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AIFMD


Venture capital strikes it lucky


An amendment to a European Directive could provide a much-needed boost to an ailing venture-capital fund industry – but there’s still a need for clarification, as Brendan Scott discovers


O


N AUGUST 10 2011, two years on from the initial draft of the Alternative Investment Fund Managers Directive


(AIFMD), the European Commission ruled on a consultation looking at whether its intention to regulate the European venture-capital industry may have been inappropriate. The EU body concluded that: “AIFMD does not always appear to be the ideal instrument for the promotion of the cross-border activity of venture capital in the EU.” Seen by some as a knee-jerk reaction of sorts, AIFMD appeared after the banking sector had been bailed out and the dust kicked up by the economic crisis had started to settle. Within it was a crippling list of provisions for alternative investment funds. Distinct asset classes were thrown together, venture capital commensurate with private equity buyouts and, inexplicably, hedge-fund speculators. Together they faced the prospect of strict authorisation, capitalisation, remuneration, depository, management, organisational, leverage, liquidity and marketing requirements. “One of the things we noticed when the directive was drafted was that there seemed to be an effort to try and lump venture capital in with private equity, saying that it posed a systemic risk. We were worried there would be no


38 businesslife.co October/November 2011


differentiation between the two,” says Barry Maloney, a Partner at venture firm Balderton Capital.


Fortunately, venture capital appears to have sidestepped the brunt of AIFMD’s blow. Instead, a light-touch, stand-alone initiative is now on the cards for small funds – venture vehicles with less than €500 million under management. This softer approach is set to include basic reporting obligations, lighter operating conditions and removes protectionist measures for institutional – though not retail – investors. But why the sudden change of heart?


“Venture-capital investing was dropping in Europe after the financial crisis, and you don’t want anything to make that worse. Some schools of thought say venture is the very lifeblood – it’s where business enterprises start,” explains Nigel Strachan, Chairman of the Jersey Funds Association. The numbers bear this out. According to Dow Jones VentureSource, venture firms made 447 investments in European companies in the first half of 2011, a 28 per cent fall on the year before, and an all-time low. In fact, the asset class has been floundering for some time now, and AIFMD was starting to look like the killer blow. “We were hoping that common sense would prevail, but we were all very nervous,” admits Maloney. “When you have that kind of bureaucracy, you don’t


know what the outcome is going to be. Our fear was that the baby would be thrown out with the bath water.”


Best of both worlds


While AIFMD has been denounced by both venture-capital and private-equity communities, there was one part of the text that held promise – the Europe-wide marketing passport. And with fundraising still a struggle, any help is welcome. Small funds can now either avoid regulation altogether or opt in to the new lightweight regime to obtain the much coveted passport. The document will allow venture-fund managers who want to raise and invest throughout the bloc, regardless of where they are domiciled, to do so unimpeded. This single market was the public consultation’s immediate priority. Language and cultural barriers aside, venture-capital funds currently face two hurdles in Europe – a lack of an internal market and double taxation. “An important thing for venture funds is tax neutrality,” says Strachan. “What they don’t want is 27 member states with different tax systems that vary greatly and can be highly complex. For a venture fund to have to cross borders and not achieve tax neutrality will involve an extra cost burden for the funds, and will in turn result in lower returns to investors.” Under the proposed new rules, early-stage investment into Europe





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