01 October 2015

The EU's Capital Markets Union

This week, the European Commission took the next step in its ambitious plan to build "a true single market for capital" across all 28 EU member states.  As expected, the "Action Plan" – although wide-ranging and high level – does include some initiatives which will be welcomed by both the venture capital and the private equity community.  However, much more work is needed to flesh out the details, and it is still too early to tell whether the Capital Markets Union will live up to its considerable hype, especially so far as alternative finance sources are concerned.

Facilitating access to venture capital is reassuringly high on the Commission's agenda, and this week's report refers to the relative strength of the US VC market in aspirational terms, whilst pointing out the importance of start-ups and SMEs to the European economy. However – although the promised review of the existing venture capital passport regime is welcome, and may yet lead to better take-up of this well-intentioned but overly-complex regulation – considerable work is still needed before it delivers meaningful changes, which are pencilled in for this time next year. 

In parallel, the Commission says it will review tax incentives for VC investment, so that it can "promote best practice across Member States" when the study is complete, expected to be in 2017. Any such review will need to cover the existing application of EU state aid rules which, despite guidelines issued in 2014 to "promote risk finance", still hamper efforts by member states to encourage investment in SMEs, and it is not yet clear whether that will be part of the review's remit.

The Commission says it will also bring forward a proposal for pan-European venture capital funds of funds and "multi-country venture capital funds" supported by the EU budget.  This is very welcome, but here again we must wait for more detail of how this initiative will operate in practice, and the extent of private sector involvement in its delivery.

The action plan is also encouraging in its aspirations for public markets, and should lead to greater access to equity and debt markets for smaller companies.  That will have indirect benefits for the industry – not only because public equity markets are a key exit route for venture capital and private equity investors, but easier access to debt markets also offers the prospect of cheaper debt for portfolio companies.  And infrastructure investors will welcome the commitment to ease the prudential capital requirements for institutional investors committing to that asset class.   This is being done immediately, with a new definition of "infrastructure" also published this week.

Mentions of private equity are sparse in this week's report, although there are promises to consult next year on the national impediments to use of the cross-border funds marketing passport, and to look again at the prudential treatment of investments in private equity for insurance companies in 2018.  There will also be a better risk weighting for ELTIFs, the new long term investment fund wrapper, which could benefit some private equity strategies.  More ominously, there is a promise to look at the deductibility of interest payments, although it is far from clear where that investigation might lead (especially since it is linked to the politically challenging project to create a common corporate tax base across the EU).

A Capital Markets Union is an ambition with considerable merit.  It could broaden Europe's finance base significantly, with particular benefits for SMEs.  There is no doubt that it also presents a valuable opportunity for European policy-makers to foster both private equity and venture capital: the Commission has recognised the importance of both sources of financing, and sees them as allies in its quest to secure Europe's financial future.  This week's Action Plan offers a few more tentative steps in that direction.

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