26 May 2017
Two years on, the Capital Markets Union has been good news for private equity, but there are more barriers to break down.
Much has changed since the inception of the European Commission’s plan for a Capital Markets Union (CMU) in early 2015. Some critics may argue that political shifts in Europe could knock the project off course, but its ambitions to improve access to diverse sources of funding for businesses, to increase opportunities for savers and investors, and to remove barriers to the cross-border flow of capital in Europe are just as important for Private Equity (PE) and Venture Capital (VC) today as they were two years ago.
The Commission is currently working on a mid-term review of the CMU project, to be published in early June. As part of this important step in assessing the project’s effectiveness, it has invited the financial services industry and all stakeholders to give feedback on how the current CMU programme can be updated and completed, its progress so far and discuss next steps
While some other sectors may not share our view, at Invest Europe we believe there have been concrete initiatives proposed by European policymakers that hopefully will improve investor access to PE, VC and infrastructure investments, and ultimately result in tangible benefits for businesses and the whole economy.
Innovation was a key theme of the 33-step CMU action plan announced in September 2015 and venture capital is an important means for making it happen. Since then, the European Commission has proposed changes to make the European Venture Capital Fund Regulation (EuVECA) more attractive and accessible to a larger set of fund managers. It has also announced the creation of a pan-European VC fund of funds programme, backed by €400 million of new investment from EU and EIF funds. And later this year it will report back on its study into tax incentives for VC to identify best market practice.
Why do these measures matter? They could open up our increasingly successful VC universe to more investors in Europe – and potentially globally – and could help to scale up the European VC industry. The VC fund of funds initiative is expected to attract attract over €3 billion of fresh institutional investor capital into the industry. This will help fund more companies to follow in the footsteps of the many VC-backed European start-up success stories, including Swedish music service Spotify, the UK’s travel comparison site Skyscanner, Germany’s online sales platform Auto 1 Group and Finland’s gaming pioneers Rovio, King and SuperCell.
There are also proposed changes to the Prospectus Directive which would help smaller companies list on stock exchanges by reducing the amount of paperwork required. Another positive move, one of the first initiatives of the CMU project, has been the calibration of infrastructure projects under Solvency II Directive that sets out prudential rules for European insurers. This is reducing the risk weighting to 30% to facilitate more investment into essential infrastructure projects such as power supplies, transport and telecommunications on which European businesses and citizens rely.
Of course, we would like to see the CMU’s actions go further. The risk classification of infrastructure corporates managing existing infrastructure such as toll roads or telecoms towers should be brought in line with that of new projects. Equally, the capital charge for private equity should be reduced from 39% - (or in some cases even 49%), as evidence shows that these investments are lower risk for insurers and that the weighting should be in the range of 20% - 35%.
Barriers still exist to cross-border fundraising and flow of capital and these need to be removed. European investors need to have access to the best investment opportunities, not only across Europe but also globally, and equally European fund managers need such access to raise capital to put it to work through investments in companies located in different EU Member Sates.
The existing passporting framework prevents many fund managers, including managers based outside Europe, to market their funds in some European countries. This is because some of them may not qualify for the EuVECA label and may be too small to bear the regulatory burden of the Alternative Investment Fund Managers Directive (AIFMD). Therefore, a workable passporting regime, with proportionate regulatory obligations, alongside well-functioning national private placement regimes, is necessary to permit investors to access these funds and maximise the capital available to invest in Europe’s most promising small and medium-sized enterprises (SMEs).
And while financing to SMEs and start-ups is important European policymakers should also look at companies that seek capital to facilitate their growth and scale up their businesses and ensure appropriate market conditions for fund managers that can provide funding for these companies. It is not only SMEs and start-ups that require capital. Access to different sources of funding is relevant to companies at all stages of development.
This is why the CMU commitment to improve access to diverse sources of funding and breaking down cross-border barriers is crucial and must continue. It only becomes more important when factoring in the current and potential political shifts we’re seeing.
With another two years until the end of the current Commission and European Parliament terms we are encouraged by the progress of the CMU and look forward to more positive advancements to come.
First published in Private Equity International.
Anna Lekson, Head of Public Affairs, Invest Europe
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