Before the adoption of the EuVECA and EuSEF Regulations only managers whose assets under management were above a threshold of €500 million benefited from European passporting granted by the AIFMD, i.e. allowing access to non-retail investors across the EU, unless sub-treshold managers (assets under management of less than €500 million) opted in the full AIFMD regime. The novel feature of the two Regulations was that they opened up passporting possibilities to sub-treshold managers of EuVECA and EuSEF funds and speciffically created a uniform approach for the categories of investors eligible to commit capital to such funds. The Regulations were first EU legal instruments in the asset management area which laid down two uniform "single rule books" ensuring that investors know exactly what they get when they invest in the funds.

This section summarises the review questions addressed in our assessment.

Question 1: What is the current situation?

Question 2: How effective has the EU intervention been?

-To what extent have the objectives been achieved and what factors influenced the achievements observed, namely types of managers that can manage and market the EuVECA and EuSEF funds, types of investors who can invest in the EuVECA or EuSEF funds and range of eligible assets adequate for the EuVECA and EuSEF funds?

Question 3: How efficient has the EU intervention been?

-How affordable were the costs borne by EuVECA and EuSEF managers, given the benefits they received? In particular is it too expensive to set up EuVECA or EuSEF funds? Are there significant differences in costs (or benefits) between Member States and what is causing them? Are the costs relating to fund registration proportionate to the potential benefits for funds from having the passport?

-Are the requirements for minimum own funds imposed on the EuVECA or EuSEF managers relating to fund registration proportionate to the potential benefits for funds from having the passport?

Question 4: How relevant is the EU intervention?

-To what extent is the intervention still relevant and how well do the original objectives correspond to the needs within the EU?

Question 5: How coherent is the EU intervention internally and with other (EU) actions?

-To what extent is the intervention coherent internally?

Question 6: What is the EU added value of the intervention?

-To what extent the intervention changed situation and to what extent do the issues addressed by the intervention continue to require action at EU level?

This review is based primarily on desk research of Commission services 48 and stakeholder consultations including:

numerous bilateral meetings between the Commission services and stakeholders;

three public online consultations: (i) the consultation on the Green Paper on the Capital Markets Union; (ii) the EuVECA and EuSEF consultation, and (iii) the Call for evidence 49 ;

technical workshop organised by DG FISMA with managers of existing EuVECA and EuSEF funds as well as practitioners who are interested in offering these funds.

Where possible the conclusions of the review are based on triangulation of information from different sources.

Limitations

The EuVECA and EuSEF Regulations become applicable only in mid-2013 (i.e. less than 3 years of application) therefore the data available for extensive analysis is limited.

EuVECA and EuSEF funds are still in the early period of their development and they are small and niche markets compared with other more well-known and developed investment funds.

Although under the AIFMD reporting rules there is a set of information required from the all funds to be provided to the National Competent Authorities, the breakdown of the information provided does not take in to account EuVECA and EuSEF funds specifically. Moreover, ESMA reported that the AIFMD reporting system is not fully operational yet, and the data are not immediately comparable.

Respondents to the EuVECA and EuSEF consultation also noticed that the ESMA database on EuVECA and EuSEF is not updated on a regular basis and this is not helping to make the labels more visible and to compare the progress on registrations in different Member States.

For all the above reasons, data, and in particular granular data about the costs of setting-up a fund and of getting it approved, as well as the contribution of EuVECA and Eusef Regulations to the funding of the SME market was very difficult to identify.

Therefore, for the puprose of quantifying impacts, this review makes very cautious use of available data which should be rather understood as 'anecdotal evidence' rather than as comprehensive.

The EuVECA and EuSEF Regulations are directly applicable in EU Member States from 22 July 2013. Establishing common EU requirements through binding measures was aiming at reducing inconsistencies, and hence compliance costs.

The Commission Services are not aware of cases currently pending before national courts, which eventually could also present questions about interpretation and application of the EuVECA and EuSEF Regulations to the Court of Justice of the European Union.

Several respondents claim that some Member States has gold plated the provisions of Article 3, Paragraph 3, of the AIFMD by requiring that all national AIFMD-authorised managers, including sub-threshold managers (i.e. also EuVECA and EuSEF managers), should be authorized and comply with the same organizational and supervisory requirements. While EuVECA and EuSEF managers are formally registered (not authorized), the conditions to to obtain registration are de facto the same as for an authorization under the AIFMD (including, for instance, the appointment of a depositary). This results in EuVECA and EuSEF managers in some Member States face longer time to market (e.g. more than 8 months to obtain the registration) and incur heavier establishment and organizational burdens than many of their EU competitors. Moreover, managers may be “pushed” to traditional AIFM structures, considering that no preferential treatment is granted to EuVECA and EuSEF managers in terms of registration, organizational and supervisory requirements. The only advantage thus remains the possibility to market to non-professional investors investing at least €100,000.

The legal form of EuVECA and EuSEF instruments Regulations, which do not require national transposition measures. However, a respondent to the EuVECA and EUSEF consultation reported that some host Member States are (considering or already) imposing additional fees and charges and/or other requirements on EuVECA or EuSEF managers looking to use their EuVECA or EuSEF passports and to market in those jurisdictions. These costs, which are to be paid in addition to the home national registration costs, constitute a substantial burden for such managers, contribute to regulatory divergence and are an impediment to cross-border marketing. In fact, they are a disincentive to firms to operate in other Member States and are already discourage some fund managers from marketing in certain jurisdictions, thereby restricting the free flow of capital across EU borders and undermining the single market. Host marketing fees also discourage managers from marketing funds in the whole EU. The benefit of marketing a fund in the EU may become limited compared to the costs, and especially smaller funds may decide not to market a fund in most EU Member States. Accordingly, some managers are reluctant to request extensive passport authorization and focus only on those jurisdictions where they consider having a realistic prospective investors’ base.

The burden of completing the forms which many Member States are also requiring (including the costs of discovering which forms need to be completed) is significant and should not be overlooked. Where a EuVECA or EuSEF manager has been authorised by its ‘home’ Member State to use the EuVECA or EuSEF label and to market this fund in other Member States, it cannot be obliged to pay any fee or charge to the authorities in any ‘host’ Member State as a condition of marketing in that jurisdiction. In order to facilitate consistent implementation, ESMA published on 11 November 2014 Questions and Answers on the application of the EuSEF and EuVECA Regulations (ESMA/2014/1354). The purpose of ESMA's document was to promote common supervisory approaches and practices in the application of the two Regulations. The document aimed at NCAs, with a view to ensure that in their supervisory activities their actions are converging.

Question 1: What is the current situation?

Venture capital is an important source of funding, alternative to traditional bank loans, which could play a growing role in the EU economy.

However, the take-up is not sufficient. Despite a similar size of economy, the United States provide more risk capital to companies, including SMEs: in 2013, European firms received more than 5 times less capital from venture capital funds than US firms (€5 billion vs. €26 billion). Over the same period, €20bn was invested by angel investors in US SMEs, versus only €6bn in Europe. 50 The CMU Green Paper reports that if the EU venture capital markets were as deep as in the US, as much as €90 billion of funds would have been available to finance companies between 2008 and 2013.

Data from Invest Europe (see table 1 below) shows incremental funds raised by venture capital funds in Europe in the period between 2011 and Q3 2015 (preliminary), with 316 funds and almost €16 billion. This is to be compared with data from ESMA at May 2015 reporting a total of 32 EuVECA funds intending to raise capital of €1.3 billion in the period between 2013 and May 2015 51 . There is not current breakdown of the effective capital raised, compared to the committed capital at funds' inception.

As of beginning of April 2016 there are 70 EuVECA funds registered in the ESMA database. These figures show that while take-up of the opportunities presented by the EuVECA Regulation is increasing it could still be improved further.

Table 1: Incremental funds raised (2011-Q3 2015 preliminary), by number of funds and by amount

Source: Invest Europe/PEREP_Analytics

Note: This covers all Europe, including Norway and Switzerland.

As regards EuSEF funds, there is no such a publicly available breakdown for EuSEF and social investment funds. ESMA data suggest that in March 2016 there was 1 EuSEF fund in France and 3 EuSEF funds in Germany, with total assets under management of € 32 million. These figures are clearly below the expectations as, according to EVPA’s latest Industry Survey on “European Venture Philanthropy and Social Investment 2013/2014”, the average size of European social investment funds - which are not covered by the EuSEF Regulation - is €13,8 million 52 . EuSEF average size is around € 8 million.

Question 2: How effective has the EU intervention been?

- To what extent have the objectives been achieved and what factors influenced the achievements observed, namely types of managers that can manage and market the EuVECA and EuSEF funds, types of investors who can invest in the EuVECA or EuSEF funds and range of eligible assets adequate for the EuVECA and EuSEF funds?

Given the date of entry into application (i.e. not even 3 years before this review) it is too early to assess to what extent the EuVECA Regulation achieved the general objectives to make European SMEs more competitive in a global marketplace and ultimately to contribute to EU goals on inclusive, sustainable growth. It is also too early to assess the specific general objective of the EuSEF Regulation to have social businesses able to flourish across the EU and fully take part in the benefits of the single market.

The EuVECA Regulation's specific objective was to create a European system for the cross-border fundraising of venture capital funds. This objective has been met as according to the ESMA data at the end of March 2016, 71% of the EuVECA funds are marketed cross-border 53 .

The EuSEF Regulation's specific objectives were to allow EU investors to have confidence and trust in the social investment funds offered to them. This requires that such funds have defining characteristics differentiating them from other alternative investment funds. Also, that social investment funds have better access to interested investors across the EU and better allocation of existing capital to social businesses. According to the ESMA data at the end of March 2016, 75% of the EuSEF funds are marketed cross-border 54 . However, considering the limited number of funds and the small amounts of committed capital, these objectives have not been met yet.

The two Regulations partially met the operational objectives of creating a common regulatory framework governing social investment funds, venture capital funds and their managers. Indeed, the Regulations established the main characteristics of venture and social investment funds and improved the comparability between them (by standardising the portfolio composition, defining eligible assets, and requiring reporting). This objective has been met.

