Close, but not confirmed

A recent client report from the law firm SJ Berwin noted the British Venture Capital Association's reaction to a consultation paper from the UK's Financial Services Authority. The FSA had issued a second consultation paper on revising laws concerning investment entities back in December 2006, after its initial one in March of that year. If implemented, the suggestions would create an environment conducive for the public listings of private equity funds in the country. But there are still issues to be resolved, according to the BVCA.

The current regulatory stance towards publicly listed investment entities prohibits them from controlling the underlying portfolio companies. The rationale for the law is that trading companies would use the regime for investment entities to dodge the rule demanding a mandatory three year track record before listing.

In response to FSA's initial consultation, the BVCA argued that private equity firms can clearly differentiate themselves from such trading companies in a rush to list. The BVCA explained that portfolio companies remain distinct entities under the ownership of the firm, without such things as a common treasury function among them. The FSA must have been persuaded, as the follow-up paper recommended that the prohibition towards holding majority stakes in underlying companies be dropped.

If the FSA's recommendation is implemented, it could pave the way for private equity firms to list as investment entities, to which the BVCA applauded the move in their response to the second paper. However, the FSA's sequel maintains that the board of directors of portfolio companies must be independent of the investment manager. With so many firms exerting control through board seats, the rule clearly interferes with common industry practice. The BVCA's initial argument was that disclosure of the board's composition and the appointment of some independent directors should provide adequate investor protection.

While the FSA maintains that the rule concerning the independence of directors should remain, the UK financial services regulator also admitted revisiting the concept of a ?directive minimum regime.? The approach applies only to overseas entities, but merely requires meeting the minimum obligations under EU law, not the full breadth of UK listing regulations. Non-UK entities listing under this regime would be allowed to have directors from the investment managers on the board. In a reversal from its initial paper, the FSA now recommends maintaining this regime for non-UK companies.

The BVCA has applauded the effort to balance investors' concerns with the UK's competitive standing among the world's markets, but is also paying attention to how these proposals may change on their way to becoming law.