New developments - Private Equity & Venture Capital funds

New developments - PE & VC funds

What is EuVECA?

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New developments - Private Equity & Venture Capital funds

What is EuVECA?

As stated earlier, registered AIFMs cannot avail of the EU marketing and management passport unless they opt in and apply for full authorisation. Opting in allows PE and VC firms to raise money across the EU for their funds and avail of the directive’s “badge/brand of quality”.

But opting in may be challenging for smaller fund managers, both from a logistical and cost point of view, and any decision to opt in should be based on strategic grounds and should not just be viewed simply from a cost or compliance perspective. For fund managers who are not convinced that opting in will necessarily benefit their business, there is an alternative to the AIFMD directive… the EuVECA Regulation.

The European Venture Capital Fund (EuVECA)

The EuVECA Regulation came into effect in July 2013 and can provide certain registered AIFMs with a marketing passport for their funds. The regulation, in effect, allows EU-registered AIFMs who are in compliance with the directive and who manage certain qualifying funds known as EuVECAs to market these funds to professional investors throughout the EU. This greatly simplifies the marketing of the funds, as there will be no requirement to meet the different private placement requirements in the different EU member states as would otherwise be the case.

To obtain EuVECA designation:

  • The fund must be established in the EU 
  • The fund must be an AIF as prescribed by the AIFMD directive 
  • The fund must invest at least 70 percent of its aggregate capital contributions and uncalled but committed capital in “qualifying investments”
  • The fund must not use more than 30 percent of its total capital on non-qualifying investments.

For EuVECA purposes, “qualifying investments” are quite diverse. They include equity or quasi-equity instruments, secured or unsecured loans granted by the qualifying VC fund to an investee company, or shares in other qualifying VC funds. There are limitations on the use of leverage for EuVECA funds.

What is EuSEF?

The European Social Entrepreneurship Fund (EuSEF) has an equivalent framework to a EuVECA except that it must invest at least 70 percent of its aggregate contributions in businesses that have a positive social impact and address specified social objectives.

What is an ICAV?

The Irish Collective Asset Management Vehicle (ICAV) is a new corporate structure for Irish investment funds which can be used for both UCITS and AIFs.

If the ICAV is used to establish an AIF, then it is subject to the AIFMD directive.

Once the legislation providing for ICAVs is enacted in 2014, it will give new PE and VC funds an additional option when deciding on the legal framework they wish to use when setting up new funds. One of the key features of an ICAV that may make it attractive to US investors is that it can elect to be classified as an “eligible entity” which can allow it be treated as a partnership for US tax purposes. This would mean that US investors could avoid certain tax consequences.

The tax treatment of “1994” partnerships

We’ve already covered 1907 partnerships, so what exactly are 1994 partnerships?

Legislation introduced in 1994 facilitated the formation of Investment Limited Partnerships (ILPs). Like 1907 partnerships, the rules applying to a 1994 partnership require the appointment of at least one general partner to manage the fund, with the liability of the limited partners confined to the size of their contribution to the fund - as long as those limited partners are not involved in the running of the partnership. The difference in the two forms is the tax treatment.

The Finance Act 2013 brought in new measures which will make Irish ILP’s a more attractive proposition for international PE and VC firms. Previously an ILP was classified as an “investment undertaking” but the 2013 Act removed this classification. This meant that instead of tax being charged to the partnership itself, tax is now imposed on the income of the partners in proportion to the value of their investment while exemptions for stamp duty, capital acquisition tax and withholding tax still apply.  

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