The two Regulations also created a network of administrative co-operation for the effective introduction and supervision of managers of EuVECA and EuSEF funds (notification processes among NCAs as regards cross-border operations, ESMA's supervisory convergence role and central database with registered EuVECA and EuSEF managers). Moreover, the EuSEF Regulation provides a regulatory framework for assessing and analysing social impacts/returns, including the measurement of the extent to which the social undertakings, in which the EuSEF funds invests achieve the positive social impact to which they are committed. This objective has been met.

However, the EuSEF Regulation's operational objective of ensuring that regulatory frameworks across EU are proportionate and effective for maximising fundraising opportunities for social investment funds has not been fully met – see Question 3 below.

Invest Europe data (see graph 2 below) shows the percentage of funds raised (in terms of amount) by venture capital funds from investors based within their own country (in dark blue) and investors based in Luxembourg (in light blue).

Graph 2: Cross-border venture capital fundraising in Europe (2011-Q3 2015 preliminary)

Geographic origin of venture capital funds managed from Europe

Source: Invest Europe/PEREP_Analytics

For the vast majority of Member States, European venture capital funds were almost entirely relying for their fundraising on national investors and investors based in Luxembourg. The Invest Europe assumption is that this money came for the vast majority from the EIF. Only a small percentage of the total amounts raised came from investors in another country. Putting Luxembourg aside (where much of the small amount of funds raised came from Belgium and the United States), only in two Member States did cross-border fundraising by venture capital funds amount to 20% or more: the United Kingdom and the Netherlands. This shows the extent of the fragmentation of the European market.

In this context, the fact that 71% of the EuVECA funds and 75% of the EuSEF funds are marketed cross-border shows the effectiveness of the fundraising opportunities across EU created by these two legal frameworks.

Several stakeholders reported that there are likely to be a range of barriers which prevent more widespread take up of these funds. A particular concern that has been raised is that managers whose portfolio exceeds €500 million may not apply for registration, set up and operate such funds, nor may they use these two designations to market the funds in the EU. Another specific concern was related to the funds rules which governs the EuVECA and EuSEF funds, e.g. the definitions of qualifying portfolio undertaking, the €100,000 minimum entry ticket for non-professional investors, etc.

Limitations on manager

The EuVECA and EuSEF Regulations are currently designed for management and marketing by EU domiciled managers who manage a total portfolio of assets of less than €500 million. This threshold was chosen because managers below this threshold do not benefit from the passport under the Alternative Investment Fund Managers Directive (AIFMD) 55 unless they opt in the full AIFMD regime for large managers. To fill this gap, the Regulations introduce a separate marketing passport for EuVECA or EuSEF only. According to Invest Europe data (2011), 98% of European venture capital managers manage a portfolio of venture capital funds that are beneath the €500 million threshold set out in the AIFMD There is no data on how many alternative investment fund managers (AIFM) manage venture capital funds as part of a broader portfolio.

Currently, a manager of either a EuVECA or a EuSEF fund must obtain an authorisation under the AIFMD as soon as its overall portfolio exceeds the AIFMD threshold of €500 million. In these circumstances, the EuVECA and EuSEF Regulations only provide for the continued use of the EuVECA or EuSEF labels, but not the marketing and management passports established in these Regulations ("limited grandfathering") 56 .

ESMA in a Questions and Answers document on the application of the EuSEF and EuVECA Regulations 57 maintains that there are no prudential concerns in allowing large managers whose overall portfolio exceeds the AIFMD threshold of €500 million in allowing them to set up and market EuVECA and EuSEF funds to professional investors. ESMA explains that from a regulatory and supervisory perspective, an authorization under the AIFMD is more stringent than a registration under the EuVECA and EuSEF Regulations. However, ESMA opinions are not legally binding and stakeholders subsequently asked for more legal clarity and certainty. Indeed, several bilateral contacts with stakeholders, as well as a recent ESMA consultation on the EuVECA and EuSEF Regulations, revealed that (large) managers authorised under the AIFMD perceive the limitation on managers as restrictive prohibiting them from managing and marketing EuVECA or EuSEF funds whilst using their respective labels.

Almost 60% of respondents to the CMU consultation proposed specific changes to the EuVECA and EuSEF Regulations and also pointed out that above-threshold and restrictions on AIFMD–authorised (large) managers are restrictive; they should be equally entitled to set up and market EuSEF and EuVECA funds.

Most of respondents to the EuVECA and EuSEF consultation underlined that AIFMD-authorised managers are already compliant with requirements which are more onerous and stringent than those in the two Regulations. Respondents claimed that disallowing AIFMD-authorised managers do not benefit investors: (a) as same products are not named the same way, (b) bigger players cannot put more resources in promoting EuVECA or EuSEF products; as large managers are not given access to the EuVECA and EUSEF labels, they are not in a position to pave the way for smaller players, and hence (c) further promote the development and financing of small and medium-sized enterprises. Other respondents argued that the restriction on managers does not per se increase the number of managers who would manage EuVECA and EUSEF funds; and, secondly, large managers are deprived of contributing with their experience in managing and marketing venture and social entrepreneurship funds.

Data collected by EVPA from 24 social investment fund managers representing 37 investment social funds shows that the existing social investment funds are still rather small and the eligible EuSEF fund managers, who currently typically manage only one social entrepreneurship fund, are far from reaching the €500 million threshold of aggregate assets under management. However, a number of bigger players (including finance-first AIFMD –authorized managers, etc.) are creating investment vehicles dedicated to the financing of social enterprises.

There is a general consensus that disallowing AIFMD-authorised managers to manage EuVECA and EuSEF funds does actually not benefit from reduced transaction costs by creating economies of scale (in terms of improved efficiencies such as streamlined reporting systems, lower administrative costs, leveraged knowledge and staff experience or enhanced attractiveness as an employer).

Fund rules

EuVECA and EuSEF funds are subject to specific requirements on the eligible assets they can invest into. Both funds are subject to a requirement to invest minimum 70% of their committed capital in qualifying portfolio undertakings. The EuVECA Regulation builds the definition of qualifying portfolio undertakings on the EU wide spread definition of SMEs, which include companies in the early stage of development, such as start-ups and innovative SMEs i.e. unlisted SMEs that employ fewer than 250 people with annual turnover of no more than €50 million or annual balance sheet of not more than €43 million. The EuSEF Regulation defines the eligible social enterprises as unlisted companies with the achievement of measurable, positive social impacts as its primary objective.

Some of the responses to the CMU Green Paper suggested that the range of products in which a EuVECA fund can invest is not sufficient. It should be borne in mind that the primary goal of the EuVECA Regulation was to provide funding to very small companies, SMEs that are at their initial stages and have strong growth potential. This should also be looked at in consideration with the EU programmes and policies of support for SMEs through venture capital, which currently exclude large buyouts.

Several respondents to the EuVECA and EuSEF consultation claimed that the inability to determine with enough certainty whether the obligation to invest 70% in eligible assets (SMEs or social undertakings respectively) is achievable throughout the full life of a fund (which could be even 10 years) is sufficient to discourage them from making an application. In this context, the respondents recalled that venture capital funds invest across a wide range of stages from funding start-ups to providing development capital and later stage growth equity.

The EuSEF definition of qualifying portfolio undertakings (i.e. social undertakings) was not criticised by the large majority of the respondents. However, some suggested to rely on the wider definition of a social enterprise, such as the one used in the Social Business Initiative of the European Commission [SBI - COM(2011)682].

The SME definition used in the qualifying portfolio undertakings definition in the EuVECA Regulation was identified as a potential issue, excluding companies that would be considered ‘small or medium’ sized by fund managers and investors. A respondent to the EuVECA and EuSEF consultation argued that many innovative and rapidly growing SMEs can achieve the defined threshold very early on. For example, companies active in the services field (i.e. non-manufacturing, active in the provision of health and care services, education, etc.) may fairly rapidly reach 250 employees but from a financing and business development perspective are still ‘early stage’ and looking for funding from venture capital or other active fund investors.

Large fund managers tend to execute transactions of a larger size, i.e. they look at and invest in companies that are larger than those defined by the EuVECA Regulation (but are still considerably smaller than the size of companies typically involved in large buy-out financings elsewhere in the private equity market). As a consequence, the restriction on managers discriminates against managers with large amounts of capital to invest. There is an increasing number of managers that have funds in the €100-200 million bracket that do invest in early stage companies, although often those with more than 250 employees. Moreover, there is still a huge size gap between the SMEs, as defined in the EuVECA Regulation, and those which are mature/eligible to eventually go on the SME exchanges or other listed markets. The EuVECA Regulation could not have stepped in as a pipe-line of funds that would invest into these companies up to this stage of their development. Other respondents claimed that the restriction impedes a manager’s ability to provide his portfolio companies with subsequent rounds of funding if they grow beyond the SME definition after his early stage investments. From the responses received it is the number of employees aspect that is proving to be most problematic, rather than the turnover/balance sheet criteria.

Minimum investment

Whereas the AIFMD passport only covers marketing of funds to professional investors, the passports in the EuVECA and EuSEF Regulations extend the passport also to marketing to certain retail investors defined as those able and willing to commit at least €100,000 of their investable funds to them. This minimum "entry ticket" was introduced to ensure consumer protection. However, the entry ticket has been criticised as being prohibitively high, particularly by managers interested in setting up EuSEF funds.

EuVECA and EuSEF funds are marketed in Member States alongside domestic funds with similar profiles which have lower minimum entry tickets. For example, the minimum investment in France is €30,000 provided some other fund-related requirements are met. A high threshold does not attract private non-professional investors. A high entry ticket into the EuVECA and EuSEF funds restricts the range of investors from Member States with less experience in venture and risk social capital.

Several respondents to the EuVECA and EuSEF consultation were considering this entry ticket appropriate. Investors in such funds are typically institutional investors as well as family offices and certain types of individuals. Individual investors may include:

-Entrepreneurs and other angel investors (many of which are entrepreneurs themselves), who have traditionally constituted an important source of “intelligent capital” to the small funds sector;

-Members of management teams running companies in which the fund invests;

-Industry sector experts (where the fund has a sector focus);

-Venture capital experts which would include both venture capital executives and other professionals connected with the industry;

-Finance sector experts; and

-High net worth individuals.

