A wave of criticism mounted as the Commission revealed that funds managing €500m or more will be subject to disclose information regarding structure, strategy and investors. Under the reforms firms will also have to disclose details about the company’s performance to stakeholders.
The final figure of €500m was only arrived at on the morning the proposals were announced. Javier Echarri, the secretary general of the European private equity trade body EVCA, told EVCJ the number initially proposed as a threshold was €10m to ensure that everything from the smallest venture capital firm to the largest mega-buyout fund would be subject to the new requirements. EVCA countered with €1bn to safeguard venture capital firms, to which the Commission offered a €250m threshold before settling on €500m.
Commenting on the dramatic doubling of the final threshold figure, Martin Calderbank, partner at Stirling Square Capital Partners, says: “Five hundred million Euros is an improvement on €250m but the details of these proposals could be quite a heavy burden on smaller companies.”
EVCA were also quick to criticise the latest proposals, believing they will adversely affect smaller private equity firms. “The Commission’s proposals hit the wrong people, at the wrong time, in the wrong way. We are deeply concerned that the thresholds set out today punish middle market companies, which lie at the heart of corporate Europe,” says Jonathan Russell, chairman of the EVCA.
According to EVCA, 5,000 portfolio companies will have to comply with the “costly and unwarranted disclosure rules that go beyond even those required by publicly-listed companies”. Under the new proposals, portfolio companies that make in excess of €50m in turnover will also be subject to reveal structure, strategy and investors.
Russell continued: “The proposals include rules on valuation, custody, delegation, risk, liquidity and capital reserve requirements. These issues have no relevance to the private equity and venture capital industry whatsoever, and will only have the effect of increasing the cost of investment for end-investors.”
Vincent Neate, head of the private equity advisory team at KPMG, believes there is a fundamental misunderstanding of private equity firms on the part of the EU Commission which has led to the introduction of these controversial changes.
For now, the private equity industry has a long wait ahead to see how the detail of the proposals is ironed out. “This is the start of a process that could take two years or longer to complete in whatever form but ministers need to focus on this issue forensically in the months to come. This proposal is bad for British business,” says Walker of the BVCA.
There was one positive. “There is recognition that private equity is not the cause of the current financial crisis,” says Calderbank.
Although the proposed changes seem like a big loss to the private equity industry, Echarri is quick to point out nothing is set in stone. “When the draft is finished it will be sent to the member states, which will require a reading that will take several months. It will be February or March 2010 before we see any kind of action and by that time there will be a new political structure in place following the European elections in June.”