EUROPE: EVCA calls for unified private equity regulation

Wednesday February 25 2009

The European Private Equity and Venture Capital Association (EVCA) has submitted a review document entitled ‘Private Equity and Venture Capital in the European Economy-An Industry Response to the European Parliament and the European Commission’.

The review, which calls for a European regulatory structure for private equity, submits that the European private equity and venture capital industry is an important source of long-term capital, and can be part of the solution to help overcome the current funding difficulties and thereby play an active role in contributing to the recovery of European economies.

Since the industry is already highly-regulated at national and EU level, the report says that it does not pose systemic risks either through its funding model or the companies in which it invests. The report also includes a Detailed Risk Analysis of the Private Equity Industry covering the structure and operations models of the Private Equity industry as well as a risk analysis of Private Equity Participants and Stakeholders.

The report also stresses that although private equity investments are characterised as a form of Alternative Investments, their business models remain distinct from other alternative investments, such as hedge funds.

Private equity invests, largely, in unlisted (and therefore illiquid) companies’ equity where it will usually (alone or together with like-minded investors) acquire a majority stake. Whereas, hedge funds normally take minority positions in heavily traded, highly liquid securities in public companies, currencies and commodities. Furthermore, Private equity investments do not use short selling strategies.

In terms of regulations, EVCA submits that the industry recognises the need for its regulatory framework to be consistent with existing and future national and European regulatory reforms. And therefore, the regulatory framework should consist of unified professional standards and an effective enforcement regime with oversight by appropriate supervisory bodies at both national and EU levels.

Background

In October 2008 the European private equity and venture capital industry met to discuss the position of the industry in light of the increased political scrutiny emerging at both EU and Member State levels. A key outcome of this meeting was the creation of an industry Representative Group, comprising of 30 representatives from private equity and venture capital funds. The Representative Group formed a Brussels Task Force to formally respond to the EU Parliament’s Resolutions and to support the EU Commission in formulating possible EU policy outcomes.

This submission is the industry’s formal response to the European Parliament and European Commission, made possible through the combined effort from a very large number of professionals operating within EVCA.