There is a consensus among the respondents that the high entry ticket does not need to be inevitably accompanied by an imposition of further (retail) investor protection requirements. The less burdensome investor protection requirements do not serve to detract from the ultimate benefit of a lower compliance regime combined with an EU passport that the EuVECA and EuSEF Regulations provide.

Some respondents suggest that the minimum entry ticket does not offer advantages and guarantees like, for instance, a maximum investment amount, as introduced by the UK Financial Conduct Authority in its crowdfunding rules (investors do not face barriers to investing, but they can only invest a certain percentage of their net investible assets to ensure they are not over-exposed to one particular asset class). Other respondent pointed the EuVECA and EuSEF frameworks miss criteria which could relate to the investor's income, net assets, knowledge, experience, understanding of the risks involves etc.

Also in the EuSEF framework, the respondent reported that EuSEF funds currently tend not to raise money from many different individual/non-professional investors and the €100,000 threshold is not (yet) perceived as being restrictive. This being said, most of the received testimonials are pointing to more sensible smaller entry tickets (e.g. €50,000 or €20,000), as private investors (or sometimes foundations) do not usually invest “big” tickets of €100,000. Finally, a respondent pointed out that investors in venture capital funds are typically investing well above the €100,000 threshold. Also, some of the (bigger) impact funds are applying higher entry tickets (e.g. €500,000) and are therefore not really impacted by the threshold in the existing Regulations (which is a minimum).

It appears there is not a clear consensus on the minimum investment, but the restricted population of investors does not need to be balanced against the increases in administrative work this may entail and which, therefore, did not have a negative impact on fund costs.

Question 3: How efficient has the EU intervention been?

- How affordable were the costs borne by EuVECA and EuSEF managers, given the benefits they received? In particular is it too expensive to set up EuVECA or EuSEF funds? Are there significant differences in costs (or benefits) between Member States and what is causing them? Are the costs relating to fund registration proportionate to the potential benefits for funds from having the passport?

- Are the requirements for minimum own funds imposed on the EuVECA or EuSEF managers relating to fund registration proportionate to the potential benefits for funds from having the passport?

The procedure for the registration under the EuVECA and EuSEF Regulations is meant to be a much swifter, less burdensome process than under the AIFMD authorisation. In principle the EuVECA or EuSEF manager notifies its home Member State competent authority of its intention to manage and/or market and EuVECA or EuSEF, the home competent authority checks the EuVECA or EuSEF meets the requirements of the applicable Regulation and notifies the relevant competent authorities in the host member state. These host Member State competent authorities would not charge the manager additional fees, insist on a detailed review of the application and the fund documents or insist on the appointment of additional, local service providers.

However, fund registration fees vary considerably between Member States and may affect take-up by fund managers. As already noted in the 2011 EuVECA and EuSEF impact assessments, venture capital activities are not homogenously spread across the European Union.

Moreover, in the framework of the CMU consultation, some respondents referred to different treatment in some Member States in relation to the level of "own funds" (as specified in Article 10 and Article 11 of the EuVECA and EuSEF Regulations respectively) required for EuVECA and EuSEF managers to be authorised.

Home Member State

The legal frameworks resulting from the transposition of the AIFMD into Member States’ laws differ in material aspects in the various Member States, and this affects also the EuVECA and EuSEF registration procedures. Respondents to the EuVECA and EuSEF consultation claimed that registration requirements are perceived as a hindrance for small managers which sometimes do not even consider an application for registration. Inappropriate requirements from a perspective of small managers include high minimum capital requirements, high registration and marketing fees, the requirement to set up a local IT infrastructure or to use local service providers as opposed to well-known international cloud offerings, the requirement to hire an external auditor for the manager, and finally the separation of roles for micro entities.

Regarding fees and other requirements imposed by home Members States to managers in connection with the marketing of their funds in Europe, Invest Europe, an industry association, claimed in its response to the EuVECA and EuSEF consultation the following:

-Luxembourg: The CSSF levies fees of 5,000 EUR with respect to the processing of the initial registration of EuVECA managers / funds.

-Italy: CONSOB is requesting communication of information and data for the purpose of the calculation of fee amount due to the regulator. Pursuant to the Italian laws and regulations implementing the AIFMD and the EuVECA Regulation, an Italian EuVECA fund manager is subject to almost the same organisational and structuring requirements and burdens imposed on an Italian AIFM. Accordingly, setting up an EuVECA fund in Italy is more expensive than in other European jurisdictions.

-Germay: from a German perspective, the additional organisational requirements imposed by the German competent authority (BaFin) are substantial and are only accepted because otherwise there is no alternative to market for small fund managers. However, not all managers can afford these costs and so venture capital funds simply refrain from cross-border marketing.

-Spain: The CNMV is requesting the payment of an initial registration fee of EUR 2,500 (Tarifa 4.5.1) pursuant to Law 16/2014 ( http://www.boe.es/boe/dias/2014/10/01/pdfs/BOE-A-2014-9895.pdf ).

-Czech Republic: No EuVECA or EuSEF fund has yet been registered in the Czech Republic, therefore, the potential costs of fund registration can only be estimated. Nevertheless, the respondent presumes that registration costs for the first EuSEF/EuVECA fund in the Czech Republic will be quite high and possibly higher than the benefits stemming from having the passport. However, the actual registration fees for EuSEF/EuVECA funds will be very low and should not amount to more than 2,000 EUR for the EuVECA/ EuSEF manager licence fees, and less than 75 EUR for the registration of EuVECA/ EuSEF funds. No fees for the funds from other Member States are applied.

-Malta: The MFSA is requesting payment of notification and supervisory fees as described in the relevant local law.

The different levels of fees for registration/authorisation of the AIFs which are applied by Member States in the AIFMD framework are not in the scope of this review, but they will be analysed in the AIFMD review planned for 2017.

Total costs, including own funds

Moreover, in the framework of the CMU consultation, some respondents referred to different treatment in some Member States in relation to the level of "own funds" (as specified in Article 10 and Article 11 of the EuVECA and EuSEF Regulations respectively) required for EuVECA and EuSEF managers to be authorised.

The approach to the minimum own funds requirements, as set out in the two Regulations, i.e. merely imposing a general obligation to have sufficient own funds, with no specific amounts required, was intended to allow flexibility to cater for a proportionate approach to these smaller funds. The obligation is intended to be on the manager to be able to justify the sufficiency of their own funds to maintain operational continuity.

However, it seems that in practice some NCAs interpret the requirements for minimum own funds differently and as a result, the level of own funds requirements differs considerably. Respondents to the EuVECA and EuSEF consultation reported that some Member States are considering imposing on EuVECA and EuSEF managers high capital requirements, along the lines of those required under the AIFMD (for example, in Germany the manager is required to retain ¼ of the yearly overhead costs (in line with the AIFMD). A similar case can be observed in Luxembourg, where the own funds requirement amounts to €125,000. In Denmark the own funds requirement totals 1/8 of the costs for the preceding year, which is considered to be reasonable. In Ireland, under certain circumstances the ¼ can be reduced to 1/8 of the yearly overhead costs. At the other end, the UK imposes an amount of £5,000).

Moreover, the requirements are often to a large extent aligned to the requirements of the AIFMD, especially in terms of human resources (segregation between portfolio and risk management), infrastructure (including IT) and audit requirement at manager level.

One of EVPA’s Members reported in the EuVECA and EuSEF consultation the following costs for the EuSEF registration of its fund: €40,000 (external costs), €25,000 (legal advice), €14,000 (costs related to the NCA and ESMA), +/- €50,000 (estimation of costs supported by the fund management internally). On top of those +/- €130,000, that same EVPA’s Member also mentioned additional costs (internal and external; exact amounts yet to be confirmed) arising from post-registration obligations (e.g. ESMA reporting via special interface).

On the EuSEF framework, respondents to the consultations highlighted that compared to more traditional passive funds investing in listed companies, the staff of socially driven funds is usually highly engaged and spends a lot of “hands on” time supporting social enterprises non financially (providing coaching, consulting, access to networks, fundraising capability, being part of their board, etc.). As shown in the Graph 3 below, social enterprises highly value the non-financial support they received from their funders, considering it as being at least as valuable as the financial support they get.

Graph 3 |Importance of non-financial support (NFS) for social enterprises 58

Adding the NFS support to the explicit costs it can be very hard for managers of smaller funds to meet all the requirements, which are often more modelled on trading funds, and risk damaging the sector.

A respondent to the EuVECA and EuSEF consultation provided a country overview based on experiences of venture capital managers that have been through the EuVECA process:

-Denmark: the fees are relatively limited.

-Ireland: the registration requirements are not a hindrance to setting up new EuVECA funds. Once the AIFM is registered, when a new fund is established, no further registration is required unless the registered AIFM details are changed significantly. The registration requirements are moderate and manageable.

-Netherlands: the registration requirements are not considered a hindrance for setting up a EuVECA fund.

-Germany: the process in is more akin to a full AIFMD authorisation.

-UK: full AIFMD authorisation is also required in the UK but under a very similar licensing regime to the pre-existing domestic authorisation regime, and therefore one which is reasonably well understood and manageable.

-France: require full-scope AIFMD authorisation.

-Italy: the legislative framework for implementation of the AIFMD has not provided a lighter regulatory regime for sub-threshold managers, which is different from that imposed on fully AIFMD compliant and authorised managers.

-Finland: managers have been facing local “fit & proper” requirements which were not clear at all and took some time to resolve.

-Luxembourg: registration requirements are also perceived as a hindrance for small managers which sometimes do not even consider an application for registration. Inappropriate requirements include high minimum capital requirements, high registration and marketing fees, the requirement to set up a local IT infrastructure or to use local service providers as opposed to well-known international cloud offerings, the requirement to hire an external auditor for the manager, and finally the separation of roles for micro entities.

