Travers Smith's Alternative Insights: Fixing the European plumbing

A regular briefing for the alternative asset management industry.

Political consensus may be rare at the moment, but there is one thing that most European politicians can agree on: Europe needs to reform its regulations to focus on investment and growth – and find ways to cajole its regulators to do the same. Indeed, this week the UK issued an Action Plan, which included a series of pledges from regulators.

Of course, there are disagreements about the scope and scale of reform, but the direction of travel is pretty clear. Changes to environmental and planning regulation in the UK, and deregulation of sustainability disclosure rules in the EU, are just a few topical examples.

But, as Huw van Steenis pointed out last month, if Europe wants investment, it must also fix its financial plumbing. As a critical part of the infrastructure, securitisation rules are long overdue for reform.

Fortunately, an overhaul is on the horizon in the EU. If handled properly, it could have a significant impact on Europe's ability to attract investment, with knock-on benefits for alternative asset managers.

Securitisation is a financing technique that involves converting receivables – including corporate loans and mortgages – into marketable securities. The receivables are pooled, and investors are issued with bonds or other securities backed by the cashflow they generate.

As is well known, certain types of securitisation were misused in the subprime lending market in the United States and played a significant role in the build-up of systemic risk. European securitisations, on the other hand, performed very well, showing very low rates of default over a very long period – including during the crisis.

It is perhaps not surprising that regulators – in Europe and the US – tightened up the rules significantly as part of their post-crisis regulatory drive; however, the way that was done in Europe has significantly reduced the attraction of securitisation ever since.

In the US, $1.5 trillion of securitised debt was issued in 2024, a significant increase on pre-crisis levels. The European market lags a long way behind. As industry body AFME has been pointing out for several years, Europe's market is still significantly smaller that was in 2008. The Alternative Credit Council (ACC) has argued that the low growth of the European securitisation market since the financial crisis is "due to the disproportionate, unwarranted and punitive regulatory framework imposed on the market in its aftermath".

Changes to the rules would certainly chime with the EU's aspirations. For years, the European Commission has worked to develop a "capital markets union", or at least to improve the real economy's access to non-bank capital pools – an ambition which has so far proved elusive. Some estimates suggest that securitisation reform could unlock €1 trillion for investment in the real economy.

Alternative asset managers will be among the significant beneficiaries if the market is liberalised.

Most obviously, private credit funds will benefit. AFME reports that €213bn of securitisation debt was issued in 2023, while S&P Global figures suggest that one-tenth of the $5 trillion of consumer debt in the United States is currently securitised. Although specific volumes are hard to estimate, alternative asset managers play an important and growing role as lenders in these markets.

        
Calibrating the regulation in an appropriate way is therefore crucial, and several reports – including last year's influential Draghi report – have highlighted the benefits of removing regulatory hurdles.

Relatedly, credit funds have historically been active as issuers under collateralised loan obligations (CLO) structures. These are products which pool and securitise corporate and leveraged finance loans to buyout funds and others.

For credit funds, securitisation is therefore not only an investment opportunity, but also a tool to leverage their credit assets.

Other private funds, especially buyout funds, will also benefit from liberalisation. Securitisation affects the terms on which credit funds can raise finance – and therefore the terms on which they lend to portfolio companies and private equity acquirers.

Calibrating the regulation in an appropriate way is therefore crucial, and several reports – including last year's influential Draghi report – have highlighted the benefits of removing regulatory hurdles.

The UK has already taken some limited steps to adjust the rulebook that it inherited from the EU in a series of reforms that became effective at the end of last year.

More fundamentally, the European Commission launched a consultation on the Securitisation Regulation in October 2024 – to which industry associations such as the Alternative Investment Management Association (AIMA), the ACC and AFME have now responded.

A few common themes flow through the industry responses. First, the definition of what constitutes a securitisation within the regulatory perimeter is unpredictable and overly wide – and could benefit from a list of carve-ins and carve-outs (in line with the US regime). Detailed reporting requirements for asset issuers should be reduced, as they add little incremental value to investors but impose significant compliance costs. Crucially, capital charges for securitisation positions should be lowered for insurers and banks. Asset managers who qualify as AIFMs should be allowed to act as sponsors for securitisations, enabling them to manage these structures directly without needing to partner with banks.

The requirement for EU asset managers to comply with due diligence requirements when investing in non-EU securitisations should also be revisited, as adapting these rules to a more flexible, principles-based approach would facilitate freer capital flows into offshore investments. The UK's own reforms adopt an approach along these lines, recognising that UK AIFMs should not be required to ensure line-by-line compliance by US and other foreign issuers with the detailed asset-level reporting templates set out in the UK regulations.

The first stage of the EU consultation has now closed, and it remains to be seen whether the European Commission will adopt these suggestions. The AIMA and ACC and AFME responses are characteristically constructive, but there is a concern that the result will be more limited reforms than the industry is calling for. Many would see that as a missed opportunity.