ECVA and EU discuss policy priorities for private equity growth

EVCA’s White Paper, Policy Priorities for Private Equity, formed the basis of a recent meeting between EVCA’s senior committee members and members of three Directorates General of the EU: Internal Market, Economic Affairs, Enterprise and Information Society. The document encompasses EVCA’s four long term priorities for European venture capital and private equity: to promote an entrepreneurial environment and increase incentives for entrepreneurial investment, to ensure that venture capital, private equity and entrepreneurship are taken into consideration in all policy making, to facilitate fund formation and address structural requirements for efficient investment, and to develop long-term capital sources.

Reflecting the first of these priorities, calling for the promotion of an entrepreneurial environment, the White Paper pressed for the inclusion of entrepreneurship and finance modules in scientific and technical university courses and for private equity investment processes in professional training for the advisory community. It goes on to argue for the easing of legislation, where it exists, prohibiting individuals who have undergone bankruptcy from playing active roles in new company formations, citing the example of the US framework which recognises the ‘right to fail’ as part of the learning process of business. It also calls for EU governments to follow the example of Britain, in reducing capital gains tax on unquoted investment in growth companies and argues for favourable tax treatment of stock options throughout the EU.

With regard to the promotion of entrepreneurship, EVCA’s white paper explains that total private equity venture capital and buyout needs to be considered in policy making as a key mechanism for entrepreneurship. Measures, such as merger regulation, which were not intended for private equity may have inadvertently reached this sector due to the inadequacy of the threshold calculation for private equity deals.

Addressing EVCA’s priorities concerning long term sources of capital, fund formation and structures, the White Paper urges the need for pension funds throughout the region and sets out the case for pension funds being encouraged to invest in private equity funds on the ‘prudent man’ basis deployed in the US and UK. It also reviews the problems caused by non-harmonised fund structures in each national tax regime, often making it impossible for a pan-European investor to actively invest in certain member states. The Paper argues strongly for fiscally transparent and harmonised fund structures, with tax liabilities devolving upon investors rather than on the funds, and the exemption of permanent establishment regulation, where it exists. EVCA has worked closely with the EU in the past few years, particularly on the Commission’s Risk Capital Action Plan and its Financial Services Action Plan, both launched in 1998. Significant progress has been made at EU level and with certain member states, however there still remain important areas where policy work needs to be done. EVCA is also pressing for a definition for Accredited Investor, similar to that deployed in the US, to distinguish for regulatory purposes between the experienced institutional investor in private equity and venture capital situations, and the retail investor.

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