In the meantime, the low and negative interest rates, combined with toppish stock exchange markets and absence of real alternative investments have increased the size of available liquidities to be invested in these funds. There were lots of delisting operations and big deals negotiated, although in number deals are declining. The over-performing PE’s have attracted number of new investors. Unfortunately, it will be difficult over time to maintain former level of returns given the above listed elements. It remains a good business with good returns, relatively to other classes of assets. If you want to sell an asset, better to wait as multiples keep increasing because of the scarcity of cheap and available assets rather than because of their intrinsic performances. Investors seem to be more cautious than before and more reasonable in terms of return expectations. Lower returns could be compensated by shorter holding of assets and higher turnover of investments. We will see but can imagine it. The fact that PE valuation was higher than stock-exchange valuations, before 2008 financial crisis and again now could be viewed as a sign of the next crisis by the most pessimistic investors. It has been estimated at roughly 2.000O billion of Dollars of liquidities available, the highest level in history (close to 2008 level). Given the young age of these funds and the quantity of cash accumulated, we can expect larger deals in future and bigger targets. Industry, health and technology seem the most popular sectors researched by PE’s. We can imagine that these funds will keep growing. As cash return becomes an issue with negative rates and pressure from banks to charge positive balances, we can also easily imagine that PE’s will sophisticate further their asset management strategies in future and potentially use similar vehicles as corporates, like money market funds. They will also revisit organizations and processes to become more efficient and reduce all-in costs to compensate lower returns. They will need to be more optimal in cash management and fund calls to reduce noise caused by negative rates. This industry, like in Luxembourg, will certainly reach a further level in professionalism of the liquidity and payment management to optimize investors return. Luxembourg LPEA is well placed to provide this kind of support to its members and is doing a great job in developing the industry in the country and abroad.