The interview: Michael Collins

As the brussels-based CEO of Invest Europe, Michael Collins represents pan-european private equity, venture capital and infrastructure firms, as well as their investors. He spoke to Businesslife about how the industry is performing on the continent and the role the Channel Islands play. Photography by David Plas

What’s your background and how did you get to where you are now?

I joined Invest Europe – or the EVCA [European Private Equity and Venture Capital Association] as it was then – almost six years ago. Initially, I was Director of Public Affairs, responsible for all the work the association does in lobbying EU institutions.

Before that, the first 15 years of my working life were spent in the UK civil service, where I dealt, in one way or another, with the EU. I spent a good chunk of that time in Brussels in the UK Representation to the EU. 

After 15 years in the civil service, I decided, in 2009, that I quite fancied seeing life from the private sector side of the table. I was lucky enough to be offered a job by Citigroup, and I worked as their Managing Director for European Government Affairs in Brussels for about three years, before joining Invest Europe.

So, the thread that’s run through pretty much every single job I’ve ever done has been working with EU institutions.

You mentioned the name change from the EVCA to Invest Europe – what was the thinking behind that rebrand three years ago?

There were two main reasons. One was that the association and the composition of the membership had changed. We started out 30-odd years ago as a venture capital [VC] organisation. We’d grown to include private equity [PE] general partners, and then to include limited partners as well, and we’d started to attract infrastructure funds. So, the old name, EVCA, didn’t really feel like it fitted any longer with the members we were actually representing.

The second thing we could see was a really strong trend here in Brussels, away from associations with acronyms towards names. Lots of organisations had gone from being the European Association for X or Y to a much snappier, sharper name. We felt that was right for us too, given the nature of the industry we represent. 

The name change was also driven by the need to speak in a more coherent way to the external stakeholder community we deal with here in Brussels.

In a nutshell, what does Invest Europe do?

We’re a pan-European association for the private equity, venture capital and infrastructure industry. There’s a whole network of national associations, but we’re the only body that has a pan-European reach. We represent fund managers, general partners [GPs], limited partners [LPs] and service providers.

We also lobby and represent the industry to political, regulatory and supervisory authorities; we represent the industry to wider stakeholders, including the media; and we’re responsible for raising the industry’s profile and managing its reputation. 

We’re also a major data provider on what’s going on in European private equity. The data we publish on the PE sector is, we think, the most comprehensive. 

We provide opportunities for the industry to get together – lots of networking events, seminars and so on. And we’re responsible for the industry’s professional standards. So, the code of conduct and the professional standards handbook that Invest Europe produces and oversees is at the heart of how this industry polices itself.

The reports you’ve issued in recent months for both VC and PE in Europe show that figures are at 10-year highs. Why do you think that is? And will it continue?

There are three principal reasons why we’re at 10-year highs for fundraising. First, I think there’s a general trend among investors for alternative assets. This has been driven in part by a prolonged period of very low interest rates. But even without that, there’s a need from many investor types – particularly pension funds – to find assets that can deliver real return over the medium to long term. 

Second, there’s the improved economic situation and the end of any meaningful fear that we’re in a financial crisis. After the crisis we experienced in 2008/09, it was inevitable that investors would go for the safest of safe haven assets, and place a real premium on liquidity. But as they become more comfortable and optimistic about the future, capital will start to flow back into other assets.

The third reason is performance. If you speak to investors about PE and VC, they’ve been pleased with the contribution it’s made to their returns. So, you’re seeing investors re-upping into funds – you’re seeing investors increase their allocations to PE and VC because the numbers are there. 

As for whether it will continue, well, we don’t have the final data yet for 2018, but the preliminary signs are that it’s going to be another strong year. 

Have you seen, or are you seeing, any trends in PE or VC – an increased interest in a particular sector, for instance? 

If you look at the sorts of sectors that PE and VC invest in, it’s actually quite stable. For VC in particular, the ICT sector has been the biggest for the past four or five years, followed by biotech and healthcare. 

As for buyout – the bigger investments into more well-established companies – there’s quite a lot of consistency over time. Consumer goods and services are always very strong, as are business products and services.

Anecdotally, what I’m starting to hear from buyout firms and VC firms is that some of the larger fund managers in Europe are increasingly interested in the tech space. They’ve seen the success of venture-backed companies and are starting to get interested in investing in that sector themselves. 

So, what we might start to see over the next few years is an increase in the capital that’s going into the ICT sector from non-VC fund managers. 

And how about private equity investing in financial services businesses – something we see a lot of in the Channel Islands?

