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Ticket to ride – part two: new ventures under EuVECA

JWG analysis.

Regulators have given a huge boost to the small and medium enterprise (SME) markets under EuVECA, which aims to support the harmonisation and growth of the EU’s venture capital funds.  Venture capital funds are investment funds that specifically focus on pooling funding from other financial institutions (such as pension funds) in order to reinvest in high-risk high-potential ventures in the SME markets and, thus, are in a unique position to access specific financing to support SMEs.  So far, they have only been set up in a handful of European countries, in contrast with their relative abundance on the other side of the Atlantic.

Previously, venture capital funds suffered from a lack of access to finance from beyond their Member State, but this is now being tackled.  Part two of our EuSEF and EuVECA regulation overview looks at how the designation of EuVECA to the EU’s venture capital funds will remove barriers to cross-border fundraising, install confidence in investors through improved clarity and provide a well-needed boost to Europe’s SME industry in the post-crisis world.  It is an opened-up journey across the continent for the venture capital funds; in line with the Europe 2020 vision for ‘an industrial policy for the globalisation era’, seeking to improve access to credit for SMEs and removing red tape.

And red tape has most definitely been removed.

Like EuSEF, EuVECA managers can enjoy a significant loosening of capital requirements and will not be required to appoint a depositary, unlike those investment funds that fall solely under the Alternative Investment Fund Managers Directive (AIFMD).  In addition, they receive all the lucrative benefits, such as a designated brand and passport to market across the union, unlocking investment potential that was previously obscured by the divergent rules across Member States.

So, what’s the catch?  It seems no more specific than the requirements for EuSEF.  For a more detailed analysis, look at our part one article on this regulation, but the main points stand at this:

1. Managers of EuVECAs must be honest, responsible and true to their cause. They must invest at least 70% of their aggregate committed capital (once costs have been taken into account) in qualifying undertakings[1], and no more than 30% on unqualifying undertakings. These unqualified undertakings will likely be mainly invested for the purpose of maintaining liquidity and operational requirements.
2. Managers of asset management funds for which the total value of assets is less than €500 million are permitted to register to be designated as EuVECA and, thereby, enjoy the looser regulation under this banner, compared to AIFMD, as long as they are also established in an EU Member State.
3. Marketing to investors is to be restricted to professional clients who are to invest a minimum of €100,000. To ensure a broad investor base, the regulation permits other investors, such as high net-worth individuals, to be marketed to, as long as they sign a written agreement that they are aware of the appropriate risks. Employees and managers of the funds may also invest in it as they are deemed to have sufficient levels of knowledge regarding their activities.
4. Administrative penalties will be mainly levied for operational and marketing infringements, being dealt out for failure to comply with:

• Portfolio composition requirements
• General operational requirements (such as applying policies that discourage malpractice)
• Safeguards on eligible investors
• The use of the designated term EuVECA.

Earlier this year, ESMA published technical advice for EuVECAs and EuSEFs.  The EuVECA technical advice focuses mainly on dealing with conflicts of interest in a manner that is proportional to the size and complexity of the business.  ESMA will carry out reviews of both regulations in 2017, looking particularly at the impact of this regulation compared to the effects of the generic regulation on collective investment undertakings (UCITS) and the inclusivity, efficiency and security of the regulations.

Comprehensive, yet simplistic

For managers, the main code of conduct seems to be to ‘judge your instincts and be responsible’!  EuVECA may follow the same model as EuSEF, but it can be seen more easily as just a mini AIFMD with an emphasis on ensuring that capital is also steered towards SME markets.  Regulators noticed after AIFMD that they would need to protect venture capital from certain rules under the regulation, such as capital requirements, and, hence, created EuVECA.

The EU is really doing what it can here to help give venture capital funds a leg up in the competitive market – and provide them with exclusive rights to do so.  After all, a key priority of EU policies and an essential target of its 2020 strategy is fostering innovation.  Removing the barriers, cutting the tape and establishing the brand all seem to be right moves in the right direction for the venture capital and SME market, but there will be plenty of reviews to come to assess the progress.

These reviews will also have pay specific attention to the effects of the regulation in encouraging innovation in green growth, with a likelihood of amendments and the possibility of new regulations to follow.

It’s just the beginning of the adventure, and JWG will be tracing every turn taken along the way.

[1] A qualifying portfolio undertaking for EuVECAs is as follows – (1) Annual turnover does not exceed €50 million (2) It employs fewer than 250 people (3) It is not admitted to trading on a regulated market or MTF (4) It is established within the territory of a Member State