Capital Markets Union - Opening up cross-border investment

Capital Markets Union – Opening cross-border investment

Under the banner of the Capital Markets Union (CMU) Action Plan, the European Commission is consulting on possible changes to the European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF) Regulations to improve the effectiveness of their passports.

Director, Investment Management, Regulatory Change

KPMG in the UK


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The Regulations were published in April 2013 and Level 2 measures have only just been finalised. The Commission recognises that venture capital has a key part to play in supporting growth and in offering entrepreneurs an alternative source of funding to bank lending. It is asking what technical changes are needed to the Regulations to improve the effectiveness of the fund passports, including whether to extend the range of eligible investments and eligible investors, and whether to allow larger fund managers and non-EU managers to offer such funds.

EuVECAs and EuSEFs are EU-domiciled Alternative Investment Funds (AIFs) with EU managers. Both types of funds must be at least 70% invested in undertakings that are not admitted to trading. In addition, EuSEFs must have the achievement of measurable positive social impacts as their primary objective, use their profits primarily to achieve that primary social objective, and be managed in an accountable and transparent way.

The original objective of the twin Regulations was to allow small EU fund managers, falling below the threshold of the AIFMD, to secure a passport for their funds without having to opt up to full AIFMD compliance. The consultation paper rewrites their rationale to fit the stated CMU objectives: to bring together investors and unlisted SMEs; and to increase non-bank finance for the economy.

Over the past two years, national regulators have authorised only 34 EuVECAs and 6 EuSEFs. The low take-up may be due to a number of factors, including that only small managers can currently launch such funds and that professional investors can freely choose between the much wider range of AIFs that invest in such asset classes.

Respondents to the Commission’s CMU Green Paper suggested a number of changes to encourage the launch of more funds. In particular, because the Regulations apply only to small EU fund managers, bigger houses (with a wider range of AIFs) cannot launch these funds. The Commission is therefore consulting on a wide range of questions, including whether: larger and/or non-EU managers should be able to run these funds; the minimum threshold of investment into such funds of €100 million should be lowered; the range of eligible assets should be widened; and additional national administrative costs be tackled.

Interestingly, the consultation is silent on the fact that the current Regulations do not require such funds to have a depositary, whereas the AIFMD requires medium to large-sized fund managers to appoint a depositary for each of their funds. It seems illogical that such funds, which are available to retail (albeit wealthy) investors, are absent this important investor protection if the manager is small, but that AIFs, which can be sold only to professional investors, must have a depositary. The justification for this policy disconnect should be reviewed.

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