VC associations unite against AIFM

Fearing ‘unintended consequences’ resulting from the pending directive, the world’s largest venture capital associations met up this week to discuss the industry’s concerns.

Nine of the world’s largest venture capital associations joined together Tuesday to express concern over disclosure requirements and third country rules currently being negotiated by EU lawmakers.

Hosted by the US’s National Venture Capital Association, and joined by industry heavyweights including the EVCA, BVCA and CVCA, the newly formed global venture capital congress stated provisions in the pending Alternative Investment Fund Managers directive will have a “devastating impact on economic growth and innovation”.

Gathering in New York – with what is likely to become an annual event according to an EVCA spokesperson –  the assembled body argued the directive’s third-country rules would result in a “mass exodus of venture capital firms investing in European companies and ability to raise capital from EU investors”.

Under both the Parliament and the Council texts, non-EU domiciled fund managers, or “third country” managers, would be barred from marketing their funds to European investors unless they can demonstrate they comply with certain sets of requirements; doing so would give them a “passport” to market their funds. The requirements as well as the passport measures are treated differently in each text.

More than 90 percent of the venture capital firms in the emerging markets of Africa, Asia, Europe, Latin America and the Middle East look to investors in the EU as a critical source of funds

Sarah Alexander

“More than 90 percent of the venture capital firms in the emerging markets of Africa, Asia, Europe, Latin America and the Middle East look to investors in the EU as a critical source of funds,” Sarah Alexander, president and chief executive officer of the Emerging Markets Private Equity Association, said in a statement.

Furthermore, the group argued requiring small and medium sized portfolio companies to comply with disclosure requirements would be overly burdensome.

EU lawmakers are set to introduce new disclosure requirements by portfolio companies which are controlled by private equity firms. The EU Council and Parliament are currently in negotiations to determine which thresholds would trigger the provision, with Parliament arguing for stricter standards.

The congress argued the AIFM directive is an effort to reduce risks for large private equity firms, and if applied to their smaller venture capital sibling, would result in “significant unintended consequences”, meaning the rules as they stand “will irreparably harm small and medium sized enterprises by instituting burdensome regulations on the venture capital firms which invest in them”.
“Such regulation would effectively negate all the past support the EU has given to this important ecosystem,” stated Katherine Woodthorpe, chief executive of AVCA.

The assembled body did not however argue for complete exclusion from the directive. Many EU institutional investors, pension funds and insurance companies will only be able to invest in AIFM compliant funds, according to a spokesman, meaning exempted funds may be ignored as a matter of policy.

The congress was arguing for a “light touch opt-in approach for venture funds”, according to the spokesman, who stated venture capital firms were concerned institutional investors “will only invest in managers under prevailing regulations”.

“We’ve had very clear indication from large pension funds that this is a very likely scenario, so we’re not trying to avoid regulation, as we think will be better off inside this regulation, but if we are going to be inside it needs to be proportionate, we can’t be facing crazy capital requirements.”