New laws and regulations emanating from Brussels over the past few years have had mixed effects on the private equity and venture capital industry, writes law firm King & Wood Mallesons in its latest Private Equity Comment.
The Alternative Investment Fund Managers Directive (AIFMD) has increased regulatory compliance costs but made marketing throughout the EU easier for authorised managers. And the recent announcements on European Long Term Investment Funds (ELTIFs) could open up a new pool of capital. So what should we make of the European Commission’s latest initiative – the creation of a Capital Markets Union (CMU)? Will this benefit fund managers, or add further legal and compliance headaches?
The new European Commission President has extensively trailed his plan for a “capital markets union” in recent months, but until now there was little indication as to its content. Last week’s Green Paper puts some flesh on the bones, and marks the beginning of a broad consultation on an ambitious set of measures. In principle, the aims of the initiative – the removal of barriers to accessing investments across member states, unlocking sources of capital for companies, in particular small and medium sized enterprises (SMEs), and reducing the reliance on bank financing – could clearly benefit fund managers and their portfolio companies, so long as the Commission’s noble intentions do not get undermined as the proposals develop.
Most significantly for the private equity and venture capital industry, the Commission Green Paper (and the Commissioner’s launch of it this week to the Parliament), refers to the important role that the industry plays in the European economy and asks how it can be developed further as an alternative source of finance. Positive statements about venture capital have been made before, but it is welcome that private equity is mentioned in a positive light as well. It also discusses how to improve access to alternative finance for SMEs and recognises that securitisation can play an important part in freeing up capital for banks to lend. And while recognising that risky sub-prime securitisations are a thing of the past, the Commission acknowledges that high quality, transparent securitisations could create around €20 billion of additional funding.
For venture capital funds, the EuVECA regime offers a marketing passport for smaller fund managers without the regulatory rigours of the AIFMD, but the qualification criteria are restrictive. The paper acknowledges that changes may increase the number of managers in this space and presents an opportunity to remove some flaws in the current regime. The lack of exit opportunities is also acknowledged as an issue which may restrict investment in venture companies, especially start-ups, and views on any measures to address this should be put forward. As part of the CMU project, the Prospectus Directive will be reviewed to try to streamline the process and simplify information requirements, which may help to reduce the costs of listing and make IPOs more attractive as an exit strategy.
A common theme of the paper is boosting long term investment and the new ELTIF regime might play a part in that. Not only could it increase investment in SMEs but might also allow retail investors access to long-term illiquid investments. Following beneficial changes for fund managers in the final ELTIF paper published late last year, the Commission is keen to maximise the take up of ELTIFs and invites views on how they can be supported.
And while a true single market for capital may be some way off, the Commission makes it clear in the paper that small changes to current policies can, when aggregated, make a big change in freeing up the flow of finance. There may also be further work required on other legislation that is not so beneficial to the private equity and venture capital industry, but coupled with the Commission’s positive statements about the industry, this three-month consultation presents a real opportunity for industry participants to engage on a number of issues and take an active role in the future of several important initiatives.