In 2013, the EU venture capital fund regulation (EuVECA (1) was adopted. As backdrop, the rules had the financial crisis of 2007, which by then had severely affected the opportunity for smaller businesses to fund themselves through bank lending. In addition, the previously adopted Alternative Investment Fund Managers-directive (the AIFM directive) had introduced onerous requirements for managers of alternative investment funds, limiting marketing opportunities. The main purpose of the EuVECA-regulation was therefore to provide a framework for increased investments, in particular in small and medium sized businesses, by both institutional and other investors. In the following we will give a brief update on the timing with respect to implementation in Norway.
EuVECA in brief
The EuVECA regulation is a voluntary framework currently available to managers of alternative investment funds (AIFMs) below the thresholds for authorisation under the AIFM directive. The objective of the regulation is to facilitate investments in small and medium-sized enterprises (SMEs). The main feature of the regulation is therefore a simple set of conduct of business rules combined with a pan European marketing passport in order to provide market access for small managers to raise funds across the EU. Also, Solvency II for insurance companies provides for a lower risk weight for investments in EuVECA funds, making such funds more attractive (all else being equal) compared to other venture funds.
This autumn, Norway passed the necessary legal acts to participate in the EU financial supervisory system through EFTA, according to a negotiated solution between the EU and EFTA. This has been necessary to implement the EuVECA regulation in Norway.
The Norwegian Ministry of Finance has conducted a public consultation process concerning the EuVECA regulation, which ended in July 2015. The Ministry has indicated that implementation will require passing an amending act (see below), which means that the rules are unlikely to enter into force before Q2 2017.
Can the EuVECA “format” deliver?
In July 2016, a total of 70 EuVECA funds from the entire EU had been notified to ESMA. Today, the register contains 20 such funds (11 of which are German and five of which are Irish). This is not a very high number after three years.
In order to increase the attractiveness of the format, the EU Commission proposed amendments to the EuVECA regulation under the Capital Markets Union (CMU) initiative in July 2016. The aim of the proposals was to provide for more flexibility for managers. The proposals are set to be discussed by the ECON committee of the EU Parliament in March 2017 and it remains to be seen if they are adopted, and if they succeed in repairing what seems to be a fundamental problem. The proposal to open up the format to managers that are authorised under the AIFM directive may provide room for more experienced management teams to establish such funds.
Specific questions for Norway
For Norwegian managers the delay in implementation of the EuVECA regulation has led to some missed opportunities.
The government has established a new National Seed Capital scheme, planning the establishment of two seed funds with a combined size of NOK 600 million. Half of the commitments are provided by the Norwegian government, while the other half shall be sought from private investors. Had the EuVECA regulation been implemented in Norwegian law, the seed funds may have had easier access to a larger investor market than the case is now.
As its “bigger brother” the ELTIF fund (2), EuVECA funds may lend to qualifying portfolio companies – both in parallel with equity investments and as a stand-alone form of investment. Only banks and financing companies may presently lend on a commercial basis in Norway. This is likely also why an amending act will be necessary to implement the regulation in Norwegian law. The ability to provide financing will add flexibility in certain venture investments, as well as easier access to financing for start-ups. In order to avoid risks to financial stability, EuVECA funds may not use leverage (at the level of the fund) - no changes have been proposed on this point.
For Norwegian investors the delay in implementing the regulation may not have had any direct consequences – the availability of venture funds is to a greater degree dependent upon the right management teams existing and vintages of funds.
Norwegian financial regulation will change substantially in the coming months, as Norway will implement the “back log” of EU financial regulation passed since the establishment of the EU system of financial supervision. As the back log is quite substantial, this will likely take upwards of two years. In addition, the question of Norway’s future relationship with the United Kingdom after “Brexit” will become a practical one before long. Investors’ search for higher returns in a low interest rate economy, combined with a more pressing need for other high growth industries following the fall in oil prices will test the ability of the Norwegian authorities to facilitate investments into the real economy.
As a consequence, the asset management business may find that it will need to engage more directly with the legislator in the coming years to ensure that it may remain competitive in the European economy going forward.