Private equity and venture capital update - May 2015

Welcome to the latest edition of Osborne Clarke’s quarterly private equity and venture capital update.

We hope that you find it interesting. If you would like to discuss any of the content, or have a subject that you would like us to cover in a future edition, please let one of us know. Our contact details are set out below.

Best regards,

Mark Spinner, Alisdair Livingstone, Rob Wood and Dipika Keen

Election 2015: 24 hours to go! Private equity and venture capital policies

As the election campaign reaches its climax, we highlight those policies of the major UK-wide political parties which are likely to impact the private equity and venture capital industry.

Click here to read more.

Issues for founders on a VC fundraising

We have published a series of briefing notes guiding founders through the venture capital fundraising process:

• Understanding issues for founders on a VC fundraising

Based on our wide-ranging VC and investee company experience, we’ve pulled together a list of the key points that founders are likely to consider as they approach a VC investment. Click here to find out more.

• Understanding convertible loan notes and VC bridging rounds

What are the usual terms associated with convertible loan notes and bridging rounds? And what are the advantages and disadvantages of using them? Click here to find out more.

Will the UK’s new public “PSC register” reveal who controls your UK portfolio companies?

As we trailed in our last update, details of the individuals who ultimately control UK companies will have to be recorded in a new “people with significant control” register – to be known as the “PSC register” – which was passed into law as part of the Small Business, Enterprise and Employment Act 2015. The new law is part of a global move by governments and supra-national organisations towards greater transparency in corporate structures, with the aim of combatting money laundering, terrorist financing and tax evasion.

Every UK company (except publicly listed ones) will have to maintain a PSC register – and the Government has stated that it intends to extend the register to UK LLPs. The register will name, and contain information on, individuals who directly or indirectly own or control more than 25% of a company’s shares or voting rights, or who otherwise have the ability to exercise “significant control” over the company or its management.

Will limited partners, investment directors or fund managers need to go on the register of UK portfolio companies? This is not yet clear as we await Government guidance on the “significant control” test. What is clear is that all UK portfolio companies will have to undertake an analysis of their shareholders’ investment structures – and private equity and venture capital fund managers will need to be ready to respond to questions about their fund structuring and limited partner profiles. The statutory guidance is expected to be finalised by October 2015, although no drafts have yet been published.

The UK Government expects companies to start maintaining their PSC register from January 2016. The register should be open to public inspection and be searchable online via Companies House from April 2016.

We have a set of resources dedicated to the introduction of the PSC register here.

Cyber security: what do you do if you have suffered an attack?

Last year, according to Government estimates published in March 2015, 81% of large businesses and 60% of small businesses suffered a cyber security breach. What can you do to protect the assets of your portfolio companies in the event of a cyber attack?

Click here read more.

Employee share plans: have you registered and filed your annual returns online with HMRC?

Portfolio companies operating employee share plans (whether tax-advantaged or unapproved), including enterprise management incentive plans (EMI plans), must take action to comply with the new HMRC online registration and annual reporting requirements.

The deadline for compliance is 6 July 2015, but the online processes take a few days to complete – if you have not already registered, action should be taken as soon as possible.

Failure to comply with these requirements will result in penalties and loss of tax relief in the case of tax-advantaged plans.

Click here to read more.

What does the EU’s Capital Markets Union mean for private equity and venture capital?

Whilst the private equity community is still coming to grips with AIFMD (the EU Alternative Investment Fund Managers Directive), it seems as though the European Commission has grander plans in store for developing Europe’s capital markets.

Fifty-eight years after its founding treaty, the Commission has launched an effort to create a true “Capital Markets Union” (CMU) in Europe: a project finally to put into effect one of the “four freedoms” enshrined in the Treaty of Rome, namely that capital (along with goods, people and services) should be able to move freely across the internal borders of the EU.

The principal aim of the CMU is, in the words of the Commission, “to create deeper and more integrated capital markets in the 28 Member States” by, amongst other things, “more effectively and efficiently, linking investors to those who need funding at lower cost, both within Member States and cross-border”.

This renewed push for a unified European capital market was begun by the publication of a Green Paper in which the Commission explicitly acknowledges that “private equity and venture capital play an important role in the European economy”. There is however a wide variation in risk-capital markets among EU Member States: around 90% of all venture capital fund managers are concentrated in eight Member States (UK, Germany, Sweden, Denmark, Finland, Netherlands, France and Spain). In addition, the venture capital market is about five times bigger in the US than it is in the EU, in terms of the amounts invested. The Commission estimates that if European venture capital markets were as developed as those in the US, an additional €90 billion of funds would have been available to finance companies between 2008 and 2013; and more than 4,000 additional VC-backed deals could have been struck.

In our opinion, these statistics illustrate the huge potential opportunity offered by a completed CMU for the private equity and venture capital industry across the EU.

The Green Paper is short on specific policies with regard to private equity and venture capital, though there are strong hints that the EuVECA (European Venture Capital Funds) and EuSEF (European Social Entrepreneurship Funds) regimes are likely to be made available to managers whose funds under management exceed €500 million.

Otherwise, there are many open questions in the Green Paper for the private equity and venture capital community, including:

• What steps could be taken to reduce the costs to fund managers of setting up and marketing funds across the EU?
• What barriers are there to funds benefiting from economies of scale?
• How can the EU further develop private equity and venture capital as an alternative source of finance for the economy? In particular, what measures could boost the scale of venture capital funds and enhance the exit opportunities for venture capital investors?

The Commission acknowledges that this is a long-term project but has set an ambitious 2019 timetable for the “building blocks” of the CMU to be in place. This is a central plank of President Juncker’s platform and is also an area in which the UK is heavily invested, both because of the importance of these markets to the UK economy, and because it is Jonathan Hill, the British EU commissioner, who is leading the capital markets charge in Brussels.

Click here to read our longer note about the CMU and the Green Paper.

Osborne Clarke news

Osborne Clarke has been named “Law Firm of the Year” 2015 at this year’s prestigious Legal Business Awards. The firm was commended in particular for its recent growth trajectory and its focus on sectors and issues that are at the cutting edge of the law, such as building smart cities and the sharing economy. The award was judged by an independent jury of senior General Counsel. Click here to read more.

In the last quarter, we advised on PE and VC deals with a value in excess of £245 million, including:

• Google Ventures on its Series C investment in Kobalt
• Funding Circle on its $150 million fundraising
• Milestone on its exit from Compre
• Rethink Group on its investment from the BGF
• Management on its MBO of Barbon Insurance funded by Carlyle

Seen elsewhere

• “Shift your focus away from what you want (a billion dollars) and get deeply, intensely curious about what the world wants and needs,” Advice from the ex-Mrs Musk on how to emulate the success of Bill Gates, Steve Jobs, Elon Musk and Richard Branson (NY Times)
• Will the tech boom go bust? Mark Speigel from Manlo Ventures reads the signs (Wall Street Journal)