Requiring a full AIFMD authorisation process means that a venture capital fund manager wishing to use the EuVECA designation and passport must comply with a number of operational, organisational and transparency requirements, including those related to portfolio composition, and concerns regarding borrowing, delegation, conflicts of interest and valuation. These obligations and compliance requirements impose additional costs on the setting up of such funds. Sub-threshold managers who also decide to obtain the EuVECA passport must comply with the full set of obligations and requirements under the AIFMD.

Host Member States’ fees

One of the key benefits of the internal market passport offered by the two Regulations was that it would enhance efficiency at EU level (avoiding multiple time-consuming registrations in each Member State) and have neutral to positive cost effects in comparison to having to obtain first time or ongoing professional legal advice on a country-by-country basis of changes to the national private placement regimes in those Member States where the manager wants to market.

The level of fees charged by some Member States to managers in connection with the marketing of their AIFs in Europe has been noted by ESMA in the ESMA's Opinion to the European Parliament, Council and Commission and responses to the call for evidence on the functioning of the AIFMD EU passport and of the National Private Placement Regimes (30 July 2015) 59 . Indeed, ESMA has identified divergent approaches with respect to marketing rules, including heterogeneity of fees charged by the NCAs where the AIFs are marketed. Examples include:

-Austria, where the FMA charges €1,000 per AIF for processing documents required for a marketing passport, plus €220 for each additional sub-fund and €600 annually once the fund is marketed;

-France, where the AMF charges €2,000 per AIF being marketed;

-Germany, where BaFin charges €772 per AIF for processing the passport notification and €216 for each amendment;

-Luxembourg, where the CSSF charges a flat fee of €2,650 for AIFs with a single compartment and €5,000 for EEA AIFs with multiple compartments;

-Malta, where the regulator imposes an application notification fee of €2,500 per AIF and an annual supervisory fee of €3,000 per AIF and more if the AIF has sub-funds;

-Spain, where the CNMV has recently informed passporting managers that it will also require the payment of additional fees.

The different levels of fees for the marketing of AIFs in the AIFMD framework are not in the scope of this review, but they will be analysed in the AIFMD review planned for 2017.

However, Article 16(2) of the EuVECA Regulation (which corresponds to Article 17(2) of the EuSEF Regulation) states: "The host Member States indicated in accordance with point (d) of Article 14(1) shall not impose, on the manager of a qualifying venture capital fund registered in accordance with Article 14, any requirements or administrative procedures in relation to the marketing of its qualifying venture capital funds, nor shall they require any approval of the marketing prior to its commencement."

Question 4: How relevant is the EU intervention?

- To what extent is the intervention still relevant and how well do the original objectives correspond to the needs within the EU?

Venture capital investors provide finance to companies that are generally very small and new, often innovative start-ups, with strong growth potential. This type of investment, which often takes the form of temporary stakes in the capital of the companies, entails high risk since returns are linked to the success of newly created companies. For this reason some venture capital investors also provide important non-financial support to these companies, such as consultancy services, financial advice, marketing strategy and training.

Social entrepreneurs often tackle challenges and fill gaps not addressed by mainstream business or via philanthropic work. But to do this they need access to a wider range of finance than is currently usually available. Venture capital funding which explicitly targets social entrepreneurs is one of those sources of funding. Social enterprises are usually small business which target social, ethical or environmental goals as their primary and explicit corporate objective in what are often highly innovative ways. In common with other SMEs they often struggle to get funding. Indeed their challenges are often greater as their business models and emphasis on social rather than economic return is not always understood. Yet their role in focusing on areas that fall beyond the traditional boundaries of State responsibilities, complementing public policy rather than replacing it, is vital to Europe's economy.

As shown in graph 4 below, from the latest ECB Survey on the Access to Finance of Enterprises in the euro area (April to September 2015) 60 , bank-related products remain the most relevant source of finance for SMEs vis-à- vis market-based products and other sources of finance. The survey reports that during the period from April to September 2015, 54% of SMEs considered bank loans to be relevant, while 55% included bank overdrafts. Furthermore, 37% signaled that grants and subsidised loans, which involve support from public sources in the form of guarantees or other interventions, were relevant for their financing. Leasing and trade credit were also relevant for 45% and 34% of SMEs respectively. Other loans, for example from family, friends or related companies, were important sources of financing for 21% of SMEs. Market-based sources of finance, as well as factoring, were reported less often as relevant instruments. Internal funds played an important role as an alternative source of finance, as indicated by 25% of SMEs.

Graph 4: Financing structure of euro area SMEs

Source: EBC

High bank dependency means that enterprises, and particularly SMEs, have difficulties accessing alternative funding sources when they cannot get credit from banks. For many companies, particularly in vulnerable Member States, access to finance has become markedly more difficult with the financial crisis. Difficulty in accessing finance is one of the obstacles that prevent SMEs from launching new products, broadening their activities and markets, strengthening their infrastructure and taking on more employees. This situation is equally true for well-established SMEs and those innovating ones that are small and rapidly expanding. Financing conditions remain tight in countries whose economies have been hit most severely by the crisis and especially for start-ups, SMEs and/or innovative companies.

The EuVECA objectives to (i) make European SMEs more competitive in a global marketplace and to (ii) create a European system for the cross-border fundraising of venture capital funds; as well as the EuSEF objectives of (i) having the contribution of social businesses and entrepreneurship to EU goals on inclusive, sustainable growth should be fully realised and (ii) having social businesses able to flourish across the EU and fully take part in the benefits of the single market, are aligned with the objectives of the Capital Markets Union (CMU) initiative.

Indeed, the CMU initiative has three main objectives 61 :

-The CMU will broaden the sources of financing in Europe towards non-bank financing by giving a stronger role to capital markets. It will offer to borrowers and investors a broader set of financial instruments to meet their respective needs 62 .

-The CMU will help deepen the single market for financial services. Capital markets will benefit from the size effects of the single market and become deeper, more liquid and more competitive, for the benefit of both borrowers and investors.

-The CMU will help promote growth and financial stability. By facilitating companies' access to finance, in particular SMEs, the CMU will support growth and jobs' creation. At the same time, by promoting more diversified funding channels to the economy, it will help address possible risks stemming from the over-reliance on bank lending and intermediation in the financial system. By diversifying the risks, it will make the whole system more stable and help financial intermediaries granting more funding to the economy.

Non-bank financing does not merely substitute for investment that was previously funded by banks, but it enables additional investment that banks would not be ready to fund. Market financing is usually regarded to being better at dealing with uncertain environments and therefore better suited to fund riskier investment projects (with a higher required rate of return).

Deep, liquid and efficient capital markets bring advantages to borrowers and investors. They have three main advantages for companies seeking finance: (i) improve their access to funds; (ii) reduce their capital costs by creating competition among investors; and (iii) reduce the risk of disruption in financing by diversifying their funding sources. On the investors' side, by increasing the investment opportunities, efficient capital markets offer investors a broader set of financial products to (i) meet their investment objectives, (ii) diversify and manage their risks, and (iii) optimise their risk-return profile, while respecting their investment constraints – whether in terms of risk, duration, or other assets' characteristics. Overall, capital markets (especially equity markets) facilitate entrepreneurial and other risk-taking activities, which have a positive effect on economic growth.

Large and well-integrated capital markets can contribute to jobs and growth through a number of channels. They can contribute to allocative efficiency by opening up investment and diversification opportunities for investors across Europe, improving access to risk capital for borrowers, and allowing greater competition (unleashing corresponding benefits such as productivity gains, lower costs, greater choice, financial innovation, etc.). Unobstructed capital flows within the single market should allow financial resources to reach the most profitable investments.

Question 5: How coherent is the EU intervention internally and with other (EU) actions?

- To what extent is the intervention coherent internally?

With assets under management of more than €17 trillion, the European asset management industry plays a pivotal role in channelling investors' money into the economy. A great deal of this success is the direct result of Europe's investment funds frameworks. The UCITS (Undertakings for Collective Investment in Transferable Securities) 63 framework for mutual funds is a recognised international standard, while the AIFMD has created a framework within which European alternative investment managers are able to operate.

The EuVECA and EuSEF Regulations created voluntary marketing passports for managers to market funds under the EuVECA and EuSEF labels across the EU. The EuVECA and EuSEF Regulations are complementary to the AIFMD and they do not overlap with other legal frameworks in the asset management sector, in particular the UCITS Directive. EuVECA and EuSEF funds offer entrepreneurs wider fund raising options by bringing together investors and unlisted SMEs (as well as other mid-range, small or start-up companies) and by increasing non-bank finance. The main purpose of the EuVECA Regulation is stimulate economic growth, contribute to the creation of jobs and capital mobilisation, foster the establishment and expansion of innovative undertakings, increase undertakings investment in research and development and to foster entrepreneurship, innovation and competitiveness. The EuSEF Regulation provides a common framework for providing funding to social enterprises that are acting as drivers of social change by offering solutions to social problems.

EuVECA and EuSEF funds can only be designed and managed by sub-threshold managers of alternative investment funds, i.e. managers who manage an overall portfolio of assets of below €500 million. Investors must invest at least €100,000. Importantly, every fund using the EuVECA and EuSEF labels has to invest a high percentage of investments (at least 70% of the capital commitments) in supporting so-called qualifying portfolio undertakings, i.e. young and innovative companies or social enterprises respectively.

Question 6: What is the EU added value of the intervention?

- To what extent the intervention changed situation and to what extent do the issues addressed by the intervention continue to require action at EU level?

In terms of the EU added value, EuVECA and EuSEF Regulations covered a gap that existed in legislation before by introducing a new framework aiming to address the need of small managers to market funds cross border and to increase the amount of non-bank capital available for investment in start-ups and social enterprises. The novel feature of the two Regulations was that they opened up passporting possibilities to sub-treshold managers of EuVECA and EuSEF funds and speciffically created a uniform approach for the categories of investors eligible to commit capital to such funds. The Regulations were first EU legal instruments in the asset management area which laid down two uniform "single rule books" ensuring that investors know exactly what they get when they invest in the funds.

