There has, for a number of years, been a feeling within the European venture capital community that the regulatory environment within the European Union ("EU") is not optimally configured to foster specialised equity investment focused on innovative start-up companies. This dissatisfaction has manifested itself across a plethora of industry and governmental papers and consultations, the most significant recent example being the European Venture Capital Association's ("EVCA") White Paper of March 2010. One of the White Paper's principal propositions was that the industry's failure to develop as hoped is closely linked to the fragmentation of the regulatory operating environment across the 27 member states of the EU. The European Commission's (the Commission) response to the clamour for reform came on 15 June 2011, when it published a consultation document entitled A New Regime for European Venture Capital ("the Paper"). In this DechertOnPoint article we explore the centrepiece policy option, set out in the Paper, which is mutual recognition and passporting of venture capital funds throughout the EU.
That all is not well within the European venture capital industry can be seen by comparative analysis of the top-line figures. Prior to the financial crisis of 2008, European venture capital investment across the EU amounted to around €6-7 billion annually. Figures for 2009 and 2010 suggest that that figure has fallen to around €3-4 billion for those years, which means that, according to Ernst & Young, European investment for those years amounted to just 21 per cent of the sums invested in the United States during the same period, despite the respective potential markets being of a similar size. The Paper goes on to agree with the EVCA that the state of affairs is principally down to a fragmentation of the single market in respect of venture capital investment.
It might also be said that venture capital is, in regulatory terms, a victim of its own benign impact on the sorts of issues that tend to attract political attention. Venture capital tends to be seen as the acceptable, nurturing face of the investment industry, rather than the "Barbarians at the Gate" image ascribed (unfairly) by politicians and the media to the wider private equity sector. Thus, venture capital was not perhaps at the forefront of the minds of European policymakers when they were framing the EU's new framework for the regulation of investment techniques including venture capital, the Alternative Investment Fund Management Directive ("the AIFMD") in 2009 and 2010.
Whilst the AIFMD does impose significant new obligations on managers of alternative investment funds (into which generic category venture capital fund managers fall for the purposes of the AIFMD regime), it must also be conceded that the possibility for passporting around the EU for fund managers with assets under management of at least €500 million (or who opt-in to the AIFMD regime) is a step forward in terms of promoting a single market for this type of investment across the EU. However:
most European venture capital fund managers will fall below the €500 million...