EU investment funds directive ‘will hurt SMEs’

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New rules designed to improve the transparency of investment funds could make venture capital less attractive to small businesses by forcing them to publish commercially sensitive information, according to venture capitalists.

The EU has set up an SME finance forum to tackle the ongoing funding crisis facing small businesses but Uli Fricke, chair of the European Venture Capital Association (EVCA), says a clause in the Alternative Investment Fund Managers Directive (AIFMD) will undermine efforts to support fast-growing firms.

Fricke said companies with 50 employees will have to meet additional disclosure criteria if they accept venture capital, forcing them to share details of research investments and business strategies.

"The disclosure rules for venture-backed companies – many of whom are SMEs – put them at a commercial disadvantage compared to competitors who have other sources of funding," she said.

Venture capitalists are accusing the European Commission of "trying to change company law by the back door". "We don't oppose change if it is necessary but it we need a level playing field," said Fricke.

Fricke addressed the SME Finance Forum in Brussels yesterday (6 May), hosted by Industry Commissioner Antonio Tajani. She said venture capitalists appreciate the support the EU provides, particularly through the European Investment Fund, but said the AIFMD will be bad for small firms unless it is revised.

Asked whether this was a concern, Commissioner Tajani said venture capital is important for high-growth companies but he did not say whether the current wording of the draft directive could be changed.

In a memo published yesterday, the Commission said 2009 was a difficult year for the venture capital industry and investment in early-stage innovation has been hit hardest. "The immediate outlook for venture capital activity in Europe remains bleak," said officials.

Tackling finance bottlenecks

Addressing the SME Finance Forum, Tajani said improving access to finance is a top priority as part of his efforts to support SMEs during the crisis.

The Commission said a more efficient venture capital market is needed to kick-start "smart growth" in innovative firms with high growth potential.

Making it easier to list medium-sized firms on the stock market will be part of an action plan designed to tackle bottlenecks in investment.

In a statement, the Commission also said it would review the application of several securities market directives imposing obligations on issuers – including existing directives on transparency obligations and market abuse – to ensure they comply with the 'Think Small First' principle enshrined in the Small Business Act.

Innovation deficit

Meanwhile, Innovation Commissioner Máire Geoghegan-Quinn said Europe was facing an "innovative deficit" and needed to do more to turn science into new technologies, products and services.

"We have excellent schools and fine labs and facilities, and while our scientists publish a lot, European companies did not create Google, Twitter or Facebook, nor the iPhone or iTunes. These are some of the truly game-changing ways in which new technologies have been applied. In other words, we are failing to fully capitalise on our research and science," she said.

Addressing the European Research Area's board, Geoghegan-Quinn said financing for early and mid-stage technology is too scarce and patent costs in Europe are too high, particularly when compared with the United States.

Access to finance has been a major challenge for small business since the outbreak of the economic crisis and, despite the efforts of the EU and member states, the credit crunch lingers on (EURACTIV 27/03/10).

Around 18% of loan applications from SMEs have been rejected this year and the April 2010 bank lending survey by the European Central Bank (ECB) shows that credit standards are still tight.

Demand for loans has also fallen by 13% compared to the final quarter of 2009.

The ECB survey shows differences in the ease with which companies can raise funds, depending on where they are and which sector they operate in. SMEs in the services and construction industries are particularly hard hit, while Spanish firms are in a worse situation than Germany, France and Italy.

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