European Private Equity and Venture Capital Industry: Response to Proposed EU Directive on Alternative Investment Fund Managers

Brussels - Commenting on the EU Proposal for an alternative asset managers directive, Jonathan Russell said on behalf of the European private equity and venture capital industry:

“While we welcome the Commission’s distinction between hedge funds and private equity, we are deeply concerned that the thresholds set out today punish middle market companies, which lie at the heart of corporate Europe. We estimate that around 5,000 portfolio companies will have to comply with costly and unwarranted disclosure rules that go beyond even those required by publicly-listed companies.

“As investors in a large number of companies, of all sizes and in all sectors across Europe, the venture capital and private equity industry is supportive of measures that would address shortcomings in the financial system, manage systemic risk and improve the environment for European businesses.

“But none of the major reports into financial regulatory reform, including De Larosière and the G20, have identified private equity as posing a systemic risk. There is no clear rationale why middle market companies and their long-term backers will be made to suffer under proposals prompted by the failure of investment banks and designed for short term trading funds.

“These proposals merely heap unwarranted costs on value-creating parts of the economy at a time when these businesses are dealing with the effects of a severe economic downturn. They also impose rules on private-equity backed companies which will not be equally applied to their competitors owned by private investors falling outside the Directive.

“At a time of severe capital scarcity, any moves to hamper European businesses’ access to finance would be extremely misplaced. The Commission’s proposals hit the wrong people, at the wrong time, in the wrong way. We are eager to see the situation remedied during the legislative process, through the member states and the members of the European Parliament.”

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Notes to editors
Assessment of the rules was based on fundamental principles of good regulation: fairness, proportionality and appropriateness.

Application to private equity and venture capital
• The proposals include rules on valuation, custody, delegation, risk, liquidity and capital reserve requirements. These issues have no relevance to the private equity and venture capital industry whatsoever, and will only have the effect of increasing the cost of investment for end-investors.
• The proposals appear to be extensions of a regulatory response prompted by the failure of investment banks and designed for large hedge funds. Applying rules intended for funds with short term trading strategies onto those that invest in and support businesses over the long term is indiscriminate in the extreme.

Proportionality
• The thresholds proposed, of €500m in assets under management for private equity funds, unfairly and unnecessarily impose great cost burdens upon companies for which there have been no calls for such unwarranted disclosure. Disclosure requirements in most cases exceed those obligations placed on public companies. Any threshold must be aligned with a properly articulated policy intention, based on the systemic risk posed.

Competition issues
• The proposals are anti-competitive, because they single out venture capital and private equity, one of many forms of private ownership and certainly not the largest, for a regulatory treatment from which individual investors, family trusts, charitable foundations, worker co-operatives, public companies, and sovereign investment funds are excluded.

• The proposals sidestep the widely-accepted principle that regulation should be based on the substance of activities undertaken and the risks this might impose.

Brussels Task Force
Jonathan Russell is chairman of a task force mandated by the European private equity and venture capital industry to asses this proposal.

Other members of the Task Force are:
• Anne Holm Rannaleet, IK Investment Partners
• Douwe Cosijn, 3i
• Dörte Hoppner, BVK
• Pierre de Fouquet, AFIC
• Nickholas Reinhart, Fleishman Hillard
• Javier Echarri, EVCA
• Simon Walker, BVCA
• Uli Fricke, Triangle Venture Capital
• Vincenzo Morelli, TPG Capital

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