21 November Introduction

Transcription

1 EVCA, The Eurpean Private Equity and Venture Capital Assciatin, cmments n CESR s 2 nd Cnsultatin Paper n CESR s Draft Advice f Definitins cncerning Eligible Assets fr Investments f UCITS (CESR/05-490b) 21 Nvember 2005 Intrductin EVCA represents the Eurpean private equity and venture capital industry. The assciatin has well ver 900 members, including the leading fund managers, and supprts a wide range f initiatives designed t encurage an entrepreneurial envirnment in Eurpe, and establish high standards f business cnduct and prfessinal cmpetence. 1 EVCA welcmes the 2 nd cnsultatin pened by CESR n its draft advice f definitins cncerning eligible assets fr investments f UCITS (CESR/05-490b), further t its first cnsultatin paper f March 2005 (CESR/05-064b). This secnd cnsultatin paper will help CESR t define whether and t what extent sme financial instruments culd be cnsidered eligible investments. Clarificatin clsely relates t the cnduct f business rules within the current framewrk f the UCITS Directive, which has been designed fr retail prducts, and the need t achieve rapidly a level playing field between Member states. As the representative f the EU private equity and venture capital industry, EVCA will take the pprtunity f this secnd cnsultatin t cnfirm its first psitin dated June Private equity and venture capital supprts the develpment f businesses by prviding financing and assistance in their management and grwth. Last year alne, ver 8,000 Eurpean businesses benefited frm private equity and venture capital funding, creating many thusands f jbs acrss all industry sectrs and all sizes f cmpanies in bth new and existing cmpanies. Many f the cmpanies financed stimulate the research, develpment and innvatin, essential t sustainable ecnmic grwth. In 2004, the private equity industry raised 27.4 billin frm institutinal investrs and invested 36.9 billin in Eurpe's grwth cmpanies. 2 Fr mre infrmatin, please cntact inf@evca.cm 1

2 Out f the seven areas cvered in the cnsultatin, EVCA will therefre answer t: - Transferability criteria and clsed end funds as transferable securities (Bxes 1, 2, 3); - Techniques and instruments (Bx 10); - The level f supervisin and unit hlders prtectin f private equity and venture capital funds, as ther UCITS (Bx 12) T fully assess the psitin f the private equity and venture capital industry, EVCA prvides in annex a summary f the industry s business mdel, t facilitate a better understanding f the specificities f the asset class and its value within the framewrk f well-balanced harmnised UCITS, within the limits f investrs prtectin and efficient prtfli management. I. Clarificatin f Art. 1 (8) Definitin f Transferable Securities 1. Treatment f structured financial instruments (Bx 1 - Q1) Private Equity ( PE ) and Venture Capital ( VC ) securities are nt generally admitted t trading n a regulated market and are nt raised frm the public but frm prprietary channels. As such, the private equity and venture capital industry is nt cncerned by this questin 1, referring t eligible assets under Art. 19 (1) (a). 2. Other eligible transferable securities (Bx 2 Q2) Private equity and venture capital securities as such are part f the 10% share f any UCITS prtfli which is pen t any securities that d nt meet the eligibility requirements f Art. 19 (1) f the UCITS Directive. Transferability In respect f the cnsultatin paper, regarding Bx 2, private equity and venture capital funds shares cmply with Level 2 and Level 3 requirements, except fr the 4 th indent f the first criteria f Level 2: securities are nt freely negtiable n the capital markets. As mentined in EVCA s respnse t the first cnsultatin paper, thse securities are nt transferable t a third party withut a specific cnsent f any ther party t the transactin. Investrs in private equity and venture capital funds are linked tgether by a pre-negtiated cntractual agreement which creates specific relatinships between fund managers and fund investrs ( Partnership Agreement ), which prevent the free transferability f their securities. This limited transferability is ne f the key elements f the private equity and venture capital business mdel t guarantee cnsistency in its investment strategy in rder t fulfil the lng-term needs f underlying investee cmpanies. 2

