Interest Representative Register ID number: August By to: Dear Sir/Madam

Transcription

1 Interest Representative Register ID number: August 2011 By to: Dear Sir/Madam A New European Regime for Venture Capital IMA represents the UK-based investment management industry. Our Members include independent asset managers, the investment management arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of over 4 trillion of assets, which are invested on behalf of clients globally. These include authorised investment funds (both UCITS and non-ucits), institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. We welcome this initiative and appreciate that the financing of SMEs (particularly at the initial start-up and growth phases) is a key priority for the Commission. We recognise that access to finance for SMEs is a key ingredient in the promotion of growth within the EU. Venture Capital Funds (VCFs) may have a significant role to play. We fully support the proposal for an EU passport for VCFs marketed to professionals, based on an appropriate and proportionate conduct of business regime. This will enable VCFs to raise capital and to make investments in SMEs across the EU. Also, as recognised in the paper, third country VCFs can provide a major boost to economic growth and job creation in the EU. Therefore, third country VCFs should also benefit from an EU passport. We have two key points to make in this context. First, with regard to the AIFMD, we urge the Commission to undertake a wide-ranging review, in recognition of the fact that the same principles driving this initiative apply also in the context of a wide range of other funds. Second, we believe it is important to align the Commission s work on VCFs not only with AIFMD, from which VCFs will be exempted, but also with MiFID, which will govern trading in publicly-listed securities at the next stage of an SME s growth. 65 Kingsway London WC2B 6TD Tel: +44(0) Fax: +44(0) Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 Review of AIFMD We welcome that the Commission has recognised that where funds are available only to professional investors and do not pose systemic risk, then these are good reasons for dis-applying much of the AIFMD regime. We fully support the Commission s statement on page 5 of the Communication that for venture capital funds which are not likely to either pose important systemic risk to the financial system or create investor protection concerns (in so far as they are addressed to professional investors)... it would seem to be disproportionate to require venture capital managers the compliance with the strict AIFMD requirements in exchange of the passport. We understand that a number of venture capital vehicles, which already exist in the UK, will be below the AIFMD threshold where they are self-managed, so would have to opt into the AIFMD to obtain the passport. The AIFMD regime does, though, include some important safeguards for fledging firms. For example, Section 2 of Chapter V of AIFMD includes controls to prevent asset stripping, which are designed to protect the interests of SMEs whose shares are held by AIF. Also, the AIFMD includes a number of measures to provide transparency for investors and to encourage good governance and controls. We would also point out, as we argued throughout the Level 1 negotiation process, that the AIFMD requirements are disproportionate for many other funds that fall within its scope, which are marketed solely to professionals and do not pose systemic risk (or are nationally regulated retail schemes that are already tightly regulated). For both these reasons therefore, in response to the questions in Box 1, we would strongly support a wide-ranging review of the AIFMD rather than a stand-alone initiative with regard to VCFs. In addition to the focus on venture capital, we believe the Commission should use this opportunity to revisit the AIFMD and assess the proportionality of its requirements for all professional/non-systemically important funds. Broadly speaking, there should be a simple EU passport regime for managers of funds aimed solely at professionals, with additional requirements only where the fund is to be promoted to retail investors, and additional reporting only for cases considered to be systemically important. By way of example, our members operate or provide investment management services to a very wide range of investment vehicles, which are domiciled in Europe or in third countries, and which are within the scope of the AIFMD. In particular, we estimate that there are about 2,000 AIF domiciled in the UK. A relatively small number of these are venture capital vehicles. But about one quarter are authorised open-ended retail funds that are not UCITS (such as real estate funds), a further one quarter are listed, closedended securities funds, and nearly one-half are pension fund pooling vehicles. These vehicles are not, and have never been said to be, creators or bearers of systemic risk. It is important to recognise that the overly prescriptive approach in the AIFMD will have undesirable socio-economic consequences not just for venture capital funds but also for these other funds which do not pose systemic risk. The exact cost impact of the Directive, for example the requirements to appoint a depositary and the extensive and detailed reporting to Competent Authorities is difficult to quantify, but it is clear that it will have a further negative impact on investors returns. In the context of a professional market, these costs come without significant benefit because appropriate oversight is

