Ireland and France more attractive to PE than UK

The UK loses pole position as Ireland becomes the top spot in Europe for private equity. The UK fell from first to third place as France edged into the number two spot in The European Venture Capital Association’s (EVCA) third benchmarking study. Regina Breheny, director general of the Irish Venture Capital Association (IVCA), says she is absolutely delighted that Ireland is on top. The country has benefited from low corporation tax and capital gains tax. A few years back, the Irish Government encouraged pharmaceutical companies and tech companies to set up in Ireland and now R&D spin-offs from those companies are providing opportunities for private equity managers and investors. The Irish Government also recently committed to spend an additional €3.5bn on R&D in 2007. Despite the UK’s slide to third in the rankings, the chief executive of the British Venture Capital Association (BVCA), Peter Linthwaite, says: “The UK remains the undisputed centre of the European private equity and venture capital industry, accounting for over 50% of the European market. The industry in the UK and the UK Government have worked hard to create a supportive tax environment and appropriate regulatory regime. The EVCA report reinforces the need for that work to continue to be positive and constructive. The UK constantly needs to be assessing what more it needs to do to remain at the forefront of competitiveness and attractiveness for the industry. Private equity is an important element in the Chancellor’s drive to further strengthen the UK’s leading position as the global financial centre. The UK’s private equity and venture capital industry is the envy of many other countries and we must continue to build on this strong position.”

The most significant move for a single country up the league table was France, which was ranked as the 10th most attractive country for private equity in Europe in 2004, and in 2006 it moved into the top three. Like the Irish Government, the French Government has committed €2bn to venture and private equity and it has set up incentives for individuals and funds to invest in private equity. However, despite the Government’s commitment, those in the know in France are not entirely sure how the country was able to rocket up the league table by eight positions. George Pinkham, a senior partner at SJBerwin in Paris says: “I am surprised at how this happened because there have not been any startling changes to the industry in France. However, France has been underrated for a long time.” Some in the industry are bamboozled by France usurping the UK in the rankings because carried interest at the fund level in France is favourable but not as much as in the UK. Pinkham adds: “This is great for our industry and is probably a reflection of France’s positive economic condition. Credit is fairly cheap and it is easy to structure LBOs in France with few impediments.”

Belgium and Spain also moved to above-average composite scores since the EVCA’s first survey in 2003, which indicates a relative willingness to reform. EVCA secretary-general Javier Echarri says: “It is worth highlighting those countries that have clearly focused on improving their competitive positions, namely France, Belgium and Spain, where the most important progress of the last two years is to be found.”

Norway, Sweden and Germany have been ranked below average since the first survey in 2003 and this is unchanged for 2006 despite talk of reforms and clearer tax treatment for private equity funds in Germany. New EU countries and accession countries tend, unsurprisingly, to be below the European average, but they seem to be making good progress.

The EVCA study draws comparisons between tax and legal environments that affect the development of private equity and venture capital and encourage entrepreneurial activity across 25 European countries. The study focuses on three areas considered important for the private equity and venture capital industries: the tax and legal environment for LPs, the environment for investee companies and the environment for retaining talent in investee companies and management funds. Overall, the study showed a slight improvement in the tax and legal environment for private equity and venture capital and entrepreneurship across Europe, with an average composite score in this criteria of 1.84, compared with 1.97 in 2004 (where one is a positive score and three is a negative score). Echarri says: “It is encouraging that the European tax and legal environment has improved overall, but the differences between countries at the higher and lower end of the ranking should be noted. There are a number of tax and legal impediments across the global landscape and inadequate regulation creates high entry costs and low levels of cash flow. We would like to see a level playing field for domestic and international investors, but a domestic focus is all too evident across most countries.”

Most of the 25 countries surveyed have adopted an appropriate domestic fund structure to attract both foreign and domestic capital. The tax and legal environment has also improved with respect to pension funds and insurance companies investing in entrepreneurial projects. But very few countries provide incentives to invest in private equity and venture capital, scoring an average 2.04. Likewise, tax and performance-related incentives to retain talent, within both investee companies and investment funds, are still not sufficient. Moreover, fiscal R&D incentives achieve the lowest score of all at 2.13.

The collection of data was carried out by the KPMG M&A tax network and the study evaluates seven criteria and 29 variables. Information gathered reflects the situation in each country surveyed up to July 1 2006.