Global Trustee and Fiduciary Services News and Views Issue 48

Brexit

Global Trustee and Fiduciary Services News and Views

| Issue 48 | 2017

EuVECAs

So far, the flagship CMU VC initiative has been

a proposed regulation amending the European

Venture Capital Funds (EuVECA) framework

with the intent of improving the profile of VC

funds more broadly. The EuVECA Regulation

was designed to create a well known VC vehicle

that would attract pan-European investment

and that could be marketed on a cross-border

basis. Initially, it was designed to give smaller

VC managers outside of the AIFMD’s scope

an opportunity to nonetheless access an

equivalent passport. In addition, EuVECAs enjoy

some structural advantages as the regulation

allows them to market to a wider client pool

than typical AIFs by including certain high-net-

worth individuals and subjects them to lighter

regulatory requirements (i.e. an absence of

depositary requirements).

However, the proposed regulation seeks to

address some of the limitations of the original

regime as identified by the Commission. While

allowing smaller AIF managers to enjoy a

passport is still a core element of EuVECA, the

Commission is proposing to extend EuVECA

eligibility to all AIFMs regardless of size and

whether they lie within the AIFMD’s scope.

While such managers obviously already enjoy

a passport, such an extension would allow

registered AIFMs to enjoy lighter requirements

for their VC vehicles and to market to a subset

of retail investors. The inclusion of these larger

managers is intended to incentivise their

wider involvement in VC, thereby attracting

the strongest firms to the market and bringing

better economies of scale.

Furthermore, the Commission believes that

the criteria for eligible investments were

too narrowly drawn and that a wider range

of companies, such as those with up to 499

employees and those listed on small- and

medium-sized enterprises (SME) growth

markets, should benefit from the VC funding

that EuVECAs can provide.

Fund-of-funds support and tax incentives

Another major CMU initiative is the pan-

European VC fund-of-funds programme. Here,

the EU is putting its money where its mouth

is by authorising the European Investment

Fund (EIF) to make investments in qualifying

fund-of-funds with a target amount of EUR300

million. The primary focus will be VC funds that

can credibly grow past the AIFMD threshold

of EUR500 million in a short period of time,

as these are the vehicles that can provide the

desired economies of scale and cross-border

reach. The funds must be established in the

EU, managed by an EU entity and have at least

50% of its investments in EU companies.

Finally, the CMU is also exploring how to

best apply tax incentives for VC firms and

angel investors, specifically for longer-term

investments that have higher risk-reward

profiles. A number of Member States are already

using targeted incentives and the Commission

has requested a study that will look at national

best practices, among other areas.

Addressing cross-border impediments for

investment funds

Improving the cross-border reach of the main

EU investment fund regimes (UCITS and AIFMD)

is clearly a top CMU priority, as the issue is

central to two separate workstreams: the

broader initiative to address impediments to

cross-border capital flows and the more focused

work of ameliorating cross-border distribution

of funds. The Commission notes that while there

is widespread usage of the passport, whereby

80% of UCITS funds are marketed cross-border

and 40% of AIFs, it is still geographically limited

as 33% are only marketed in one host state and

another 33% are marketed in no more than four

Member States.

While acknowledging there may be broader

issues restraining cross-border activity — such

as concentrated fund distribution channels in

individual Member States, cultural preferences,

etc. — the Commission views the time and costs

spent navigating regulatory divergence as a

key barrier. Like with its efforts to expand the

reach of VC funds, the Commission is concerned

that the multitude of smaller, more regionally

focused funds means that capital is not being

efficiently allocated, certain regions are cut off

from deeper investor pools and the funds are

unable to benefit from economies of scale.

While some of the regulatory and legal concerns

will probably only be addressed through national

law, many of these issues can be dealt with

through amendments to EU directives. Despite

the relative comprehensiveness of EU rules,

there are a few areas where the discretion

enjoyed by Member States has resulted in

unhelpful divergence. Given the upcoming AIFMD

and UCITS reviews, it is possible that the CMU’s

focus on this area will inform the conclusions of

such reviews and yield regulatory proposals.

Venture-capital

package

Addressing cross-

border impediments for

investment funds

Focus on supervisory,

but less on regulatory,

convergence