3 already in place in the form of external audit and investor due diligence, as the Venture Capital paper acknowledges. Moreover, there are other ways in which the Directive is likely to have further adverse (and unintended) consequences for many professional and non-systemically important funds. For instance, the AIFMD effectively applies a no fault standard of liability on the depositary. As a result, depositaries may be no longer willing to accept certain types of assets, e.g. from emerging economies, where there are less stringent standards, making it impossible for investment managers to offer emerging market funds in the future and probably forcing them to wind up existing funds. Harmony with MiFID VCFs could play an important role at the initial start-up and growth phases of SMEs. However, it is important to bear the entire life-cycle of SME fund raising in mind from angel start-up capital to investment in publicly-listed securities - when designing effective policy to stimulate SME growth. Clearly, it would be counterproductive to stimulate venture capital funding without thinking of the logical next steps for SMEs as they emerge from the world of venture support into the world of publicly-tradable securities (for those companies that go down this route). Conversely, potential actors in the VCF market may be deterred if they cannot see a smooth transition for their investment from private equity ownership to public listing on SME and main Recognised Investment Exchanges. In this context, we think it is important that the Commission align its work on VCFs not only with AIFMD, from which it is proposed they be exempted, but also in particular with MiFID, which will govern trading in publicly-listed securities of an SME at the later stage of its growth. We would therefore refer the Commission to the range of comments, concerning the impact on SMEs, we made in response to the MiFID Review in February of this year, relating to: Admission to trading (Question 1); SME markets (Questions 25 and 26); and A calibrated approach to trade transparency for SME markets (Question 36). Relevant extracts from that response are attached for ease of reference. A VCF may often hold a large bloc of shares in an SME. Such shares will often be intrinsically less liquid. When the VCF s manager decides to deal in the shares so as to realise the VCF s investment, it will do so by placing orders with other entities for execution. Those entities may be market-makers or other proprietary traders which need time to offset the risk they take on. This risk arises from taking on both a large bloc of shares and shares which themselves are less liquid. Any reduction in the maximum time within which a trade must be made public (post-trade transparency), might markedly increase the cost to the VCF (and hence its investors) of the transaction and in the extreme a rule requiring too early disclosure might lead to the exclusion of certain SME securities from investment strategies. Although our firms are generally supportive of more post-trade transparency, they are alive to a range of costs inherent in a reduction in publication delay.

4 We offer our assistance to the Commission in progressing this initiative. Yours faithfully Alwine Jones EU & International Regulation

5 Extracts from IMA s response to the Commission consultation on The Review of MiFID, February 2011 Appendix (1) What is your opinion on the suggested definition of admission to trading? Please explain the reasons for your views. The Commission has not identified the purpose of this proposal. Extending the application of admission to trading to any financial instrument to be traded on an MTF or organised trading facility (OTF) would trigger obligations on issuers under the Market Abuse Directive, the Prospectus Directive and the Transparency Directive. Whilst the former may be appropriate, this might be seen to run counter to the SME work at the heart of the Commission s concern. For example the AIM market in the UK is an MTF which trades the shares of small and medium sized companies. To treat a decision by an MTF to permit trading as equivalent to an admission to trading would lead to the issuers being treated equally in all respects as on a regulated market (save for the 18 month rule regarding prospectuses and trading on alternative RMs). We have wondered whether this proposal is about consent of issuers to the identity of those who trade in their shares, as this example has been raised publicly by an exchange. We would not support this suggestion in any case, as it fails to recognise that shares in a company are the property of their owners and not of the company. We would encourage the Commission to articulate its objective more clearly. (25) What is your opinion of the suggestion to introduce a new definition of SME market and a tailored regime for SME markets under the framework of regulated markets and MTFs? What would be the potential benefits of creating such a regime? (26) Do you consider that the criteria suggested for differentiating the SME markets (i.e. thresholds, market capitalisation) are adequate and sufficient? I. Given the primary and secondary market functions provided by the existing growth markets across Member States, their default regulatory status as MTFs does not accurately reflect the function or importance of the European SME markets and therefore does not provide an appropriately tailored regime for them. II. Any strategy that seeks to assist SMEs in obtaining appropriate funding must also deal with more than the regulatory environment for admitting to trading and secondary market regulation; the SME sector (however defined) is a complex mix of types of issuers, investors and advisers and all aspects must be addressed to have any prospect of delivering a successful outcome. Growth markets across the Member States already vary widely as to the size and nature of the companies supported, the profile of the investor base, the