If you look at PE generally, and buyout in particular, financial and insurance activities (which is how we describe the sector) aren’t that big a part of the investment story. There are investments made into it – £5bn to £6bn – by the buyout sector each year. 

While I think there have been a lot of opportunities in some parts of the finance and insurance sector in recent years, it’s also been a sector that a lot of investors have been wary of because of the scale of the regulatory change that’s been experienced post-financial crisis. 

I also sense a concern that there are still too many unknowns about where debts and liabilities might be sitting. 

What’s starting to change is a growing interest in fintech as a place to invest. A lot of the large financial institutions are realising that they need to be taking the fintech revolution seriously and potentially getting ahead of the curve – because if they don’t invest in these new technologies, somebody else will come along and do so. 

If I were to make a guess about the future interest of PE and especially VC in finance, it would be at the fintech end, rather than in taking over traditional bricks-and-mortar financial institutions.

It’s also worth noting that some of the largest PE houses have now developed their own credit fund businesses – using their private equity experience and the basic model of ‘LP investor/GP manager/fund’ to provide debt financing, rather than equity to businesses.

With regard to the amount of money that’s slopping around at the moment, do you have any figures on dry powder?

We don’t, no. That’s not a data point we collect and its actually methodologically quite difficult to come up with an accurate and reliable number on dry powder. Anecdotally though, we’ve had a number of years of very good fundraising in Europe.

If you look back over the past five years, fundraising has exceeded the level of investment pretty much every year – not by much in all cases, but every year a little bit more has been raised than has been invested. So that would suggest fund managers are sitting on some capital. 

But these are 10-year funds, or longer, so it’s not necessarily something to be concerned about. Fund managers know that ultimately they’re being paid by their investors to put capital to work and find good opportunities to invest in and deliver a return. They know that at some point the money will have to get out of the door and get to work in portfolio companies.

Let’s move on to Brexit. What’s your view on how it’s going to affect the pan-European fund industry?

It all very much depends on the type of Brexit we end up with. The softer the Brexit – or the closer the UK remains aligned to the EU regulatory norms, the closer it is to the single market, the closer it remains to EU funding programmes such as Horizon 2020 – the lower the impact. 

The harder the Brexit – or the more chaotic, if you like – the greater the potential impact. The sense I get from speaking to our membership is that a lot of firms have done their contingency planning, have worked out what, at a high level, the implications could be of the different Brexit scenarios, and have done enough to be ready for those scenarios.

When it comes to fundraising, most managers are reasonably sanguine about it – they recognise that they will still be able to make contact with LPs on the other side of the UK/EU line. It might get a bit more complicated, but it’s not going to be impossible to do so. 

My sense is that now the initial shock has worn off in the PE and VC industry, people will wait and see what the medium to long-term relationship will be between the UK and the EU, and factor that into the planning for their next fundraising.

Do you think it’s likely the UK will become a third country and have to get a passport or its own private placement regime, just like the Channel Islands?

Yes, I do. We know from the AIFMD regime what the worst-case scenario is – that the UK becomes a third country. That said, the third-country passport only exists in theory rather than in practice at the moment – and until the passport is available, there are private placement regimes. And there’s no reason to believe those will be switched off in March.

The bigger concerns are for fund managers who have invested in portfolio companies pre-Brexit that are part of complex pan-European supply chains – the threat of 20-mile tailbacks on the M20 in Kent is potentially quite significant. 

But those are a subset of the broader issues that certain parts of the UK economy might face – they’re not really specific to PE and VC. 

On AIFMD, has that bedded down now or are there still hurdles and issues in a broader European sense?

AIFMD is now pretty settled. But nonetheless, I think it’s still sub-optimal for the PE industry. We commissioned a piece of research earlier this year into the impact of AIFMD on private equity. And it confirmed what, anecdotally, we knew – that the benefits it was supposed to bring are pretty small compared with the cost of the Directive.

We’re in a phase now, as we come to the end of the life of this European Commission and this European Parliament, where we’re waiting to see what the set of policymakers that come in next year will want to do – not just with AIFMD, but with financial market regulation more generally. 

All of the regulatory reforms that were going to be put on the table by the current Commission are now out there, they’re being negotiated – and then we’ll go into a period of 12 to 24 months of wait-and-see, while we have elections and a new Commission is appointed. 

Looking more specifically at the Channel Islands – as an ‘outsider’, what do you think are their main strengths and weaknesses when it comes to funds?

