Six months is a long time in private equity circles and the first half of 2005 was no exception. Since January, the active market predicted in 2004 was confirmed by record levels of investment for the year and from the positive environment in the marketplace. The industry has shown it has recovered from the downturn in recent years with remarkable speed. However, as the industry continues to grow, it continues to be under scrutiny in the good times as well as the not so good times. The private equity industry is increasingly facing comparisons with other mainstream and alternative asset classes. Consequently, the continuation of EVCA’s interaction and dialogue with regulators and policymakers is more important than ever.
Further regulatory and administrative complexity is not something the industry needs if private equity and venture capital is to fulfil its role in the European economy and contribute to economic growth and job creation.
EVCA’s public policy priorities
Showcasing the industry was done to great effect at EVCA’s third policy meeting, ‘Unleashing Europe’s Competitiveness through Private Equity and Venture Capital’ which took place in Brussels in February. At the meeting, EVCA launched its Public Policy Priorities paper , which recommended nine essential measures policymakers should take at a European, national and regional level to provide a full entrepreneurial and technological eco-system through private equity and venture capital, and to help achieve the goals outlined in the European Union’s (EU) Lisbon agenda.The meeting provided an opportunity for policymakers to discuss some of these recommendations and the issues EVCA has been addressing as well as to meet with private equity and venture capital practitioners. Many participants were enthusiastic about the debates held on the need for a pan-European stock market for high growth companies, a specific status for young innovative companies and a pan-European fund structure.
One of the keynote speakers at the meeting was Wim Kok, chairman of the high level group that carried out an independent review of the EU’s Lisbon strategy for growth and employment. In his speech, he clearly acknowledged the role private equity and venture capital can play in stimulating European economic growth. Another keynote speaker, Jean-Phillippe Cotis from the OECD, went so far as to say that “an economy that does not have a strong venture capital sector is one that displays symptoms of deeper economic problems.” Following on, Herman Daems, chairman of EVCA at the time of the event, set a challenge to both the industry and the EU member states to work together to increase the contribution of venture capital from 0.1% to 0.2% of GDP in the next three years and for buyouts from 0.26% to 0.4% of GDP.
The Lisbon processJust after EVCA’s policy meeting, the EU announced a review of the Lisbon objectives . The review examined ways of making the competitiveness element of the process stronger. The EU called on member states to ensure the necessary reforms, both regulatory and legal, are implemented to enhance the competitive environment of their countries. As part of this, member states will submit an annual report to the Commission each year to show how much progress has been made in the key areas towards achieving the Lisbon objectives. The Commission will publish the first progress report on the reforms already underway across the Union in early 2006. The member states will then present their first national Lisbon report in the autumn of next year. EVCA has called for the inclusion of a chapter on private equity and venture capital to be part of these annual reports so that reforms towards improving the environment for the industry can be monitored.
Professional standardsA priority for EVCA has been to reinforce the self-regulatory status of the industry and to oversee guidelines that fit with its specific business model. Over the years, a complete set of governing principles has been developed by EVCA and form the basis of the professional conduct of private equity and venture capital fund managers, both in respect of their activities and in their relationships with investors and portfolio companies. This year, EVCA published some further guidelines to strengthen the corporate governance element of the governing principles.
In March, at EVCA’s Investors’ Forum, EVCA, along with AFIC (the French venture capital association) and the BVCA (the British venture capital association), published a new set of international valuation guidelines for valuing private equity portfolio companies. The guidelines were launched to reflect the need for greater comparability across the industry and for consistency with IRFS and US GAAP accounting principles. Since March, 21 other associations have endorsed the guidelines. In addition to 15 European associations, they include the associations of Africa, Australia, Hong Kong, Russia and South Africa as well as the International Limited Partners Association (ILPA.)
In the summer, EVCA published new guidelines on corporate governance for the management of privately held companies – see box of main principles. They include principles of conduct for private equity and venture capital investments; for private equity and venture capital firms as shareholders and board members of portfolio companies; and for the overall management of portfolio companies. The industry has already helped to improve the level of corporate governance within their portfolio companies and EVCA very much hopes the market will use the guidelines to increase these levels even further.
Both the corporate governance and international valuation guidelines are examples of the industry’s proactive approach to self-regulation. It is important to continue to highlight to regulators and the public at large that the industry is leading the field, especially in comparison to the public markets, and is maintaining the highest possible professional standards.
