New private equity rules risk future funding for European companies, warns Invest Europe

Commission’s cross-border investment initiative well-intentioned but flawed.

Changes to regulation, proposed today by the European Commission, could limit future funding prospects for one in four companies seeking private equity investment, says Invest Europe.

Part of the Commission’s Capital Markets Union action plan, the initiative is intended to improve cross-border capital investment flow in the European Union. However, today’s announced plans to amend the private equity and venture capital laws would, conversely, make it harder for fund managers to raise cross-border capital from EU investors, warns the trade association:

“The Commission’s latest proposal goes against its good intentions for a Capital Markets Union that improves cross-border capital flows,” said Michael Collins, Invest Europe CEO. “Instead, the regulatory changes could hinder private equity managers’ fundraising activities and the €50 billion of annual investment capital that they deliver. This would be unwelcome for the large and small businesses across Europe that depend on this funding to grow.”

More than 30,000 European companies are currently supported by private equity investment — 80% of which are small and medium-sized enterprises (SMEs) — employing around eight million people, according to Invest Europe data. The statistics indicate that 28% of private equity fundraising is conducted cross-border within Europe every year.

Following a recent impact assessment and consultation, the European Commission found a lack of regulatory and supervisory convergence was responsible for limiting cross-border investments in the European Union. This includes divergent national requirements on the use of the marketing passports under the Alternative Investment Fund Managers Directive (AIFMD) and European Venture Capital Fund (EuVECA) Regulation, which allow fund managers to market to investors across the EU.

“While we appreciate the Commission’s intentions to improve the marketing passports, its proposed amendments preventing fund managers from sharing draft marketing materials with investors would impede their ability to negotiate a deal,” continued Collins. “These documents are an important part of the ongoing dialogue between fund managers and investors, including pension funds and insurers. Any legislative revisions need to take into account the way private equity operates.”

These targeted revisions come ahead of a full-scale review of the AIFMD. The private equity firms covered by the directive represent 70% of the asset class’s total annual investment amount and around 25% by number of companies the funds invest in. Last week, separate revisions to EuVECA entered into force as part of the Capital Markets Union plan.