EVCA makes final warning before directive meeting

The European Private Equity and Venture Capital Association has released a study showing that investors would pull back from venture and growth capital if proposed EU financial regulations are passed, a day before a meeting of finance ministers that may clear the way for a final vote.

Just one day before a crucial meeting of European finance ministers to hash out final details of the Directive on Alternative Investment Fund Managers, groups like the European Private Equity and Venture Capital Association (EVCA) are making a final push to point out the potential negative impact of the proposed regulations.

The EVCA has released a study just ahead of the 16 March meeting which shows that 67 percent of institutional investors surveyed said they would reduce or completely halt their allocations to European growth or venture funds if the current version of the directive passes. The EVCA surveyed 28 investors with a total of €560 billion under management, and who have committed $14 billion to the industry in recent years.

Eighty-five percent of respondents took particular exception to the “third country” rules, which would prohibit foreign fund managers from marketing within the EU unless they can demonstrate that they are subject to a regulatory regime of equivalent rigor in their home country. The EVCA last week said at its Investor Forum in Geneva that it supports keeping country-by-country private placement rules in effect until Europe's major trading partners, including the US and China, can attain equivalent status.

Members of the EU Economic and Financial Affairs Council will meet 16 March to agree on a final piece of legislation that would then be sent to the European Parliament for a vote. Among the aspects that are still being debated include an assets-under-management threshold, with current EU president Spain proposing a possible exemption to the directive for managers with less than €100 million in assets.

The UK, which has lead the opposition among EU member states against the directive, supports such an exemption, as well as proposals to allow variety of institutions to be eligible to act as depositories rather than just credit institutions and authorised investment firms, as mandated in the current draft.

France, Germany, Italy and Luxembourg are reportedly pushing for the directive to pass with stricter rules regarding asset thresholds and depositories, while the UK – which is home to more than 40,000 workers employed by the private equity industry – is joined by Sweden, Finland, Ireland and the Czech Republic in seeking to water down the proposals.

While France and Germany are in favour of making the directive apply to all investment managers that want to market in the EU, UK officials including Chancellor of the Exchequer Alistair Darling have warned that such measures are protectionist and would hurt the EU’s economic competiveness by imposing barriers to investment. They have also brought up the possibility of other governments retaliating by restricting access for European managers, pointing to a recent letter from US Treasury Secretary Timothy Geithner to the European Internal Market Commissioner in which Geithner expressed concerns that US firms would be discriminated against by the directive.