BVK: AIFM regulation may make finance more difficult to obtain for SMEs and innovation businesses

Market statistics for 3rd quarter of 2010 reveal importance of private equity for German companies.

In its plenary session today the European Parliament passed the Directive on Alternative Investment Fund Managers (AIFM). Among other things, this establishes how private equity managers will be regulated at EU level in the future. It lays down the registration and information obligations in respect of the national regulatory authorities and the minimum capital requirements and valuation guidelines that must be met by fund managers. Companies financed by private equity will have to make more information public in the future. On the other hand, it will be possible to market private equity funds with an EU passport in compliance with a uniform set of rules for the single market.

"Fundamentally we welcome the fact that the European Parliament has passed the AIFM Directive today", says Hanns Ostmeier, President of the German Private Equity and Venture Capital Association (Bundesverband Deutscher Kapitalbeteiligungsgesellschaften ­ BVK). "The German economy needs capital to grow and private equity can provide that capital. It is therefore positive that our industry and our investors finally have legal security. The application of a uniform set of EU rules in place of the 27 different national systems meets the demands of the EU's single market", says Ostmeier. The Federal Government now has to turn the AIFM Directive into national law within the next two years. Ostmeier: "The Federal Government should use this opportunity to introduce a legal framework for the German private equity market, which is long overdue and which, in addition to the harmonisation of the regulatory supervisory system within the EU, will also bring the tax regulations on German private equity funds into line with international standards."

However, not all of the rules live up to the ideal of a reasonable and appropriate system of regulation. For example, smaller private equity companies in particular, which will have to comply with the Directive voluntarily under pressure from their investors, will find the burden disproportionately heavy. "In this connection, the political decision-makers will have to consider as the process continues whether they want to run the risk of making access to capital that is urgently required more difficult for young technology companies and innovative medium-sized enterprises", suggests Ostmeier.

He is very critical of the new disclosure obligations for companies financed by private equity: "It makes no sense that, in future, companies with private equity will have to reveal more than their competitors. This is a competitive disadvantage for those companies. Someone should also explain to us why a company that was acquired by a sovereign wealth fund or a private investor does not fall under the same regulations. If the legislator wants to create greater transparency, it is imperative that all investors are treated in the same way."

Uli Fricke, Chair of the European Private Equity and Venture Capital Association (EVCA), criticises the fact that the Directive was not preceded by an impact assessment: "At no point during the legislative process was consideration given to the possible effects of the Directive on business financing in Europe. The EU has actually taken up the cause of guaranteeing access to equity finance for small and medium-sized enterprises and innovative businesses. You can see the evidence of this in numerous documents and work programmes. If these aims are now being put at risk by the AIFM Directive, it is Europe's businesses that will suffer."

The BVK's latest market figures for the third quarter of 2010 also prove that private equity is an important alternative source of finance, particularly during the current economic recovery. In the last quarter, private equity investment in Germany totalled €1.02 billion invested in 388 companies, which represents an increase of more than one third compared to the previous quarter (€0.74 billion). In this year to date, total investments in Germany were €3.31 billion in 938 companies, which not only exceeded the equivalent result for the previous year (€1.48 billion) but also the investment for the whole of 2009, which was €2.74 billion. Private equity activities were, however, interrupted by the economic turbulence, which puts the jump in investments into a slightly different perspective. "We are experiencing a sustained stabilisation after the interruptions of the financial and economic crisis", comments BVK Managing Director Dörte Höppner in connection with the latest market figures. "German companies want to grow. They need capital to do so. The private equity industry can provide this capital. We therefore continue to anticipate lively demand".

Of the money invested in Germany in the year to date, €0.40 billion was down to venture capital investments, which is almost the same as the level of the previous year (€0.43 billion ). At the same time, there has been considerable growth in buy-out investments, which almost trebled from €0.69 to €1.80 billion, and in minority investments (growth, turnaround, replacement) from €0.35 billion to €1.12 billion.