The Great European Fund Illusion: Why No One Can Raise Capital Without Permission Anymore and Complexity Masquerading as Sophistication
Somewhere between Brussels’ ambition and Berlin’s caution, between the Draghi Report’s lofty call for integration and the sluggish cadence of national regulators, Europe has constructed something that looks like a capital market—but behaves like a Byzantine guild.
At first glance, the structure appears intact: the Alternative Investment Fund Managers Directive (AIFMD), EuVECA, UCITS, PRIIPs, and a medley of passports, reporting templates, and supervisory regimes that promise harmony across the continent. But peel back the regulatory veneer, and a far less elegant reality emerges—one defined not by integration, but by fragmentation, distortion, and a quiet erosion of competitiveness.
I spent the better part of a weekend combing through Invest Europe’s response to the European Commission’s latest consultation on capital markets integration. What I found was not simply a list of grievances from industry. It was a forensic diagnosis of a system so overburdened by cumulative complexity that innovation is being throttled at source—not by markets, not by capital constraints, but by the architecture of European regulation itself.
Let’s begin with the threshold illusion.
The €500 Million Trapdoor
The AIFMD was conceived in the aftermath of the global financial crisis—a well-intentioned effort to regulate the “shadow banking” system and impose order on a previously unregulated fund universe. But as with much post-crisis policy, what started as risk containment has calcified into structural drag.
At the heart of it is a single number: €500 million—the threshold under which managers are exempt from the full brunt of AIFMD’s obligations, provided their funds are unleveraged (for leveraged funds, the figure plummets to a mere €100 million).
In 2013, that €500 million figure may have reflected materiality. But a decade later, with cumulative inflation having eroded real values by an average of 35% across Europe, that same threshold is now ensnaring small and mid-sized managers who were never meant to be its target.
Consider the case, cited by Invest Europe, of a German venture capital firm. With a portfolio of around €350 million across two existing funds and a lean team of 15, their natural ambition is to raise a third fund of similar magnitude. Yet, doing so would catapult them over the AIFMD threshold. The Invest Europe paper estimates that for a manager of this scale, the transition to full AIFMD compliance could necessitate hiring around three new full-time equivalents, an increase of 20% in overheads, simply to navigate the labyrinth of depositary appointments, Chinese walls for portfolio management, and the exhaustive Annex IV reporting. For a larger €500 million fund, the all-in annual compliance costs, including potential outsourced AIFM services and administrative burdens, can, as Invest Europe bleakly notes from other parts of their survey, approach €2 million.
The manager’s solution, in the cited real-life example? Cap the new fund at €150 million under the EuVECA regime, deliberately stunting its growth to avoid the regulatory precipice.
It’s a rational response. But in aggregate, it is a profound indictment. When regulatory structure makes underperformance a more viable strategy than growth, something has gone terribly wrong.
A Europe of Gatekeepers
We must be clear-eyed about what this means at the systemic level. European fund managers are not operating in a vacuum. They are in direct competition with their peers in the U.S. and, increasingly, the UK, where regulatory burdens are not only lighter, but often better tailored to the structure of the underlying products. By effectively punishing managers for success—scaling beyond €500 million in AUM or managing multiple vintage funds simultaneously—Europe is, in effect, outsourcing its innovation finance.
The result? A familiar one. The most promising EU startups increasingly turn to late-stage American investors. The best exits happen on Nasdaq, not Euronext. And the capital that shapes European scale-ups carries terms, governance, and sometimes even motives, forged elsewhere.
What’s worse is that this isn’t simply a matter of headline regulation. It is the fragmented implementation—the uneven texture of national interpretation—that makes the system so corrosive.
As Invest Europe details with evident frustration, in Italy, sub-threshold AIFMs are subjected to full-blown authorization procedures scarcely distinguishable from those applied to large institutions. In Spain, approval processes routinely take nine to twelve months, complicated by requirements for local agents and specific authorisations from AML units like SEPBLAC. In Germany, BaFin’s silence can stretch to half a year before even initial feedback is issued. Poland presents its own gauntlet: a ZASI (Professional External Asset Management Company) registration can take 3-4 months, but the full licensing might extend to 12-18 months. And even in Luxembourg—often seen as a fund-friendly jurisdiction—authorisation extensions are asset class or strategy-specific, requiring additional approval times.
This is not a Capital Markets Union. This is a confederation of gatekeepers, each demanding tribute in the form of documents, fees, full-time equivalents, and, above all, patience.