6 type of regulatory environment and other cultural and economic factors; the key element in any initiative to support SMEs is to recognise the need for all these elements to be managed in some way. III. IV. The challenging task of categorising SMEs in this context, both in terms of size and nature of activities will require recognition that there must be a political trade-off between precise and inflexible regulatory certainty (which may comfort regulators, but will likely stifle the market and growth sought) and flexibility to allow issuers and markets the scope to develop according to their needs and those of their investors and customers. If additional constraints are placed on the European growth markets, it is probable that intermediaries will focus on providing services to larger issuers as their liability associated with servicing more established corporates is lower and the levels of remuneration are higher. In addition, it will be necessary to recognise that supporting small businesses requires action along a continuum; appropriate funding arrangements and initiatives to promote liquidity need to be introduced in order to stimulate the development of the SME market infrastructure and ensure that the SME funding environment encourages and supports small businesses and their venture capital backers who need dynamic and liquid public markets to facilitate successful exits. V. In the wider context of other changes to MiFID, it is also important to recognise the implications for SME funding of the tendency for SME securities to be classified as complex, thereby precluding their being available to many types of investors and the consequent negative impact this has on the ability of SMEs in their capital raising. We support the proposal in Option A of para of the Consultation paper to classify shares admitted to trading on an MTF as non-complex and urge the Commission to adopt this approach throughout MiFID, not only in relation to this particular point. VI. We suggest the Commission, together with ESMA, establish an industry EU Growth Market Working Group, comprised of all exchanges that currently operate growth markets or who would be interested in doing so, together with representatives of investors, issuers and advisers. The task of the Group would be to review the way in which the current growth markets operate, draw out common principles and guidelines and identify whether this could be developed into a cohesive framework for a harmonised pan-eu approach to supporting SMEs, covering not only the admission to trading aspects, but the cultural, financial, economic and educational requirements. Key characteristics of such a framework would include: It must provide a properly constructed framework which would allow SMEs to raise equity capital more efficiently; It must not undermine investor protection by reducing standards of disclosure and transparency; It must be supported beyond the pure regulatory framework by measures to extend the investor base and facilitate investment in smaller companies e.g., providing appropriate exemptions from State Aid rules and providing a framework for appropriate fiscal incentives to

7 help address the structural equity financing gap across Member States; It must allow for exchanges and advisers to adopt innovative and flexible solutions to supporting smaller companies, including in the areas of, knowledge transfer and support by advisers (for example as sponsors, accountants and lawyers),research provision, creation of indices and attribute groups; It should allow for harmonisation across Member States but ensure flexibility at Member State and market operator level to enable domestic growth markets to account for local market practices and cultures. Quantitative / size criteria are not appropriate for setting eligibility of such markets; what is needed are flexible eligibility criteria around SME markets and adequate flexibility at the local level to allow growth markets to attract appropriate companies and investors, adapt as market conditions change and increase investor confidence in SMEs as an asset class. Criteria must not be set too low as this would inhibit the development of the growth markets, diminish liquidity and result in many SMEs having to decide whether to apply for a listing or to return to other, less public, forms of funding. (36) What is your opinion about introducing a calibrated approach for SME markets? What should be the specific conditions attached to SME markets? We have provided our answer about SMEs under questions 25 and 26.