The European Commission’s road map for Capital Markets Union puts venture capital at the centre of its drive to increase economic growth through innovation. It also wants to ease restrictions on insurers and encourage infrastructure investment. It looks like good news for Europe’s private capital providers and companies that need long-term investment.
The Commission’s 31-page action plan released on Wednesday makes the welcome statement that venture capital has a “key part to play in supporting growth”. In doing so it recognises venture capital’s critical role in spotting and developing bright ideas that can become big names and big employers – like music technology companies Spotify and Shazam, or fashion retailer Farfetch.
But the action plan also recognises that Europe’s venture capital funds tend to be small and mainly focused on early start-ups. So the Commission is looking at ways to increase the flow of funds into later-stage companies and small and medium-sized enterprises (SMEs).
This might be achieved through tax incentives, allowing larger fund managers to establish funds under the EU Venture Capital Fund Management Regulation (EuVECA) umbrella, or the creation of pan-European public-private venture capital funds-of-funds – all of which could draw in more investors and increase investment levels.
Underpinning the CMU plan is a drive to stimulate the real economy, and increase employment and wealth, by better connecting investors managing upwards of €12 trillion of capital with companies and projects in need of funding.
The Commission’s plan recognises that many specific measures are needed to make CMU a reality. It acknowledges the role the largest institutional investors, particularly insurance groups, can play in providing funding to sectors like energy, roads and rail. The Commission promises to address current risk weightings within Solvency II that discourage equity investments in infrastructure, and will review the weightings that apply to private equity.
The plan also includes action points to make initial public offerings simpler for small companies, and to remove barriers to cross-border fundraising. The EVCA has been campaigning for – and supports – many of these aims.
Fleshing out the details and hammering out the structure is a long process that will fill Commissioner Hill’s agenda for the next four years.
The EVCA – imminently to become Invest Europe – will continue work to ensure that the views of private equity, venture capital and infrastructure funds, as well as long-term investors like pension funds and insurers, are heard as the vision becomes reality.
For example, any changes to EuVECA must be calibrated in the right way to allow new funds to market effectively to new investors. And any changes to Solvency II risk weightings for infrastructure must recognise that infrastructure funds are just as important a means for investors to access this asset class as direct investments. And the reassessment of risk weights for private equity and venture capital needs to happen as soon as possible so that regulation better reflects the market realities.
Despite the scale of the task in hand, the action points presented in the CMU plan appear achievable and within reach. The Commission has taken an important first step by recognising the importance of innovation and long term investment, and the role private capital can play a wider range of funding options.
For more information, please read our press release Venture capital to play central role in Capital Markets Union.