Proportionality in Theory, Absurdity in Practice
The irony of AIFMD, lies in its failure to distinguish adequately between risk profile and reporting burden. The same broad template often applies—sometimes absurdly—to a leveraged hedge fund engaging in daily trading, a venture capital firm investing in slow-moving Series B rounds, and a growth manager raising capital from only sophisticated professional LPs.
Managers are forced to draft performance documents, such as the PRIIPs Key Information Document (KID), using methodologies patently unsuited for illiquid, closed-ended funds where past performance is a poor guide and daily valuations are a fiction. They’re expected to prepare extensive marketing filings for funds whose terms are often negotiated iteratively with institutional investors, not pre-baked for mass distribution. And they must abide by liquidity and valuation reporting rules designed for assets that simply don’t trade in the way public market instruments do.
What begins as a precautionary framework, Invest Europe implies, ends as an institutional farce: compliance budgets consuming significant portions of management fees for smaller funds, prohibitive authorisation costs that can, as they note, exceed €1 million in some markets, and onerous AML and DORA requirements applied even to closed vehicles with a handful of known institutional LPs.
Even the question of leverage—a seemingly clear line—has been obfuscated. ESMA’s updated Q&A on AIFMD, particularly in the context of real estate strategies, now suggests that debt raised at SPV or portfolio company level might need to be included in
the AIF’s leverage calculation, despite lacking direct recourse to the fund itself. The consequence? Managers who structure investments responsibly—ringfencing risk at the asset level—could still be penalised as if they were levering up the fund at the top.
It’s not oversight. It’s overreach.
The Optics of Sophistication
Why does this persist?
Perhaps because, from the Berlaymont, complexity can masquerade as sophistication. Because some regulators may believe harmonisation means absolute uniformity, rather than clarity, co-ordination, and intelligent differentiation. Because the EU, at times, conflates process with protection—forgetting that the investor most in need of safeguarding might well be the early-stage founder who can’t raise capital because her local fund manager is too busy hiring a second compliance officer instead of deploying capital.
And so the fiction is maintained: that Europe has a world-class asset management regime, when in truth it has a defensive perimeter so fortified that very little escapes, and even less gets in without significant friction.
What’s to Be Done?
To those tempted to reach for another working group or consultation round: one might suggest, respectfully, that the time for endless deliberation is past. The problems, as laid out by bodies like Invest Europe, are not unclear. They are systemic, practical, and, with political will, solvable.
Raise the AIFMD threshold substantially – Invest Europe moots €1.5 billion, or even €3 billion to truly compete with the US and UK. Index it to inflation by default. Define leverage clearly and narrowly, focusing on fund-level recourse. Simplify or abolish the PRIIPs KID for closed-ended funds marketed to professional investors. Create a truly functional passport for EuVECA managers and shield it from national gold-plating. And most importantly: shift from a model of uniform regulation to one of tailored proportionality based on fund strategy, investor type, and asset class.
The goal is not to dismantle regulatory discipline. It is to reclaim regulatory purpose—to build a framework that recognises that Europe’s financial strength lies not in its bureaucracy, but in its capacity to allocate capital intelligently, efficiently, and competitively.
While Europe wrestles with its internal market plumbing, across the Channel, the Financial Conduct Authority (FCA) presents a different, perhaps more nimble, picture of regulatory adaptation.
Their recent Quarterly Consultation Paper (CP25/16) offers a window into this. Consider their careful recalibration concerning cryptoasset exchange-traded notes (cETNs). Having previously barred their sale to retail consumers, the FCA now proposes lifting this ban for cETNs listed on UK Recognised Investment Exchanges (RIEs). This isn't an unbridled embrace of crypto's wilder shores; rather, it’s a pragmatic acknowledgement that the market has matured somewhat, and that a blanket prohibition on regulated products might inadvertently steer retail appetite towards less transparent, higher-risk offshore alternatives. The proposed solution – classifying these UK RIE cETNs as 'Restricted Mass Market Investments' and subjecting them to stringent financial promotion rules and bespoke risk warnings – is an attempt to balance innovation with investor protection. It’s a granular, iterative approach, quite distinct from the EU’s broader directive-led model. Alongside this, the FCA is also engaged in regulatory housekeeping, such as decommissioning certain data returns like REP022 (General Insurance Pricing Attestation), deemed less critical as underlying pricing rules have bedded in, or tweaking reporting schedules for consumer credit data. This constant fine-tuning suggests a regulator attempting to adapt to market realities with a degree of responsiveness that larger, multi-jurisdictional bodies might find challenging.
