14 October 2016

Venturing further

Venture capital is widely regarded as a catalyst for innovation, investment and economic growth – and, for decades, informed people have argued that Europe needs more of it.

First, the good news. According to Invest Europe figures, 2015 saw an 8% increase in European venture capital fundraising, taking it to its highest level since 2008. No doubt that was, in part, because some early stage and high-growth businesses are clearly booming: the UK’s fast-growing FinTech sector, for example, has benefitted from substantial VC investment and is attracting capital from European and international investors, while GP Bullhound reports that in 2016 Europe (so far) has 47 unicorns – billion-dollar tech companies – which is seven more than last year.

But it is also clear that Europe punches below its weight. European venture capital funding markets continue to lag behind the US, despite similarly sized economies and even after many national and EU-wide attempts to boost them. The European Commission estimated that, if European venture capital markets were as deep as in the US, as much as €90 billion would have been available to finance companies between 2009 and 2014. So what is the Commission doing about it?

One helpful initiative was the (voluntary) European venture capital funds regime (EuVECA), which provides a more proportionate regulatory burden than the AIFMD for smaller scale venture capital fund managers, in return for an EU marketing passport. However, as we reported in November, initial take up was slow, in part due to overly tight eligibility restrictions. While the number of EuVECA registered funds has since more than doubled (to 70 as at 14 July 2016), there is certainly room for improvement.

The Commission recognises this, and its July proposal to amend the EuVECA seeks to extend eligibility to a wider range of fund managers, liberalise criteria for “qualifying investments”, and to make the registration requirements easier and cheaper. An important part of the liberalisation will be to allow investment in unlisted companies with fewer than 500 employees, as well as SMEs listed on growth markets, and to exclude follow-on investments from the investee company qualifying thresholds, allowing EuVECA funds to keep investing in successful, growing companies. It will extend eligibility to managers with more than €500 million under management, and streamline registration requirements to avoid duplication across Member States. Importantly, it will also explicitly prohibit fees charged by competent authorities for cross-border marketing – something that is arguably illegal under the existing rules, but which is widely practiced.

The changes are not yet a done deal, requiring approval from both the Council of Ministers and the Parliament. However, the Council is working on getting agreement quickly and – while the Parliament may take longer, with a first discussion expected in December – it is hoped that these sensible changes will not be controversial, especially as they are a key part of the broader Capital Markets Union initiative which President Juncker has confirmed as a priority. One sticking point might be a (helpful) proposal from the Commission to lay down harmonised minimum capital requirements for EuVECA managers, to address ‘goldplating’ in certain EU Member States, which will likely require a formula to be set out in the actual text.  It will be important that this formula remains proportionate to the risk posed by the failure of a fund manager (which is low).

There may be even better news ahead: the Commission’s public consultation on cross-border distribution of funds, for which the public response deadline was last week, aims (among other things) to improve the passporting regime for smaller funds and to promote best practice for tax treatment across Member States.

However, one conspicuous absence from the EuVECA regime, and any current proposals to improve it, is market access for third country managers: the regime is strictly for EU managers only. Given there are around 25 UK EuVECA managers, its loss will be felt when the UK leaves the EU – unless the British negotiators are able to secure continued access. That would seem to be in the interests of continental European investors, who will not want to lose access to UK venture funds. Unfortunately, whether such an agreement is reached will, of course, depend more on politics than economics.

Data Central

Have you checked out our new Data Hub? Data Central contains a range of resources to help our clients minimise the legal, regulatory and commercial risks this data-driven environment presents and ensure that its full value is being realised.

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    King & Wood Mallesons Funds team analyses the impact that Covid-19 pandemic will have in the private equity sector in Spain over the next few months

    27 July 2020

    Some inefficiencies requiring correction have become clear in the European private equity sector, several of which are based on a lack of consistency in application of the regulations by each Member...

    25 July 2017

    The EIF has become invaluable for many venture and smaller buyout funds; a number of which may not have been raised without the EIF's cornerstone investment and subsequent support

    11 November 2016

    Under AIFMD, marketing a private equity or venture capital fund in the EU has either got somewhat easier, or considerably harder – depending on access to a marketing passport.

    04 November 2016

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.