EVCA encourages European institutions to adopt CAD III DirectiveÂ…

02 August 2004

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The European Private Equity and Venture Capital Association (EVCA) has welcomed the improvement in the levels of capital European-based banks will have to hold for private equity and venture capital investments compared to the Basel II Accord, as outlined in the European Commission's proposal for the third Capital Adequacy Directive (CAD III), published on 14 July 2004.CAD III is the European Union directive that will implement the recently published Basel II Accord in the EU and is designed to reflect specific European economic objectives. As a result, whereas the Accord requires levels of capital to be set aside for private equity and venture capital investments at between 24% and 32% of a total investment, CAD III capital requirements are set at 13%, up to a maximum of 17% for private equity exposure in a sufficiently diversified portfolio. This means that banks will have to hold E13m to E17m of regulatory capital for each E100m invested in private equity and venture capital, in a sufficiently diversified portfolio, compared to E24-32m under the Basel II Accord.Across Europe, banks play a crucial role as a significant source of funding for the European private equity and venture capital industry, representing nearly E5.5bn or 21.5% of all funds raised in Europe last year alone. Over the last five years, the average amount invested by banks per year is E7.5bn or 25% of all funds raised. In some member states, banks involvement as a source of finance is higher including Spain: 44.7%, Germany: 40.7%, France: 36.5% and the Netherlands: 33.3%.Welcoming the CAD III proposal, EVCA chairman Herman Daems commented: 'The improvement in the levels of capital under CAD III, compared to those in the Basel II Accord, is a significant achievement for the private equity and venture capital industry in Europe. The excessive capital requirements in Basel II would have had a negative impact on the ability of the industry to raise funds from banks and other investors, invest in companies and act as a key driver for European economic growth. EVCA has worked hard to raise awareness of the potential negative effect of Basel II through constructive dialogue with European policy makers. We encourage the European institutions to adopt the CAD III Directive now as a high priority.'