Venture capitalists: Funds regulation will ‘destroy’ innovation


Two thirds of European venture capitalists would radically reduce their investments if new EU rules on private equity come into force, according to a survey released today (15 March) ahead of a meeting of EU finance ministers in Brussels.

The European Private Equity and Venture Capital Association (EVCA) says new rules limiting the activity of hedge funds and investment firms run counter to the Europe 2020 growth strategy, which specifically lists venture capital as a key driver of innovation.

The Alternative Investment Fund Managers Directive (AIFMD) has come under fire from investment funds and the UK press amid fears it could damage the London-based financial sector (EURACTIV 08/02/10).

The results of an EVCA survey of the world's "most active institutional investors in venture and growth capital funds" found that 67% would either withdraw from venture and growth investment completely or reduce their allocations by over 30% if the directive is implemented in its current form.

If the directive does not come into force, 52% of respondents anticipated investing at the same level and nearly 8% expected to increase their allocation.

The survey comes on the day French MEP Jean-Paul Gauzès is due to address the European Parliament's economic and monetary affairs committee on the directive, ahead of a vote scheduled for 12 April.

The investment community is also stepping up the pressure on EU finance ministers who meet in Brussels tomorrow (16 March) and are expected to discuss the AIFMD.

The venture capitalist group is pushing for changes to "third country provisions" in the directive which it says could prevent EU-based investors from investing outside Europe. Its survey showed that 85% of respondents found the third country clause "unacceptable".

Javier Echarri, EVCA secretary-general, said the EU's new 2020 strategy for growth and jobs makes "an efficient European venture capital market" a priority, but said this is impossible without investors to support innovation.

"The AIFM directive, in its current form, is contrary to wider EU policy directives and could significantly counter their effect," said Echarri.

Meanwhile Open Europe, a London-based eurosceptic think-tank, is warning that the directive could threaten over €9 billion in tax revenue.

The group wants finance ministers to introduce "substantial amendments" when they meet in Brussels tomorrow.

Open Europe Director Mats Persson said ministers and MEPs "have come a long way" since the original proposal was tabled but he warned against introducing protectionist measures like the "third country" clause.

The European Commission has proposed a new set of rules for hedge funds and private equity firms requiring mandatory registration and disclosure of their activities to regulators, while at the same time easing their access to European markets in the long term.

The main regulatory component of the proposed legislation is an obligation for EU-based managers of so-called 'alternative investment funds' to register and disclose their activities, in order to improve supervision and avoid systemic risks.

The obligations are not applied to the funds themselves, but only to their managers, who are considered responsible for key decisions.

However, critics said that the exemption of funds from the proposed new regulation would leave hedge funds and private equity free to develop their investment policies, despite the fact that their risk-prone attitudes were strongly criticised during the financial crisis.

  • 12 April: Parliament's economic and monetary affairs committee to vote on AIFMD.
  • July: MEPs to cast their vote on AIFMD.

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