I’d say the biggest strength is their political, regulatory and fiscal stability. Anyone operating in or thinking about operating in the Channel Islands is fairly comfortable that they won’t face massive swings in the pendulum in terms of how they’re treated by the regulatory, supervisory or tax authorities. That’s not something you can say about every jurisdiction around the world. 

I’d also point to the value of the network that exists in the islands. There’s a real strength in depth of expertise, both from the service providers – the lawyers and accountants and so on – and the fund administrators themselves. 

In terms of weaknesses, I know from speaking to people on the islands that there are some capacity constraints. There’s clearly an expert pool of labour in the islands, but expanding that talent base doesn’t happen overnight – and that isn’t just for the senior roles, but for some of the more junior roles that need to be filled as you grow your activities. The challenge around recruiting people is something I do hear about time and again.

Do you think the islands face any other specific challenges?

I think questions around image and reputation are likely to remain for some time. The whole tax transparency agenda is going to stay high on the political agenda in the next few years.

And although the Channel Islands have done a great job in demonstrating the substance of their regulatory regimes and that their tax regimes are up to standard, when you talk to some people here in Brussels, there’s still a bit of suspicion about any jurisdiction that isn’t part of the EU. And there’s a limit to what the islands can do about that.
 
The islands will, both individually and collectively, have to continue to make sure they have the highest standards in every respect – regulatory and fiscal – as well as making sure that they keep explaining to policymakers in Brussels what they’ve done and that they continue to take the reputational threat seriously. 

Is this where the Channel Islands’ Brussels Office plays a role?

Yes, and I think that’s a very successful and professional operation. My sense is that it’s an initiative that’s very timely. It will only become more important in this post-Brexit world where, with this whole blacklist/greylist exercise, there will continue to be opportunities for others to make life difficult for the Channel Islands. 

Having a presence on the ground in Brussels not only makes it easier for the islands to react, but also shows a commitment to engaging with the EU. The symbolism of that shouldn’t be ignored.

Luxembourg and Ireland are often seen as the main competition in Europe to the Channel Islands. Is that a fair comparison?

There are parts of the PE/VC chain of activities where the Channel Islands, Lux and Ireland are looking to compete. But frankly, the fundamental difference is EU versus non-EU. That’s the real differentiator between Luxembourg and Ireland on one hand and the Channel Islands on the other. 

Consider Brexit. If you’re a UK fund manager who’s worried about the implications of being outside the EU, then you’re probably going to be looking at an onshore solution – an Ireland, a Luxembourg, a Netherlands domicile – for your management entity and possibly your fund as well. 

That, to me, is the most critical issue – there will always be people out there who want and need an onshore EU location for some of their activities.

The other thing to say, of course, is that none of us know what the third-country regime will look like in the future. I remember vividly the debate in 2008 through 2010 on AIFMD1, when third-country manager access to the EU market was a very big issue. But it was really only the UK that was advocating for that most open, liberal attitude towards the country managers.

So, AIFMD is going to be renegotiated in a very different political context than the one we faced for the current Directive, and the ability of the Channel Islands to be a location that provides easy access to the EU is going to be up for discussion again.

And finally, if you had to pull out a few highlights of what might happen in the next 24 months, what would they be?

The signs are that fundraising remains pretty robust. I think the general appetite of LPs for PE and VC is going to remain high. We might start to see some normalisation of monetary policy – interest rates starting to nudge up, for instance, which potentially gives LPs some new decisions to make on asset allocation. 

But even the most hawkish of central bank watchers wouldn’t expect interest rates to rise that far that quickly. So I think the underlying attractiveness of European PE and VC is going to remain high. 

Managers are going to have to work harder because there’s more capital in the market to find those really good investment opportunities – there’s more competition out there, you do see valuations increasing. That means managers are going to have to be particularly careful when making an investment about how they’re going to create value and how they’re going to deliver a return on that company when it comes to exit.

The big unknowns are political and macro-economic. We still don’t know exactly how Brexit will pan out. We don’t know what the outcome will be of the European Parliamentary elections next year, or who’ll be in the new European Commission. 

And given that AIFMD2 is scheduled to happen on the watch of those people who are appointed next year, well, that’s a big set of unknowns that could have quite a profound impact on PE, both GPs and LPs. 

But overall, I think there are lots of reasons to be optimistic about the health of the industry – not just in the Channel Islands, but also across Europe. It’s a mature industry, it’s an industry with a good track record of delivering for investors, and it’s an industry that operates at high standards – both in terms of regulation and the professional expectations it imposes on itself.