Apart from tackling the issue of market fragmentation, the EuSEF and EuVECA frameworks were motivated by a preventive approach - trying to address certain issues before they emerge into full view. The pre-emptive approach is motivated by several considerations: (i) historic experience in the area of investment funds and (ii) recent experience gained in the more mature area of venture capital funds and (iii) experience in the field of investor protection.

The European legislator did not await significant proliferation of divergent retail schemes before embarking on the UCITS Directives. As early as 1985, a common approach to investor protection was taken in UCITS. Action in harmonising the key features of retail investment funds were therefore taken already in the run-up to the creation of a single market by the end of 1992. Experts in the field of investment management services would converge in agreeing that a common UCITS brand could no longer have been introduced, with any promise of success in take-up, at a later stage, say in 2000.

Experience therefore militates in favour of early action, when markets are still emerging and when differences in regulatory cultures have not yet taken hold. Especially when regulation at EU level aims to launch a new market (such as UCITS did for pan-European retail investment funds which were safe and liquid enough to be suitable for all retail clients across Europe) intervention has to be times carefully so as to achieve maximum effect and take-up in the market. This issue of potential take-up is crucial for voluntary schemes, such as UCITS, which coexist alongside national schemes and apply only to those operators who wish to engage in cross-border activities.

Both the EuVECA and EuSEF Regulations lay down uniform "single rule books" governing the marketing of funds under the EuVECA and EuSEF designations. The two funds are defined by three essential requirements: 1. they invest 70% of the capital committed by its sponsors eligible assets (SMEs and social undertakings respectively); 2. they provide equity or quasi-equity finance to these SMEs and social undertakings; and 3. they do not use leverage (i.e. the funds do not invest more capital than that committed by investors so is not indebted). All funds that operate under these designations must abide by uniform rules and quality standards (including disclosure standards to investors and operational requirements) when they raise funds across the EU. The "single rule book" ensures investors know exactly what they get when they invest in EuVECA and EuSEF funds.

The EuVECA and EuSEF Regulations also maintain a uniform approach for the categories of investors which are eligible to commit capital to EuVECA and EuSEF funds, investors including retail able and willing to commit at least €100,000 of their investable assets in EuVECA and EuSEF funds. The uniform rules on such investors make sure that marketing can be tailor-made to the needs of these investor categories.

The Regulations provide all managers of EuVECA and EuSEF funds with a European marketing passport allowing access to eligible investors across the EU. This is a market improvement - the passport provided under AIFMD is only applicable to managers whose assets under management are above a threshold of €500 million.

Moreover, the EuSEF Regulation requires EuSEF funds to give an account of their investment strategies, screening criteria for selecting target undertakings and their criteria for measuring the social impacts achieved by their target undertakings. On this basis, measurement tools and methodologies to precisely determine social impacts can be developed. Here again, if disclosure requirements are allowed to develop in an uncoordinated manner, they will be of little value as a basis for developing a common approach to social impacts and the metrics used for their measurement.

On the effectiveness of the EuVECA and EuSEF Regulations, figures of the current situation show that while take-up of the opportunities presented by the EuVECA Regulation is satisfactorily increasing, it could still be improved further (as of beginning of April 2016 there are 70 EuVECA funds registered in the ESMA database, the limited take-up of EuSEF funds is clearly unsatisfactory (ESMA registered 1 EuSEF fund in France and 3 EuSEF funds in Germany). This is because EU intervention is limited by a range of barriers which prevent more widespread take up of these funds. A particular concern is that managers whose portfolio exceeds €500 million may not apply for registration, set up and operate such funds, nor may they use these two designations to market them in the EU. Another specific concern was related to the funds rules which governs the EuVECA and EuSEF funds, in particular the definitions of qualifying portfolio undertaking and the €100,000 minimum entry ticket for non-professional investors.

In respect of the efficiency, different requirements in different jurisdictions, in particular at the level of setting-up fees, costs for the host registration and sufficient amounts of own funds, seems to constitute an impediment to setting up EuVECA or EuSEF funds and enabling cross-border investment.

In terms of relevance, both fund frameworks are designed to channel money from private investors into SMEs and so to boost job creation and growth. They have, therefore, been recognised as integral to the work on the CMU. The EuVECA and EuSEF Regulations form part of the Commission's initiative to increase non-bank finance for the economy, and are aligned with the objectives of President Junker's Investment Plan for Europe, to increase competitiveness and to stimulate investments for the purpose of job creation.

The internal coherency is achieved given the EuVECA and EuSEF Regulations were proposed and adopted to offer managers that are below the AIFMD threshold to benefit from the possibility to market funds cross border, provided that they respect the fund rules of the two Regulations. The EuVECA and EuSEF Regulations are intended to be proportionate regimes which ensure that small managers have access to a managing and marketing passport without having to comply with all the AIFMD requirements.

In terms of the EU added value, EuVECA and EuSEF Regulations covered a gap that existed in legislation before by introducing a new framework aiming to address the need of small managers to market funds cross border and to increase the amount of non-bank capital available for investment in start-ups and social enterprises. The novel feature of the two Regulations was that they opened up passporting possibilities to sub-treshold managers of EuVECA and EuSEF funds and speciffically created a uniform approach for the categories of investors eligible to commit capital to such funds. The Regulations were first EU legal instruments in the asset management area which laid down two uniform "single rule books" ensuring that investors know exactly what they get when they invest in the funds.

12.ANNEX 5 (review clauses of the EuVECA and EuSEF Regulations)

The EuVECA and EuSEF Regulations include a list of items that must be reviewed by 22 July 2017.

Articles 26 and 27 of the EuVECA Regulation describe the issues that must be review. These are: the extent to which the EuVECA designation has been used in different Member States; the geographical and sectoral spread of investments used by EuVECA; the appropriateness of the information requirements in Article 13; whether there is a need to amend the definition of qualifying investments; whether it should be extended the marketing to retail investors; the effectiveness, proportionality and application of administrative penalties; the impact of the Regulation on the venture capital market; should third country managers be allowed to use the EuVECA designation; the appropriateness of adding a depositary regime; a review of barriers impeding the use of the EuVECA designation and the interaction of the Regulation with the Alternative Investment Fund Managers Directive.

In the EuSEF Regulation it is Articles 27 and 28 that set out the issues to be reviewed. These are: the extent to which the EuSEF designation has been used in different Member States; the geographical and sectoral spreads of investments used by EuSEF; the appropriateness of the information requirements in Article 14; the use of different qualifying investments and the impact on the development of social undertakings in the EU; the appropriateness of establishing a European label for 'social enterprises'; should third country managers be allowed to use the EuSEF designation; the practical application of the criteria for identifying qualifying portfolio undertakings and its impact on social enterprises and their positive social impact; an analysis of the procedures put in place by managers to measure social impact; whether it should be extended the marketing to retail investors; whether EuSEF should be eligible assets under the UCITS Directive; if a depositary regime is appropriate; an examination of tax obstacles and an assessment of the possibility of tax incentives to encourage social entrepreneurship; a review of barriers impeding the use of the EuSEF designation and the interaction of the Regulation with the Alternative Investment Fund Managers Directive.

13.ANNEX 6 (EU legal frameworks for investment funds)

13.1.1.The UCITS Framework

The UCITS Directive 2009/65/EC, as amended, establishes a harmonized legal framework for the creation, management and marketing of collective investment schemes with a focus on investors’ protection and product regulation. This harmonized framework enables UCITS funds, once registered in a home Member State, to be freely marketed to retail and professional investors across borders. It creates a single set of rules covering investment policies (diversification, risk exposure) or safekeeping that can accommodate investment strategies involving shares, bonds, money market instruments or strategies based on tracking diversified and widely recognised indices. Likewise, the UCITS framework can also accommodate so-called 'mixed' funds which engage in a mixture of the above mentioned investment strategies.

The UCITS Directive includes rules on, in particular:

The authorisation of UCITS;

Conduct of business (fair treatment of investors, conflicts of interest, remuneration, risk management, valuation, disclosure to investors and regulators);

Regulatory capital, namely initial capital, 'own funds';

European passport for managers and cross-border marketing of UCITS;

Notification procedures;

Investment policies;

Key Investor Information Document (KIID);

Mergers and master-feeder structures;

Mandatory appointment of depositaries; or

Controls over delegation of certain tasks.

13.1.2.The AIFMD framework

The AIFMD Directive 2011/61/EU establishes a uniform framework that comprises managers of a variety of alternative investment funds, ranging from hedge funds, private equity operators, real estate funds, venture capital funds and those that specialise in commodities. While the AIFMD comprises a large variety of alternative asset classes, it essentially limits itself to regulating fund managers and not funds. Managers whose aggregate assets under management are above €500 million are subject to authorisation and compliance with the reporting and operational requirements set out in the AIFMD. In exchange for compliance, these managers benefit from a European passport that ensures they can manage and market alternative investment funds to professional investors on cross-border basis. Managers below this threshold are only subject to a set of minimum rules but also do not benefit from the passport, unless they opt-in.

The AIFMD includes rules on, in particular:

The authorisation or, alternatively, registration of the AIF manager;

Conduct of business (fair treatment of investors, conflicts of interest, remuneration, risk management, valuation, disclosure to investors and regulators);

Regulatory capital, namely initial capital, 'own funds' and professional indemnity insurance requirements;

Mandatory appointment of depositaries;

Controls over delegation of certain tasks, including portfolio management and risk management;

The marketing of AIFs to professional investors; or

The use of leverage by AIFMs for all AIFs under management. Supervisors are empowered to intervene, place restrictions on leverage and pursue other supervisory restrictions where needed to avoid the build-up of systemic risk.

13.1.3.The European long-term investment fund framework

The ELTIF Regulation created a voluntary marketing passport for managers to market funds under a European long-term investment fund (ELTIF) label across the EU.