3 Liquidity Private equity and venture capital is essentially an illiquid asset class, investing in unregistered securities, as investrs cmmitments are usually made t a fund ver a perid f time f 10 years. Private equity and venture capital funds ffer little pprtunity fr investrs t exit their investment early (i.e. in advance f the full clse f the full term) withut discunting the price. Hwever, investrs in private equity and venture capital funds have t abide t specific requirements as t their eligibility in thse funds. Such investrs (prfessinal individuals r institutinal investrs) are fully aware f the liquidity risk prfile f their investment whse limitatin is clearly stated in the Investment Memrandum (which they can negtiate). In any case, the limited transferability and liquidity characteristics f private equity and venture capital funds securities d nt expse investrs t lsses beynd their cmmitment. Mrever, the valuatin f securities is available n a peridic basis and regular and accurate inf is available t the investrs. T that extent, their prtectin is safeguarded. Regarding Level 3 (5) 3, the ptential risk f insufficient liquidity in a harmnised UCITS prtfli investing in securities accrding t Art. 19 (2) (a) eligibility criteria is cvered by the prtfli limit f 10% fr thse Art. 19 (2) (a) hldings. The remaining 90% f harmnised UCITS invested in Art. 19 (1) (a) hldings mre than cver the requirements f Art. 37 f the UCITS Directive. 3. Clsed end funds as transferable securities (Bx 3 Q 3) EVCA is f the pinin that, after taking accunt f the limited transferability and liquidity f private equity and venture capital funds shares, thse shares hwever can be regarded as eligible hldings fr harmnised UCITS because:. - The Eurpean private equity and venture capital industry is currently wrking with self-regulatins 4, including crprate gvernance guidelines endrsed by the all industry participants and by natinal authrities fr the purpse f investrs prtectin. - The pre-negtiated relatinship between investrs (Limited Partners LPs ) and the private equity and venture capital fund managers (General Partners GPs ) is the guarantee f an apprpriate investrs prtectin safeguards. - In almst all EU-25 Member states private equity and venture capital managers are required t submit any private equity and venture capital fund structure and management cmpany t authrisatin granted by natinal supervisr r regulatr EVCA fully supprts CESR s view that these investr prtectin requirements allw fr UCITS t invest in private equity and venture capital clsed end funds, under the limitatin f Art. 19 (2) (a). All clsed end funds shuld be treated equally where they meet Bx 1 r Bx 2 requirements and in additin the requirements f Bx 3. Hwever, this des nt preclude any f the differences in business mdels between real estate funds, private equity and venture capital 3 See page 13, CESR Cnsultatin (assessment f liquidity) 4 EVCA has issued pan-eurpean guidelines fr the reprting and valuatin f private equity prtflis, crprate gvernance guidelines and a cde f cnduct which all EVCA members shuld fllw. See: 3

4 funds and hedge funds, and ptential Level 3 measures (as nt mentined here) shuld nt mix thse three assets int a ne size fits all plicy. In case f listed clsed end funds, EVCA des nt see additinal need fr investrs prtectin safeguards beynd thse applied t ther listed cmpanies. II. Clarificatin f Art. 1 (9) Definitin f Mney Market Instruments Private equity and venture capital funds are nt mney market instruments and, as such, are nt cncerned by this questin as a ptential eligible asset. III. Clarificatin f scpe f Art. 1 (8) (Definitin f transferable Securities) and Techniques and Instruments referred t in Art. 21 (Bx 10 Q 10) EVCA is supprtive f CESR s psitin with regard t identifying the criteria t be used t assess the cmpatibility f a given technique r instrument, rather than prviding an exhaustive list and specifying under what circumstances each technique r instrument can fall under the scpe f Art. 21 (2). It is fr asset managers t decide hw far they wish t prceed and maintain this psitin nce it has been apprved by the regulatrs and the investrs. These criteria shall be assessed under the purpse f efficient prtfli management, and regulatry appraches shuld be sufficiently flexible t understand these intentins and the use f efficient prtfli management by fund managers. Level 2: T that extent, EVCA affirms that private equity and venture capital investments are fr the purpse f efficient prtfli management. This means that the final bjective f any investment is t generate additinal capital r incme fr any UCITS investing in private equity and venture capital funds, with an apprpriate and pre-negtiated level f risk and within the afrementined limit f up t 10% f the UCITS prtfli in Art. 19 (2) (a) hldings. EVCA sees n reasn t further restrict such investments in the absence f any market failure. Level 3: Financial derivatives instruments are nt managed by private equity and venture capital funds. In respect f pint 5, as mentined earlier, private equity and venture capital funds investment bjectives are clearly stated in the Partnership agreement between investrs and managers, s that general risk plicy is well described and regular infrmatin and hldings valuatins are regularly prvided t investrs, accrding t industry-wide endrsed reprting and valuatin guidelines. IV. Embedded derivatives Private equity and venture capital funds are nt embedded derivatives and, as such, are nt cncerned by this questin as ptential eligible asset. V. Other cllective investment undertakings (Bx12 Q 12) Private equity and venture capital structures are part f ther cllective investment undertakings. EVCA welcmes the revised arrangement in the secnd cnsultatin dcument f the factrs with regard t supervisin and the prtectin f unit hlders. 4

