EuVECA getting ripe
The employment of the EuVECA regulatory framework has not reached the wide use across Europe as intended. How is the outlook for the Venture Capital in Europe?
Introducing the AIFMD directive, European legislators recognised the need to protect venture capital from certain AIFMD rules deemed too burdensome for the sector, such as high capital requirements and the obligation to appoint a depositary. At the same time therefore, July 2013, EuVECA entered into force. To qualify, EuVECA managers must demonstrate that at least 70% of committed capital is invested in small and medium-sized enterprises (SME).
The EuVECA regulation did not take off as intended in Europe. While, undoubtedly, there is a great need for venture capital funding in Europe, relatively few EuVECAs were established. Seeing this, in June 2016 the EU-Commission initiated an impact assessment of the reasons why. The main findings ended up in a number of proposals for amendments:
- widen the range of managers eligible to set up and manage EuVECA funds to include those managers with assets under management of more than €500 million (firms which are already subject to the full AIFMD regulation),
- widen the range of firms that EuVECA can invest in to include unlisted companies with up to 499 employees (up from 250),
- decreases the costs by explicitly prohibiting fees imposed by competent authorities of host Member States where no supervisory activity is performed.
- simplifies the registration process and determine the minimum capital necessary to become a manager, and
- give the European Securities and Markets Authority (ESMA) an oversight role to ensure that the funds are consistently registered and supervised.
Increased EU allocations to venture capital funding
EU venture capital funds were by 2016 half the size (average ≈ €60 million) of the ones operating in the US. This limited their ability to make larger investments and also to maintain ownership positions through subsequent phases of development. Finally, European VC funds still faced many trans-national barriers.
November 22, 2016, the EU-Commission, in cooperation with the European Investment Bank (EIB), launched the Pan-European venture capital fund-of-funds initiative named “Start-up and Scale-up”. Under the Programme, EIF committed to provide 25% of total commitments to selected fund-of-funds. The maximum size of the commitment to each fund was EUR 300 mill.
The Swedish government quickly took this opportunity and announced via Tillväxtverket the Swedish Venture Initiative (SVI). Venture capital manager teams were invited to compete for anchor investments from EIF. 3-4 new Swedish venture funds have been established based on this initiative with EIF as a cornerstone investor.
Recent funding initiative from EU – “VentureEU”
EU has noticed that the most successful venture companies are often picked up by the larger available US venture funding entities. Europe has been lagging behind the US, but also China, in terms of start-up companies achieving unicorn status, a market cap exceeding $1bn. The US and China had 109 and 59 companies respectively worth over $1bn at the end of 2017. Europe, meanwhile, had only 26.
EUs ambition is that more of these successful companies shall remain with a stronger European ownership and have introduced, through EIF, separate funding initiatives aimed to promote the establishment of large venture funds that can manage such development.
VentureEU , the European Commission’s new funding programme launched on April 10, 2018, looks to close the gap between Europe and other leading global markets in the fostering of start-ups.
The programme is developed in partnership with the EIF and looks to boost the number of start-ups that has survived the start-up stages, grown successfully, but which need additional and larger funding for further development.
With €410m from the EU, the programme aims to generate €2.1bn in public and private investment for the benefit of six participating funds. This is meant to translate into a projected €6.5bn of investment across approximately 1,500 start-up companies throughout the EU-bloc. The six funds set to receive capital are based in the UK, Spain, Liechtenstein and Switzerland.
In Sweden and most EU countries, EuVECA was introduced at the same time as AIFMD, in July 2013. The Venture industry is presently blooming in Sweden and a lot of new ventures are being funded via the Swedish venture funds.
The Swedish government was quick in facilitating new venture funds via the SVI-initiative. Saminvest is frequently supporting new venture fund initiatives.
In Norway, the EuVECA regulation (as well as the EuSEF, ELTIF and MMF) is still in May 2018 pending implementation.
The Norwegian venture fund managers have mainly organised their venture fund initiatives as registered AIFs, allowing only Norwegian professional investors.
Permian still does not find the incorporation of EuVECA into Norwegian legislation as a draft recommendation from Finanskomiteen to the Parliament for the spring session 2018. May we hope for an incorporation of EuVECA in Norway during autumn 2018?
Permian has operational experience with EuVECA
Permian is gaining operational experience with the venture industry throughout Scandinavia, and specifically via working with EuVECA funds in Sweden. This brings positive experience to benefit the Norwegian venture fund industry at the time the EuVECA regulation becomes incorporated into the Norwegian legislation.
Stockholm/Oslo, 5 June 2018