An ELTIF may specialise in variety of investments, such as unlisted companies, listed companies up to infrastructure investment, investments in or in airplane or marine financing. Only managers authorised under the AIFMD can design and manage an ELTIF. As an ELTIF is not a UCITS fund but an AIF within the meaning of the AIFMD, its manager must fulfil the requirements set out by the AIFMD. ELTIFs may be marketed to both professional and retail investors across the EU. Authorised AIF managers are able to make use of an EU-wide passport, subject to a notification procedure established under the AIFMD. An ELTIF must among other things invest at least 70% of its capital in eligible investment assets, not engage in short selling and observe strict limitations on its use of leverage and derivatives.

ELTIFs do not offer redemption rights before the end of the fund’s life. An ELTIF may be marketed to retail investors. In this context, an ELTIF manager has to undertake a suitability test to confirm that investment is suitable for the retail investor and to provide that investor with "appropriate investment advice." The manager must ensure that a retail investor with a portfolio of up to €500,000 does not invest more than 10% of their portfolio in ELTIFs, provided that the initial amount invested in one or more ELTIFs is not less than €10,000.

The ELTIF Regulation includes rules on, in particular:

The authorization (only an EU AIF may be authorised as an ELTIF and only an authorised ELTIF may be marketed as an ELTIF in the EU);

Investment policies (eligible investment assets, qualifying portfolio undertaking, diversification and concentration, investment and borrowing restrictions);

Redemption, disposal and distribution (the life of an ELTIF must be consistent with its long-term nature and must be sufficiently long to cover the life-cycle of each of the fund’s individual assets; redemption to investors must commence on the day following the end of the ELTIF’s life and investors must always have the option to be repaid in cash);

Transparency, marketing and depositaries when an ELTIF is marketed to retail investors (costs disclosures, ELTIF’s prospectus, its KID (where it is marketing to retail investors), information on the facilities).

13.1.4.The European venture capital fund (EuVECA) and social entrepreneurship fund (EuSEF) frameworks

The EuVECA and EuSEF Regulations created voluntary marketing passports for managers to market funds under the EuVECA and EuSEF labels across the EU. EuVECA and EuSEF funds offer entrepreneurs wider fund raising options by bringing together investors and unlisted SMEs (as well as other mid-range, small or start-up companies) and by increasing non-bank finance. The main purpose of the EuVECA Regulation is stimulate economic growth, contribute to the creation of jobs and capital mobilisation, foster the establishment and expansion of innovative undertakings, increase undertakings investment in research and development and to foster entrepreneurship, innovation and competitiveness. The EuSEF Regulation provides a common framework for providing funding to social enterprises that are acting as drivers of social change by offering solutions to social problems.

EuVECA and EuSEF funds can only be designed and managed by sub-threshold managers of alternative investment funds, i.e. managers who manage an overall portfolio of assets of below €500 million. Investors must invest at least €100,000. Importantly, every fund using the EuVECA and EuSEF labels has to invest a high percentage of investments (at least 70% of the capital commitments) in supporting so-called qualifying portfolio undertakings, i.e. young and innovative companies or social enterprises respectively.

Scope of the EuVECA Regulation

The EuVECA Regulation builds the definition of the qualifying portfolio undertakings on a widely spread SME definition (and is aligned with the definition of an SME under the AIFMD), namely the undertaking is not listed on a regulated market, as defined by the MiFID Directive 2004/39/EC, employs less than 250 persons and has either an annual turnover of less than €50 million or a an annual balance sheet of less than €43 million, is neither a collective investment undertaking itself nor a credit institution, insurance undertaking etc. The regulation prohibits, for the fund managers, the use of any method that would increase the exposure of the fund whether through borrowing of cash or securities, engagement into derivatives positions or any other mean with an exception of short-term borrowing to provide liquidity to cover the gap between call and reception of commitments.

The EuVECA Regulation further stipulates obligations towards good conduct of business on managers such as due skill, care and diligence in conducting their activities, appropriate policies and procedures for preventing malpractices, the best interest. The manager is also obliged to identify, avoid and, when necessary, disclose the conflict of interests. The manager shall have sufficient own funds and shall use adequate and appropriate human and technical resources. The valuation is to be made according to the rules stated in the statutory documents. The EuVECA Regulation also introduces specific disclosure requirements to the competent authorities and investors.

Scope of the EuSEF Regulation

The EuSEF Regulation follows the EuVECA Regulation model with the difference in relation to the tailored definition of the qualifying portfolio undertaking. The definition is built on two main features, namely the undertaking has to have the achievement of measureable positive social impact as primary objective and uses profits to achieve this primary objective. The undertaking must be managed in an accountable and transparent way.

14.Annex 7 (Results of the consultations)

1. Consultation on the review of the EuVECA and EuSEF Regulations

Below are the results of the public consultation on the review of the EuVECA and EuSEF Regulations which ran from 30 September 2015 to 6 January 2016.

This feedback statement presents a summary of responses to each of the eighteen questions raised in the consultation paper. The tables provide a quick overview of the respondents' opinions. These opinions have been categorized wherever possible. Some respondents have also provided qualitative commentary to supplement or nuance their 'yes/no' answers.

The responses received are from private individuals, organisations/companies and public authorities/public organisations. Most of the replies have been drafted by industry associations and private companies.

Type of organisation:

Type of public authority

Where are you based and/or where do you carry out your activity?

Field of activity or sector (if applicable):

Should managers authorised under the AIFMD be able to offer EuVECA to their clients?

There is widespread support across industry and public authorities for broadening the range of managers able to market EuVECA to include managers fully authorised under AIFMD. No respondent opposed this.

Many respondents point out that authorised AIFMs are already compliant with requirements that are more onerous and stringent than those set out in the EuVECA and EuSEF Regulations, so could easily comply with the obligations. They noted that authorised managers would often have the resources required to develop the necessary expertise to invest in venture capital and social enterprises – in doing so they would add their own brand reputation, may be able to raise larger amounts of funds and could target a wider investor base due to the scale of their existing business.

Most respondents agree that the full set of AIFMD requirements should continue to apply to authorised AIFMs where they market and / or manage EuVECAs.

The large majority of respondents agree that the main advantage for authorised AIFM will be the ability to manage and market EuVECAs to high net worth individuals on a cross-border based. This will improve the cross-border distribution of AIFs and will allow investors to reap the benefits of competition (i.e. lower prices, more choice and higher quality products).

Should managers authorised under the AIFMD be able to offer EuSEF to their clients?

While one respondent does not support the view that AIFMs authorised under the AIFMD should be allowed to manage and markets EuSEFs, there is otherwise widespread support for this, with the same arguments made in favour as for EuVECA.

Moreover, one reply notes that the average size of European social investment funds is €13.8 million. This figure, which is based on the data collected from 24 social investment fund managers representing 37 investment funds, shows that the existing social investment funds are still rather small and the eligible EuSEF fund managers, who currently typically manage only one social entrepreneurship fund, are far from reaching the 500 MEUR thresholds of aggregate assets under management. However, this respondent observes that a number of bigger players are creating investment vehicles dedicated to the financing of social enterprises. This movement could, over time, further help to develop the market for private social investment in the EU as the social objective requirement remains safeguarded.

Do you favour a reduction in the minimum €100,000 investment have on the take-up of EuVECA?

45.7% of respondents are in favour of reducing the minimum €100,000 threshold required to invest in EuVECA in order to broaden the range of potential investors and increase choice for this group, with 21.7% against such a proposal. A significant proportion of respondents (32.6%) either have no opinion or have not answered this question.

Other respondents from both industry and public authorities express scepticism over lowering the investment threshold, arguing that the risk profile, contractual obligations and illiquid nature of investing in venture capital and social enterprises are not necessarily suitable for private investors with less capital. Moreover, investors in venture capital funds are typically investing well above the €100, 000 threshold so a surge in subscriptions would not be anticipated. One sceptical respondent also notes that the administrative overhead from having large numbers of smaller investors may lead to an increase in fund costs, unless the manager could offset this through a technology

Suggestions for a new threshold range between €0 and €50,000. Several respondents argue that a reduction in the investment threshold would need to be accompanied by other measures in order to protect retail investors at the European or domestic level. A number of respondents propose taking a similar approach to that of the ELTIF regulation, for example limiting the proportion of a retail investor's portfolio that may be invested in a EuVECA (10% or 20%) and requiring an appropriateness test.

The addition of investor protection methods would be acceptable to some respondents but not others, who argue that these requiremnts would detract from the ultimate benefit of a lower compliance regime combined with an EU passport that EuVECA provides. These respondents argue that the associated burden on managers would probably not be mitigated by increased take-up by private individuals.

No reply has quantified the potential impact in term of business development.

Do you favour a reduction in the minimum €100,000 investment have on the take-up of EuSEF?

As with responses for EuVECA in question 3, views are divided over reducing the investment threshold for EuSEF funds, with 45.7% of respondents in favour. Only 8.7.% oppose this, although nearly half of respondents (45.7%) either have no opinion or have not answered this question.

Similar arguments to those in question 3 are made in favour and against reducing the threshold, with the impact on retail investors of investing a significant proportion of their savings in funds where they may not properly estimate the financial risk highlighted. Many respondents underline that the lack of tax incentives for EuSEF is a major issue limiting the willingness of retail investors or high net worth individuals to invest.

Are the costs relating to fund registration proportionate to the potential benefits for funds from having the passport?

Views are split evenly across replies from industry. Seven industry organisations consider the costs relating to fund registration as being proportionate to the potential benefits for funds from having the passport. Seven other industry organisations take the opposite view. Initial registration costs and marketing fees vary considerably across Member States.

Those respondents accepting the costs as proportionate take the view that they are worth the benefits, with the EuVECA label and EuSEF labels set to become a “stamp of quality" that will become the norm internationally for the venture capital industry and social entrepreneurship. There is an inherent cost attached to this comfort. However each manager would need to carry out a cost benefit analysis in relation to the timing of compliance with EuVECA and EuSEF. The cost of compliance relative to being a MiFID regulated manager or an authorised AIFM is considerably lower and the EuVECA/EuSEF route will therefore be attractive to certain managers which otherwise may have needed to use these regimes to establish and market their funds.

