The impact of private equity, hedge and sovereign funds on industrial change in Europe

Gist of the opinion

The purpose of this opinion is to consider the impact on industrial change of Sovereign Wealth funds (SWF), and Alternative Investment Funds (AIF). AIF are Private Equity (PE) and Hedge Funds (HF). The EESC commissioned consultants "Wilke Maack und Partner" (WMP) and they have produced an 87 page report.

The opinion examines the context in which AIF and SWF operate. The internationalisation of capital markets has been very significant. Investing institutions have assembled world wide equity portfolios and promoted international mergers and acquisitions. Pressure has been put on companies and regulators to transfer voting rights from management to shareholders. The shadow of M&A and the threat of shareholder activism have caused managements in the EU to initiate widespread industrial change. This has to some extent undermined relationships between management and stakeholders and shortened the time horizons of management general.

Conventional Institutional Fund Managers (CIFM), those in charge of pension, insurance and mutual funds, are involved with AIFM at every turn. They ultimately stand behind whatever environmental, social and governance policies the AIF implement. CIFM are the reciprocal of AIFM.

The opinion examines each one of these the funds and the way they can influence industrial change. It also contains a SWOT analysis (Strengths, Weakness, Opportunities, and Threats) for each fund.

Following consideration of the WMP report and the other perspectives included in this opinion, the EESC recommendations fall into three categories: regulation and transparency, amendments to existing social legislation and the responsibilities of CIFM.

The EESC endorses the six high level principles for the regulation of HF proposed by the International Organisation of Security Commissions (IOSCO) in June 2009. The EESC recommends to the Commission that it base itself on these principles and strengthen them for AIFM regulation in the proposed Directive. While IOSCO has completed an analysis of the risks to the financial system posed by PE, no regulatory proposals have yet been made. The EESC recommends that the Commission adapt the IOSCO HF principles to fit the profile of PE.

The Santiago principles agreed by the SWF provide a basis for improved SWF transparency and governance. However, much more remains to be done. The EESC urges the Commission to continue to press the SWF International Working Group (IWG) to proceed with the necessary developments.

The EESC recommends that the Acquired Rights Directive 2001/23/EC  be strengthened in the case of HP and PE takeovers in order to: safeguard the rights of the employees concerned, including the right to be informed and consulted; and ensure that transfers of undertakings by way of share sale are not excluded from the Directive.

In order to reflect the situation created by HF and PE, the EESC proposes that Council Directive 94/45/EC  on the establishment of European Works Councils and Directive 2002/14/EC  establishing a general framework for informing and consulting employees be amended to ensure more effective consultation rights before PE deals are finalised, during any restructuring process, and before exit.

The EESC calls for CIFM to apply the Principles for Responsible Investment (PRI) in all their dealings with AIFM. The PRI, which address environmental, social and governance (ESG) issues, were drawn up by an institutional investor initiative in partnership with UNEP Finance Initiative and the UN Global Partnership. The EESC recommends that SWF follow the lead of the Norway Pension Fund and also sign up to the PRI.