5 In the glbal framewrk f eligible assets fr harmnised UCITS, including private equity and venture capital securities under Art. 19 (2) (a), the Eurpean private equity and venture capital industry supprts the necessary supervisin and prtectin f unit hlders as utlined. This assessment shall be dne with full knwledge f Other cllective investment undertakings business mdel specificities. As mentined ( 110), there is a need fr flexibility in pndering adequate factrs. EVCA is f the pinin that, as is currently the case thrughut Eurpe, the private equity and venture capital industry is subject t a supervisin equivalent t the ne laid dwn in Cmmunity law and as such (its securities are) generally eligible. The Level 3 prpsed guidelines leave enugh flexibility t regulatrs in evaluating dcumentatin submitted by Other cllective investment undertakings. This flexibility is supprted and framed by indicatrs f equivalence as listed in Bx 12 and shuld prevent any distrtin f a level playing field between Member States. This flexibility will als prtect new generatin prducts. Mrever, these requirements are in line with the actual management rules f the Eurpean private equity and venture capital industry and cmmn industry standards 5 : - Supervisin: A Memrandum f Understanding (MOU) is signed directly between investrs and managers. This MOU designs the framewrk f the funds functining. It states, firstly, the necessary management and respnsibility cnditins fr the management cmpany and the depsitary (including management fees). It als describes functins and cntrlling pwer f investment and cnsultative cmmittees, rganises c-investment rules when needed, and reprting rules t units hlders. Secndly, it describes the legal management f the units: issue and subscriptin f shares, capital calls, distributin, shares redeem and liquidity cnstraints. Finally, it describes hw cnflicts f interest, if any, shuld be reslved. All aspects f such an MOU are subject t supervisin and authrisatin by regulatry natinal bdies, including rules f the management cmpany and chice f the depsitary. - Prtectin f unit hlders: Autnmy f the management cmpany: investing in the exclusive interest f the unit hlders is granted by the MOU. Practical management rules such as the availability f infrmatin and reprting requirements, the existence f an independent custdian and reprting requirements are all included in the MOU, under the scrutiny f the natinal regulatr. The general guidance f the prudent man apprach is well respected thrugh prfessinal industry guidelines (see Bx 3, clse end funds as transferable securities, and Eurpean private equity and venture capital industry guidelines). 5 See: 5