Ongoing issuesIn addition to working on new projects, there are some issues EVCA continues to make progress on such as a European stock market for high growth companies and a single European fund structure.
EVCA has long argued that the inability of the European capital markets to provide a reliable source of capital for high growth companies is one of the factors that have contributed to the underperformance of European venture funds and their portfolio companies. An efficient trading platform for these companies would help to increase liquidity for both companies and investors and in particular, would help to underpin returns and exit opportunities for private equity and venture capital investments. There are some encouraging signs from the EU, not least from Charlie McCreevy, European Commission for Internal Market and Services, who said in a speech in May to the Federation of European Stock Exchanges that “a pan-European growth market would improve the access of growth companies to capital because it would increase liquidity for both investors and entrepreneurs.” The challenge now is to harness this goodwill and push for some concrete actions to be taken.
The lack of a European single fund structure continues to create problems for those funds wishing to invest across borders within the EU. The European Commission has committed itself to reviewing the merits and possibilities of a pan-European fund structure for private equity and venture capital investments. Charlie McCreevy also pointed to this area suggesting, “serious thought needs to be given to how we can remove unnecessary barriers to cross-border fund raising and investment” . There is a long way to go, but there is willingness from the Commission to look at ways of improving the existing structures.
In terms of pension fund legislation, EVCA succeeded in getting a prudent man rule for pension funds asset allocation. They are now working on removing the many existing technical and legal measures at member state level that de facto make this prudent man rule either impossible or heavily restricted.
Looking aheadOne event which will help keep this positive momentum going in the next half of the year will be the UK’s presidency joint conference with the European Commission: the ‘Risk Capital Summit 2005 – Investing for Growth and Competitiveness in Europe’ in October. The aim of the conference is to debate and make recommendations on how risk capital should support the establishment of Europe as a leader in innovation, growth and enterprise. It will include sessions on the high growth stock market and the European single fund structure.
As part of this, EVCA will publish its ‘Recommendations for a Well Functioning Private Equity Environment’, which continues the work done in benchmarking the tax and legal environments in European countries in 2004 and 2003. The study will look at examples of best practice in different European countries that have contributed to developing the role of private equity and venture capital in a national economy and explore whether these can be used elsewhere in Europe.
The industry faces many challenges in the coming year. The publicity surrounding the high profile large deals in recent months, coupled with the criticism by some regulators, has put the industry in the public eye more than ever before. In response to this EVCA held its first course on private equity and venture capital for policymakers who wanted to find out more about the industry and its business model. The first session was well attended by representatives from both the member states and the Commission. This new initiative was a chance for EVCA to give them a better, more detailed understanding of the issues connected with the industry and allowed a direct interaction with policymakers. This is just one example of how EVCA looks to promote a better understanding of what it is the association does and how that benefits businesses and economies.
Principles of good governance for private equity and venture capital investing
Law and regulationsThe conduct of business should always be in accordance with applicable laws and regulations of the jurisdictions in which the business takes place including, but not exclusively, fiscal legislation, competition legislation, consumer and data protection legislation and anti-money laundering measures.
IntegrityThe private equity and venture capital investor will act with integrity towards the investee company and its stakeholders and will seek to ensure the investee company conducts its business with integrity.
PartnershipThe private equity and venture capital investor offers an investment solution that establishes a relationship in partnership with the investee company that is defined by negotiated, mutually agreed rights and responsibilities for all parties. This relationship between partners takes into account that the private equity and venture capital investor actively contributes to the success of the investee company.
The long-term viewThe business model of the private equity and venture capital investor aims to create value by taking a long-term view of investment and supporting management of the investee company in the achievement of long-term objectives and strategies.
Respect for shareholdersThe conduct of business will be successful in the long term where the interests of stakeholders, including investment fund providers (ie limited partners), the fund manager, the board of directors, company management, employees, customers, suppliers and other stakeholders are respected and in which conflicts of interest are managed appropriately.
TransparencySuccess for a private equity and venture capital investor depends upon clear disclosure and timely communication of relevant and material information to facilitate high quality decision-making. The private equity and venture capital investor will seek to establish transparent communication with investee company management.
ConfidentialityThe private equity and venture capital investor will treat investee company information as confidential and will not make use of that information in a way that is detrimental to the investee company.