Releasing the potential of a Capital Markets UnionBy Dörte Höppner on 18 February 2015
The drive towards a Capital Markets Union got well and truly under way with today’s publication of the European Commission’s Green Paper, which identifies private equity and venture capital as playing a key role in the Europe’s economy.
The publication of the paper is an important moment in itself. It comes just three months into the leadership of the new European executive and outlines Financial Services Commissioner Jonathan Hill’s vision for more effective capital markets across the continent. It also reinforces the prevailing mood in European politics that more must be done to encourage economic growth by getting capital into businesses that have been struggling to access both loans and equity investment.
The Green Paper explicitly names private equity and venture capital as an important source of direct financing. Indeed, between 2007 and 2013, European private equity and venture capital invested €307bn in 25,000 companies, employing more than 8 million people.
To unlock more of this essential financing, the EU should aim to free up the enormous pool of capital sitting with institutional investors, enabling it to flow across borders to companies that desperately need it. This means having a prudential capital regime for insurers, pension funds and banks that encourages them to invest in long term assets. Yet, there are several pieces of key financial legislation that may have quite a chilling effect.
As part of the drive to create a single market, it is essential that Solvency II for insurers, the IORPD proposal for pension funds and CRD IV for banks, make a proper assessment of the capital requirements for investing in private equity and venture capital, based on independent academic research with a rigorous evidence-base.
Investors need to be given the freedom to access the best investment opportunities, wherever they are in the world. Thus an AIFMD marketing passport regime that gives long-term investors easy access to the best fund managers, whether in Europe or beyond, is a must.
We must also remove barriers created by national governments that discourage EU fund managers from raising funds in other Member States; otherwise we are keeping capital ‘locked’ behind national borders.
Funds are an excellent way to channel investment from institutional investors to companies but we need a legal regime that encourages funds to operate. It’s therefore legitimate to ask whether AIFMD, for example, due for review in 2017, got the balance right when imposing new requirements that were designed to protect institutional investors but which inevitably lead to higher costs and lower returns.
There is no shortage of capital and no absence of investors looking to find a productive way to invest. Our challenge is to connect those investors with the companies that need backing. Private equity is one such connection. It is encouraging that the Commission recognises this role in its discussion document.
Invest Europe strongly welcomes this initiative and stands ready to work with the Commission and other participants in the capital markets to ensure that Europe leads the world in providing businesses of all sizes access to finance from a diverse range of sources.
20 March 2015
thank you for all the good work !