One other respondent considers that registration fee should not present an obstacle to new EuSEF manager registrations, particular if the manager is looking to take advantage of the passport regime. If there were additional benefits to becoming a EuSEF or EuVECA manager, such as tax incentives, then these benefits would further outweigh the registration fees. In addition, this respondent notes that once an EuSEF or EuVECA manager is registered under the applicable Regulation, it simply needs to complete a form and to notify its supervisor of a new EuVECA or EuSEF under management in order to manage and market that fund.

Other respondents argue that for smaller AIFMs these costs (regulatory fees, legal and other professional advisory fees) are more significant to bear. For many sub-threshold AIFMs seeking to market in only one or a few Member States, the costs of compliance may outweigh the benefits of the passport. Given the higher costs of running socially driven funds, where staff are usually highly engaged and spends a lot of “hands on” time on non-financial support to social enterprises (providing coaching, consulting, access to networks, fundraising capability, being part of their board, etc.), high registration costs are a considerable extra burden.

One asset manager argues that the Commission should not focus on costs when analysing why the uptake of EuSEF and EuVECA isn't higher. This respondent considers the reasons to be:

-The restriction to a category of asset managers, very small firms, that are not the best equipped to handle a large number of investors;

-The EuSEF framework is not appealing as an investment on financial grounds;

-EuVECA is not the only type of AIF that is able to invest in venture capital and small firms, but is more constrained than other venture capital AIFs;

-Crowdfunding is more attractive for investors accepting risk as they get to choose their investments.

Another respondent argued that the cost of setting up a EuSEF remains prohibitive for the following reasons:

1)pre- and post-registration obligations generate costs which are challenging and in some cases even prohibitive for socially driven funds ; the average size of a European social investment fund is 13.8M EUR and as a consequence, such funds only have limited human and financial resources at their disposal.

2)Compared to more traditional passive funds investing in listed companies, the staff of socially driven funds is usually highly engaged and spends a lot of “hands on” time supporting social enterprises non financially (providing coaching, consulting, access to networks, fundraising capability, being part of their board, etc.).

3)Additional and sometimes inappropriate fees are sometimes being charged by both home and host National Competent Authorities (NCAs) for registering a fund as a EuSEF,.

This respondent illustrated such costs for a typical EuSEF registration 64 :

-40 kEUR (external costs),

-25 kEUR (legal advice),

-14 kEUR (costs related to the NCA and ESMA),

-50 kEUR (estimation of costs supported by the fund management internally).

-130 kEUR, (internal and external arising from post-registration obligations (e.g. ESMA reporting via special interface)).

Another respondent underlines that the proportionality question arises not only in terms of cost but also in terms of timing as registration can be more time consuming in some countries than others.

A number of respondents consider it difficult to give a general answer to this question. Each manager needs to understand the respective fees charged by NCAs in Member States where marketing is proposed, and compare these to the costs of complying with national private placement regimes the amounts that are expected to be raised.

Are the registration requirements for EuVECA a hindrance to the setting up of such funds in your Member State?

Most replies do not have a clear opinion on whether registration requirements are a hindrance for EuVECA funds. Concerns were expressed by a few respondents around reporting requirements being burdensome and the time taken by national authorities to register the funds. Article 8 of the AIFMD stipulates that the national competent authority has to inform the manager of an AIF within three months of the submission of a complete application whether authorisation has been granted or not. However, there is no similar rule in the EuVECA Regulation that stipulates a maximum time the national competent authority may take to process a EuVECA fund’s registration. That registration may take longer for smaller AIF than for large ones seems disproportionate to some respondents.

One respondent considers a possible cause for this to be overstretched national authorities focusing more on AIFMD than EuVECA and EuSEF – where regulatory knowledge and experiences is also thin. This situation makes the registration process, where at all possible, more complicated and burdensome – with difficulty in determining what the requirements are.

Another respondent notes that the divergence of interpretation in the registration process across NCAs is costly and suggests having clear guidelines in order to improve standardisation (e.g. definition of own funds, number of employees in the management company, etc.).

Are the registration requirements for EuSEF a hindrance to the setting up of such funds in your Member State?

The views set out in question 6 are mirrored in the registration requirement for EuSEF.

,Some respondents note that while some NCAs may have had some knowledge and/or previous regulatory experience from the private equity and venture capital sectors, hardly any of them had any previous experience from the more recent field of investing in social enterprises. They note that this lack of knowhow around the EuSEF Regulation and general framework in the public sector is currently visible in several Member States, where it is still difficult to identify, within the NCA, the right counterpart in charge of the implementation of the EuSEF Regulation. This situation makes the registration process, where at all possible, more complicated and burdensome. In consequence, these respondents argue that it is not the registration requirements for EuSEF as such that make it difficult, but the lake of transparency of the requirements themselves.

Many respondents mention that the interpretation of the EuSEF Regulation by NCAs can differ. For example, it remains confusing for eligible EuSEF fund managers to know whether they have the obligation to register their fund with their NCA under the AIFMD and whether such registration can be done in combination with applying for the EuSEF marketing label.

These respondents express a strong need to increase and harmonise the understanding of the EuSEF Regulation among national regulators across the EU. In consequence, they suggest further guidance from the Commission and or ESMA on the applicability of the national's existing venture capital regimes (including fiscal regime) also to EuSEF funds. There is a role for ESMA to ensure a better coordination and exchange of best practices between the different NCAs in each Member State, enhancing their knowhow and motivation to quickly adopt and implement the EuSEF regulation.

One respondent considers the ESMA's XML interface for the reporting requirements to be more difficult than necessary to use, with a proportionate approach not taken.

However, other industry organisations consider the registration process to be relatively straightforward, with the requirements probablly necessary to ensure the NCAs collect all the information needed to ensure compliance with the requirements of the EuSEF Regulation.

Are the requirements for minimum own funds imposed on the managers relating to fund registration proportionate to the potential benefits for funds from having the passport?

The table above does not reflect the comments made by the respondents, which provide further insight. The vast majority of respondents agree that the approach to own funds set out in the EuVECA and EuSEF Regulations is proportionate and reasonable. However, respondents note that Competent Authorities have different interpretations of "sufficient own funds" – with some interpreting this requirement as being similar to the AIFMD requirements – and others applying a proportionate approach.

While respondents agree that a flexible approach should be maintained, respondents argued that it would be helpful to undertake a comprehensive assessment of any additional obligation not foreseen in the EuVECA/EuSEF Regulations that are being introduced by NCAs. This is an area where ESMA's supervisory convergence function could be used, helping NCAs to reach a common understanding of 'sufficient own funds".

QUESTION 9

Should the use of the EuVECA Regulation be extended to third country managers and if so, under what conditions?

A number of respondents are in favour of extending EuVECA and EuSEF to third country managers in order to foster the market in Europe, where they argue there is a lack of sufficiently experienced venture capitalists and social entrepreneurs. Extending the framework to third country managers may help foster venture capital market development by attracting experienced third country fund managers (e. g., from the U.S.) to (co-)invest in the European market and thereby improve the overall quality and quantity of venture capital supply.

These respondents also note that by also providing access to assets outside the EU, this could also help meet European investors' needs for geographical diversification. They argue that the market should therefore be extended to those countries to which ESMA has determined there are no obstacles to the extension of the AIFMD passport.

Respondents in favour consider that conditions for third country managers to use the EuVECA Regulation should be similar to the conditions for third country managers to use the AIFMD. They believe that the rights to manage and market EuVECA and EuSEF funds should be extended to AIFMs in third countries which demonstrably operate equivalent proportionate supervisory standards – specifically those third countries to which ESMA has determined there are no obstacles to the extension of the AIFMD passport.

However, other respondents do not believe that extension to third country managers should be a priority. They argue that a general principle of reciprocity should apply to third country managers in order to be admitted to the EuVECA and EuSEF regimes. Moreover, they consider that third country managers should not be allowed to benefit without bearing all the administrative burdens of being EU registered (not only regulatory - but reporting, taxation, etc.). They also argue that there is a need to ensure a level playing field, meaning that third country managers should in no event have easier access to the EuVECA Regulation than EEA-based managers.

Lastly, several respondents note that extension to third country managers could be regarded as premature, given that it is not yet functionally successfully within the EU, and recognition of the label has yet to be established.

Should the use of the EuSEF Regulation be extended to third country managers and if so, under what conditions?

The same views were expressed over extension of the EuSEF Regulation as were set out

in response to question 9.

Is the current profile of eligible portfolio assets conducive to setting up EuVECA funds? In particular, does the delineation of a “qualifying portfolio undertaking” (unlisted, fewer than 250 employees, annual turnover of less than €50 million and balance sheet of less than €43 million) hinder the ability to invest in suitable companies?

Many respondents consider the current restriction of eligible assets to investment in SMEs (defined as unlisted, fewer than 250 employees, annual turnover of less than €50 million and balance sheet of less than €43 million) to be too restrictive and inflexible. They argue that this limits take-up of EuVECA funds and reduces their ability to support their ventures as they continue to grow. This is particularly problematic for high-growth digital companies as well as those in labour intensive companies such as those in the services sector which can have a very high employee count while remaining very small businesses in the early stage of development.

Responses also stressed a potential concern that when a EuVECA manager is considering an application to establish a EuVECA, they may not be confident that they can guarantee finding the number of attractive qualifying investments that are necessary to stay within this limit during the life of the fund and also achieve a balanced portfolio.

Responses proposed included modifying the requirement that 70% of funds be committed to qualifying investments, widening the definition of SMEs (for example doubling the 250 employee threshold), applying a “2 out of 3” rule to the asset criteria, or permitting investment in funds of funds and in SMEs listed on growth markets. A further suggestion was to allow EuVECA funds to be able to continue to use their EuVECA status as their target investments grew beyond the initial SME criteria.

Some other respondents viewed the current eligible assets criteria as appropriate, noting that the role of venture capital is particularly to invest in new but uncertain technologies or business ideas. These kinds of investments are typically related to small and medium sized enterprises. Broadening the range of eligible assets could dilute the focus on smaller companies and open the framework to wider private equity activity.

Does a EuVECA’s inability to originate loans to a qualifying portfolio undertaking in which the EuVECA is not already invested hinder the attractiveness of the scheme for potential managers of such funds?

