When I was appointed Chairman of the European Private Equity & Venture Capital Association (EVCA) in June 2013, our industry faced a crisis of confidence in Europe as an investment destination coupled with significant political and regulatory challenges. The sovereign debt crisis had blinded international investors to the essential qualities of the European Union. However, Europe remained a value market offering political stability, strong governance, experienced management and a hugely diverse pool of market leading companies.
Movement Back to Growth in Europe
Fortunately, Europe has recently begun to reassert itself and is moving back onto the growth track, with the economic crisis largely overcome in the major economies of the UK, Germany and the Nordic countries.
- Fundraising. Private equity fundraising in Europe saw €33 billion raised in 2013, well ahead of the €23.6 billion raised in 2012. As in the United States, fundraising is taking longer with better terms for investors, and underperforming GPs are slowly leaving the market as it consolidates around performance and experience.
- Investments. The vast majority of European private equity investments in 2013 were made in the mid-market segment. EVCA Q1-Q3 2013 figures show that €22 billion was invested across Europe with 85% going to France, Germany, the Nordic region and the UK.
- Exits. The European IPO market returned last year, with a number of successful flotations of PE-backed companies, such as the UK’s Merlin Entertainments and France’s Moncler. There were 35 PE-backed IPOs in 2013, compared to 14 in 2012, and there is a strong pipeline of IPO candidates for the year ahead. €73.9 billion of private equity exits were recorded for 2013, the second highest annual exit total for the last six years and up from 2012’s €55.4 billion. These successes should further help the fundraising climate and investor sentiment.
This improved European fundraising, investment and exit environment underscores that there is plenty of cause for optimism in Europe, which I often highlight during my speaking engagements in countries such as the United States, China and Japan and at our own events, such as the national Chairman’s dinners and the EVCA Investors’ Forum. The Investors’ Forum, held this March 12-13 in Geneva, is the EVCA’s showcase event bringing together European GPs and LPs from around the globe to debate the investment environment in Europe today.
The EVCA’s Legal and Regulatory Engagement
Of course, in order for the private equity industry to play its part in the European economic recovery, it needs an appropriate legal and regulatory framework in which to operate. The EVCA represents the industry in the corridors of the European Parliament, European Commission and Council of Ministers, and also advocates on its behalf to global standard-setters such as the OECD.
When I started as Chairman, there was approximately one month to go before private equity became subject to pan-European regulation for the first time. As well as the impending Alternative Investment Fund Managers Directive (AIFMD), European Commission officials and regulators were—indeed still are—working on regulations with the potential to deter institutional investors from allocating long-term capital to private equity funds, such as the Solvency II capital reserve requirements for insurance companies. The EVCA’s strategy of early positive engagement with policymakers, coupled with a communications effort, succeeded in ensuring that the final AIFMD was a workable regulatory framework for the industry. It is not perfect, but it is certainly a considerable improvement on the earlier iterations.
Unfortunately, the legal uncertainty faced by the industry before the AIFMD was finalized has been replaced by new uncertainty as national governments impose their own interpretations of the Directive onto their law books. Consistent implementation is clearly vital to create a viable single market without regulatory arbitrage. For example, the EVCA has learned that some national supervisors are charging additional regulatory fees to those using the AIFMD marketing passport. The EVCA has formally notified the Commission and the European Securities and Markets Agency of this. The AIFMD will be reviewed in 2017, but much of the groundwork for that review and proposed alterations will be made in the near future. It is possible that the Commission will decide to make the AIFMD a regulation this time around.
The EVCA’s Enhanced Communications Drive and Outreach
Following my appointment, we decided to build on this strong foundation of proactive communication through research, reports, face-to-face meetings with influential policymakers and media outreach. I am also committed to fostering stronger ties with national private equity associations worldwide to ensure our arguments are joined up and as forceful as possible.
I am gratified to say this approach has garnered positive results. In Brussels, the private equity industry, which includes venture capital, is now seen as a willing partner with a significant role to play in the long-term financing of the real economy. This was reflected in Commission legislation for banking structural reform, the EU’s equivalent of the Volcker Rule, which exempted private equity and venture capital from a ban on proprietary trading, citing this long-term financing role.
The communications drive is bolstered by the association’s role as guardian of the European industry’s professional standards and its industry statistics. Backed by our entire membership, the EVCA Handbook of Professional Standards sets out the principles of accountability, transparency and governance by which our members must abide in their dealings with each other, their investors and their portfolio companies. The EVCA’s deserved reputation as the leading source of European private equity activity data gives our arguments additional credibility.
We’ve also kept our members informed on regulatory developments with regular updates. The EVCA policy team, drawing on our knowledge bank of industry practitioners and lawyers, created a series of legal and regulatory guidebooks for both EU and non-EU managers. The guides to the AIFMD and to EU national private placement regimes have fast become indispensable tools as we undergo a period of temporary regulatory upheaval.
Up Next: Focus on EU Parliamentary Elections and Commission Appointments
For 2014, the EVCA’s focus is firmly on the European Parliament elections in May and the appointment of a new European Commission in November. These elections and appointments will shape the behavior and attitudes of the EU’s leadership for the next five years. It is up to the EVCA to engage early with these influential politicians so that the good work of recent years is not diminished by the institutional changeover. The European Parliamentary elections will be extremely important, resulting in a large number of new Members of the European Parliament (MEPs). It is likely there will be MEPs who have never come into contact with private equity or venture capital. The EVCA has made it a priority to educate them about the industry and what it stands for.
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While optimistic about the improved conditions for private equity fundraising and investment in Europe, the EVCA remains committed to continuing its focus on emerging regulations, to engaging with the new members of the incoming European Parliament and Commission in 2014, and to continuing outreach to the media, our members, policymakers and other relevant industry participants and observers.