This pursuit of bespoke, national-level solutions is not unique to the UK. Farther afield, in Canada, FTSE Russell’s work on the Canada Bank Credit Spread Index Series is another case in point. This initiative directly addresses a specific domestic market need: creating a liquid, transparent benchmark for the credit risk inherent in Canadian banks, which constitute a significant portion of the national corporate bond market. The methodology, involving a reference basket of liquid bank bonds mapped against Government of Canada benchmarks, is designed to isolate and quantify this specific risk. The explicit intention to underpin futures contracts with this index signals a drive towards sophisticated, domestically-rooted risk management tools, a quiet testament to capital markets deepening at a national, rather than supranational, level.
These domestic and regional market refinements, however, are increasingly played out under the long shadow of geopolitical imperatives. The war in Ukraine, for instance, has not only prompted the Council of the EU to extend temporary protection for refugees, but has also catalysed initiatives like the EU's push for enhanced military mobility, as detailed in a recent Commission press release. This involves addressing infrastructure bottlenecks and harmonising national procedures to allow for the swift movement of military assets across the continent—a clear instance of strategic defence considerations shaping capital allocation, with bodies like the Connecting Europe Facility now having an explicit defence dimension to their infrastructure funding.
The same geopolitical currents are reshaping energy policy. The debate around the UK's Rosebank oilfield, captured by Phys.org, pits climate commitments against perceived energy security needs. Proponents argue for domestic production, while critics, including those from the Climate Action Network Europe regarding the EU's Methane Regulation, warn against locking in fossil fuel dependency. The Climate Action Network’s letter is particularly telling: it’s a plea to EU ministers not to dilute recently agreed methane reduction targets via an "energy omnibus" aimed at simplification. This highlights a fundamental tension: the regulatory burden bemoaned by industry versus the regulatory integrity demanded by civil society to meet climate goals. The state, here, is not just a referee but an active player, pulled in multiple directions.
This reassertion of the state is also palpable in the digital realm. AmCham EU’s paper on US cloud service providers in the EU underscores the delicate balance Europe is trying to strike between leveraging American technological prowess for its Digital Decade ambitions and asserting its own digital sovereignty. Simultaneously, the OECD’s note on UK mobile payments details how national regulators like the CMA, FCA, and PSR are scrutinising the dominance of Apple and Google in mobile ecosystems, particularly concerning NFC access and digital wallet preferencing. While the EU has its Digital Markets Act, the UK is pursuing its own robust, multi-regulator approach to ensure fair competition in this critical infrastructure.
Even development aid, as profiled by the OECD for the EU institutions, is not immune. The EU's substantial Official Development Assistance (ODA) is increasingly a tool of soft power, aligned with strategic objectives like the European Green Deal, migration management, and fostering partnerships in Africa and its neighbourhood. The "Team Europe" approach, coordinating efforts of the Commission, the EIB, and member states, frames finance explicitly as an instrument of foreign policy.
And the complexities of such grand strategies are felt on the ground. The joint letter from European mayors and regional leaders is a poignant call for greater inclusion in the EU’s policy-making process. They, who manage the daily realities of their communities, often feel that Brussels’ directives are ill-suited or implemented without sufficient local input, a sentiment that echoes the fund managers' frustrations with one-size-fits-all AIFMD rules. They advocate for genuine multilevel governance, where local and regional needs inform, rather than merely receive, EU policy.
Amidst these strategic and regulatory tussles, the real economy continues its rhythm. The UK GDP figures, for instance, reveal volatility potentially linked to tariff frontloading and seasonal adjustment quirks – a reminder that macroeconomic data can often obscure as much as it reveals without careful, context-aware interpretation. These are the ground truths against which grand policies are ultimately tested.
What, then, is the unifying thread in this complex weave?
It is the undeniable return of friction to the global financial system. The easy assumptions of borderless capital and regulatory convergence are receding, replaced by a landscape where jurisdictional sovereignty, national interest, and geopolitical strategy increasingly dictate the flow and cost of money. Liquidity, the lifeblood of markets, is becoming fragmented along these new fault lines. The "Great European Fund Illusion" is perhaps a specific manifestation of a broader global phenomenon: the end of the illusion of an apolitical, seamlessly integrated financial world. The new reality is one of managed, often contested, interdependence, demanding a far more nuanced and politically astute approach to navigating the world of capital. And that, one ventures, is a challenge that will define the coming decade far more profoundly than any single directive or market index.
As always, thank you for reading.
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