EU directive to ‘punish mid-market’

A proposed European directive differentiates between private equity and hedge funds, but has sparked concern among the European mid-market that managers and portfolio companies will be burdened with ‘costly and unwarranted’ reporting standards.

European private equity fund managers with more than €500 million under management will be subject to new disclosure legislation, if a directive proposed by the European Commission – the body responsible for proposing and implementing laws across the European Union – is approved by the European Parliament.

The directive, proposed today, states that any alternative investment fund with over €100 million under management will be subject to the new rules, but for unleveraged funds with a lock-in period of more than five years – as private equity funds typically are – the threshold is €500 million.

Firms affected include managers of real estate funds, hedge funds, private equity funds, commodity funds, and infrastructure funds.

In a statement this morning, Charlie McCreevy, the EU’s internal markets and services commissioner, acknowledged the importance of the part played by alternative fund managers in the European financial system but said there existed “a global consensus – as expressed by the G20 leaders – over the need for closer regulatory engagement with this sector”.

The directive would require managers to provide detailed information on their funds’ activity, governance, internal risk management, “arrangements for the valuation and safe-keeping of assets” and audit arrangements. Fund managers would also be required to hold and retain a minimum level of capital.

The European Private Equity and Venture Capital Association (EVCA) voiced it s concern over the impact on the mid-market. “While we welcome the Commission’s distinction between hedge funds and private equity, we are deeply concerned that the thresholds set out today punish middle market companies, which lie at the heart of corporate Europe,” said EVCA chairman Jonathan Russell.

To date, mid-market private equity firms and their portfolio companies have been able to operate without the burden of extensive reporting and disclosure rules. EVCA estimates that under the proposed directive around 5000 portfolio companies will be subject to “costly and unwarranted” reporting rules.

Increased disclosure rules would “do nothing to attenuate the perceived risks of the asset class, while creating a huge amount of additional cost in the wrong place,” said Charles Ind, managing partner of Bowmark Capital, a mid-market UK private equity firm with £700 million (€780 million; $1.03 billion) under management.

Martin Calderbank, partner at Stirling Square Capital Partners, also a London-based mid-market investor, said: “At the very time that the European economy needs the skills of private equity investors to kick-start a recovery, the Commission risks sending out a clear message that it wants to stifle, not encourage, this proven form of entrepreneurism.”

The EU missive will now be debated by members of the European Parliament. If political approval on the proposal is reached by the end of 2009, the directive could come into force in 2011, according to the Commission.