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

Earlier this month, the European Commission published its Action Plan on Building a Capital Markets Union. Here is our summary and view on what this means for the UK’s financial sector as a whole.

Below, we have picked out the six steps from the Action Plan which will impact private equity and venture capital.

Raising funds

1.  A consultation on widening the scope of the EuVECA and EuSEF passports to encourage venture capital investment in SMEs. We discuss this consultation in more detail below.
2.  Proposals for a “range of pan-European venture capital fund-of-funds and multi-country funds“.
3.  A report on the development of European crowdfunding, to be followed by a decision on the “best means to enable development of this new funding channel“.

Debt finance

4.  A possible future EU framework on “loan origination by funds“.
5.  A review of the EU corporate bond market.

Exit

6.  A review of access to the equity capital markets to make it easier for SMEs to get admission to trading.

Widening the scope of EuVECA and EuSEF to encourage venture capital investment in SMEs

The Regulation on European Venture Capital Funds (EuVECA) and Regulation on European Social Entrepreneurship Fund (EuSEF) created a capital raising passport for managers to market their funds across the EU without all the onerous requirements which accompany an AIFMD passport.

The EuVECA and EuSEF passports currently apply only to smaller fund operators which are defined as those with assets under management of below €500 million i.e. below the AIFMD threshold. Once a manager exceeds the threshold, it must register under AIFMD and use the AIFMD passport.

EuVECA funds can currently only invest in unlisted SMEs. These are defined as companies that employ fewer than 250 people and have annual turnovers of no more than €50million or balance sheets of not more than €43 million.

The European Commission has published a consultation to widen the scope of EuVECA and EuSEF. This includes proposals that:

• the EuVECA and EuSEF passport be used by AIFMD managers;
• sub-threshold managers that offer EuVECA and EuSEF funds who subsequently exceed the relevant threshold are exempted from AIFMD and may continue to use their EuVECA and EuSEF passports;
• the minimum investment level for non-professional investors into a EuVECA and EuSEF fund be lowered from the current €100,000, possibly down to €30,000;
• fund registration fees are lowered;
• EuVECA and EuSEF be extended to third country (i.e. non-EU) managers; and
• relaxing the restrictions on the qualifying criteria for SMEs into which a EuVECA fund can invest.

We will continue to follow the development of the Commission’s Capital Market’s Union, a key part of the drive to a true single market for capital.