6 VI. Financial derivatives instruments Private equity and venture capital funds are nt financial derivatives instruments and, as such, are nt cncerned by this questin as ptential eligible assets. VII. Index replicating UCITS Private equity and venture capital funds are nt index replicating UCITS and, as such, are nt cncerned by this questin as a ptential eligible asset. Cnclusin Accrding t the clarificatin pints cvered by this secnd cnsultatin, private equity and venture capital funds securities may be regarded as eligible assets, meeting criteria f investrs prtectin and prtfli management in rder t generate additinal capital r incme fr harmnised UCITS, with an apprpriate level f risk management. The share f private equity and venture capital assets, as part f a necessary diversificatin in a well-balanced harmnised UCITS prtfli, is prperly limited t the current safeguards f Art. 19 (2) (a). The regime applicable t private equity and venture capital under the current regulatins prtects its nn-retail rientatin and, t that extent, shall nt be included in the c-rdinated UCITS type. Furthermre, EVCA welcmes the results f the recent CESR pen hearing f 7 Nvember 2005, and the numerus remarks frm bth regulatrs and market participants, indicating that the nus shuld be n asset managers (either f the UCITS r f the management cmpany f ther cllective investment undertakings) t take respnsibility fr the investment risk analysis and in discussing it with regulatrs. The crnerstne f this apprach are the factrs fr the investment manager t take int accunt when making investment decisins. This will avid any risk f the regulatins becming t prescriptive and impeding Eurpean financial innvatin and thus returns in the lng run. EVCA remains at the dispsal f the CESR and ther stakehlders fr further discussins n the issues nted abve, and can be cntacted via the address belw: EVCA Minervastraat 4 B-1930 Zaventem Belgium Tel: Fax: inf@evca.cm 6

7 Annex: Summary f the private equity and venture capital business mdel 1. It is imprtant t define crucial criteria accrding t: a) The type and intensity f the relatinship between the investrs and the managers; b) Hw value is added thrugh the hlding f prtfli cmpanies; c) An analysis f the risks (investment prfiles) usually assciated private equity and venture capital. A. Investrs - Managers - The quality and number f investrs are majr criteria fr private equity and venture capital. Investrs are mstly sphisticated, and their number is limited. Sphisticatin depends n size f the cmmitments, experience, risk acceptance...: an investrs entry prcess is based n direct cntractual negtiatin and agreement between investrs and managers (such as the Limited Partnership Agreement, the Règlement du FCPR ); - Investment plicy is pre-agreed in private equity and venture capital memrandum, whereas investments are unrestricted in Hedge Funds; - There is little retail distributin fr private equity and venture capital funds. In case f retail distributin, Eurpean retail private equity and venture capital funds are strictly regulated (with different levels f regulatin accrding t the quality f investrs and the distributin channels used); - Investrs cmmitments are lng term, with almst n exit pssibilities befre the legal end f the fund (usually 10 years); - Just in time draw-dwns in private equity and venture capital management. Cash management fr investrs is different and nt penalizing fr private equity and venture capital investrs; - -Private equity and venture capital prfit sharing, carried interest, is distributed at the legal end f the fund s life, after capital redemptin, hurdle and the effective exit frm the underlying investee cmpanies. B. Value added prcess - Private equity and venture capital investments are the utcme f lng negtiatins with individual entrepreneurs in nn-listed securities; - Private equity and venture capital investrs are nt passive investrs: they prvide capital increases and management input t ensure entrepreneurial value creatin and participate in fllwing financing runds when needed. private equity and venture capital set a strategic agenda in the prtfli cmpanies; - Private equity and venture capital cmmitments f capital in investee cmpanies are lng term (5-6 years n average); - In the due diligence prcesses PE/VC funds have a lng-term entrepreneur s view t create value 7

8 C. Risk analysis - Private equity and venture capital has n dmin effect n markets: n derivatives, n indexes, n shrt selling, few if any listed shares (withut even mentining lck-up perid cnstraints). Private equity and venture capital des nt have the capacity r ptential t massively disrupt r shatter stck markets; - Private equity and venture capital has n negative multiplier effect: brrwing mney fr Eurpean private equity and venture capital funds is either frbidden r strictly limited t a small percentage f available funds. - Private equity and venture capital valuatin f the prtfli is made thrugh annual / semi annual audited valuatin, under the respnsibility f auditrs. This prcedure allws regular assessment f the level f risk and n grss verstatement f perfrmance; - Investment principles and natinal regulatins limit the private equity and venture capital management scpe f actin t guarantee a pre-apprved risk diversificatin fr the investrs; - Investment principles and natinal regulatins limit the private equity and venture capital management scpe f actin t guarantee a pre-apprved risk diversificatin fr the investrs. 8