30% of respondents agreed that the restriction on originating loans where the EuVECA is not already invested hinders the attractiveness to potential managers, 10% did not agree, and the remaining respondents either did not know or did not answer this question. Respondents in favour of removing this restriction argued that loan origination could be an alternative to equity investment – either where traditional equity investment is not available - or as an advantageous exit mechanism.

However, other respondents note that is no evidence that the loan origination restriction has reduced the attractiveness of the scheme for potential managers of such funds. In addition, one respondent notes that the current drafting facilitates the alignment of interest which is an important aspect in the venture capital model.

In this context, does the rule that a EuVECA can only use 30% of the aggregate capital contributions and uncalled committed capital for loan origination reduce the attractiveness of the scheme?

30% of respondents are in favour of greater flexibility over the 30% cap of the aggregate capital contributions and uncalled committed capital for loan origination. 20% of respondents think the cap should remain, with the remaining respondents either not sure or not answering this question.

Respondents calling for greater flexibility suggest that this limitation on financing is contrary to the considerable need for investment flexibility on the part of SMEs. In particular, many small funds (and private equity funds in general) provide mezzanine capital to fund their portfolio companies. Moreover, several respondents believe that the 30% limitation discourages those managers that are unwilling to lose the flexibility to find the right mix of debt and equity as determined by market conditions and the circumstances of each portfolio company. While equity is at the heart of venture capital, they argue that companies also need access to debt and their venture capital investors should also be seen as potential debt providers They also note that loans are in many cases are used when the company needs funds quickly but the valuations that are essential for determining an equity investment may not be ready or may still be very uncertain given the profile and potential of such companies or when co-investors have not yet been able to decide whether they can or want to inject additional equity but the company needs urgent financing.

The respondents argue that loan notes, convertibles and warrants help to mitigate down-side risk and offer some protection for the fund should the portfolio company become insolvent or where there is a need to urgently provide additional funding while accurate valuations necessary for an equity investment are being worked out.

Other respondents view investment in the form of equity as providing a stable source of start-up financing as it creates long term commitment to the company. The ability for 30% of the aggregate capital contributions and uncalled committed capital can be used for loan origination creates flexibility for the fund. They argue that loan origination is as an ancillary activity for a venture capital fund and strictly connected to the equity investment that has to remain the prevalent activity in order to avoid misuse and abuse of the EuVECA scheme. In consequence, if loan origination is the main activity of the fund, this fund should be regulated as a loan fund rather than as a EuVECA. Thus, limiting the share of aggregate capital contributions a EuVECA fund may use for debt financing seems prudent.

What are the key issues or obstacles when setting up and marketing EuVECA or other types of venture capital funds across Europe?

Among the replies received to this open question, the main key issues or obstacles that have been mentioned by respondents are:

-Discriminatory tax treatment.

-Cross-border distribution barriers, in particular fees paid to host Member States in addition to the fees paid to the home Member State.

-Gold plating measures introduced by some Member States. For example, some Member States require fulfilment of CRR capital adequacy requirements or compliance with domestic regimes.

-Lack of communication regarding the benefits of the EuVECA label.

What are the key issues or obstacles when setting up and marketing EuSEF or other types of venture capital funds across Europe?

In addition to the arguments made in response to question 14, one respondent notes the need to crystallise how an investor can expect to make a financial return from an investment in EuSEF, particularly through changes to the definition of a “qualifying portfolio undertaking”.. Evidence from sources such as the Social Impact Investment Taskforce set up by the G8 suggests that more entrepreneurs are seeking to set themselves up as businesses where they “lock in” their social mission, without using a lock on profit or asset distribution. These businesses are not currently covered by EuSEF and their exclusion could limit the effectiveness of this passport.

What other measures could be put in place to encourage both fund managers and investors to make greater use of the EuVECA or EuSEF fundraising frameworks?

A number of potential measures have been proposed by respondents. These cover a wide range of activity and are sometimes in contradiction with each other.

The most commonly made suggestions are:

-Apply tax incentives to create investor appetite

-Foster investment in EuVECA/EuVECA by injecting public money in particular via European Investment Bank

-Avoid the requirement for double registration as both AIFM and EuVECA/EuSEF manager

-Prohibit gold plating measures

-Remove cross-border barriers

Other suggestions have been been made by a few respondents:

-EuVECA and EuSEF Regulations should be "decoupled" and not be considered alongside each other. It is argued that there are significant differences between models for social investment and venture capital investment. Most notably, social investment, also known as ‘impact investment’, does not necessarily follow the venture capital model of investing in a range of undertakings over a fixed period with a view to disinvestment at a fixed point. It would be worth considering adapting the EuSEF model to incorporate open ended funds and funds that are not of a fixed lifecycle – this would be more aligned to the structures traditionally adopted by funds investing in social enterprises.

-EuVECA/EuSEFs that reaches the 500 M EUR threshold should not be required to apply the full AIFMD requirements.

-EuSEF/EuVECA funds should be UCITS eligible assets.

-EuVECA should apply to all registered AIFMs whatever their investment strategy is.

-EuVECA should more focus on technology, economic and social innovation.

What other barriers exist to the growth of EuVECA and EuSEF? Please specify. Are there other changes that could be made to the EuVECA and EuSEF regulations that would increase their up-take?

Views were the same as set out in question 16..

What changes to the regulatory framework that govern EuVECA or EuSEF investments (tax incentives, fiscal treatment of cross-border investments) would make EuVECA or EuSEF investments more attractive?

Most of the respondents reply that:

-Allow EuSEF funds to benefit from the tax incentives available in many Member States for investing into venture capital or early stage companies. These incentives should be at two levels - for investors to invest in EuSEF and for EuSEF to invest in social enterprises. Other helpful incentives for impact investors could be the ability to benefit directly from the same tax and fiscal benefits as mainstream investments or receiving complementary tax treatments (e.g. the Social Investment Tax Relief scheme introduced in the UK).

-Ensure tax neutrality for EuSEF funds. In most Member States, interest expenses are tax-deductible but equity disbursements are not. Re-moving the resulting debt bias in national taxation laws could, therefore, strengthen the demand for equity finance and thus the demand for investments through EuVECA funds. In Belgium, for example, the introduction of an “allowance for equity” resulted in a reduction of leverage in domestic companies (Pricen 2012). A similar measure has been proposed by the “German Council of Economic Experts” for Germany (Sachverständigenrat 2013).

-Exempt EuVECA/EuSEF funds from the Prospectus Directive. These respondents suggest that EuVECA funds should be exempted from the Prospectus Directive requirements where these funds are marketed only to professional and “semi-professional” investors, i.e. those who invest a minimum of €100,000 and understand the nature/risk of the investment, as defined in the EuVECA Regulation.

-Review the calibration of the prudential legislation such as Solvency II, CRD IV / CRR or IORPD in order to facilitate investment in particular by pension funds, insurance companies and other institutional investors

-Simplify the EU framework by creating a unique AIFMD regime which applies to all managers, with several "product labels" grafted to it.

2. Technical workshop on EuVECA and EuSEF, 27 January 2016

On 27 January 2016, the Directorate-General for Financial Stability, Financial Services and Capital Markets Union organised a targeted technical workshop aimed at managers of existing EuVECA and EuSEF, together with practitioners, supervisors and other stakeholders interested in offering these funds. The purpose of the workshop was to analyse the practical challenges posed in offering and running these funds. It also considered what practical challenges exist to successful cross-border marketing.

The Chair opened the workshop by recalling the context of the EuVECA and EuSEF Regulations and explained that the two fund schemes have had a slow take-up up to now; which is why the review of both Regulations is taking place. Moreover, the review is part of the CMU Action Plan with a package of measures to support venture capital and equity financing in the EU, including catalysing private investment using EU resources through pan-European funds-of-funds, and the promotion of best practice on tax incentives.

The Chair gave the floor to the key note speaker Sir Ronald Cohen. Mr Cohen explained that the EU venture capital's ecosystem is weaker than in the US and there is a need to find a way around that challenge. Mr Cohen made an example with Israel, which uses the NASDAQ instead of trying to set-up its own capital market for venture capital (VC) companies. The speaker highlighted that there is still fragmentation in the EU VC regulatory frameworks and the harmonisation will take some time. In the meantime there are three proposals: (i) a single legal structure for companies below € 500 million; (ii) a single passport for fundraising across the EU; and (iii) extend incentives to VC funds, including for their IPOs.

Mr Cohen explained that VC should focus on young companies, no matter what the size and the number of employees is. Also, that there should be a unique structure for social and non-social companies. The main problem for EU investors is the returns, for example the first fund in 1981 invested only in US firms. To be successful, the funds should be able to invest globally and be tax-transparent. Ability to raise money across the EU is also a very important factor.

Workshop 1. EuVECA and the AIFMD. Interactions and the implications of reform

A participant stressed that ESMA interpretation of the Regulation is not sufficient to give legal certainty to larger manager. Moreover, the label only for small managers, may be seen as a "bad label", given it has lower governance and criteria. EuVECA has to become a positive label, thus fully comply with the AIFMD.

Another participant explained that funds investing in social enterprises currently are (i) regulated under the AIFMD, (ii) regulated under EuSEF, or (iii) not regulated at all. The participant explained that EuSEF is good to push small social asset managers into the regulated framework. However, the social investors are not familiar with the asset management framework. Moreover, there are differences in national regulations and in tax treatment for the different investee companies.

Another participant agreed that already authorised AIFM should be allowed to manage EuVECA and EuSEF. For smaller managers that grow beyond the AIFMD threshold, there could be a "test" before the AIFMD authorisation become compulsory, for instance a longer time extension.

A participant explained that the AIFMD threshold is one issue, but also the difference between the AIFMD, being a Directive, and EuVECA and EuSEF being Regulations is an issue.

Several participants confirmed that the possibility to market to some retail investors (i.e. the retail marketing passport) is an incentive of the two Regulations compared to the AIFMD. Lowering the threshold would be a further incentive to help increase the recognition of the brands. A participant mentioned that the difference between UCITS and AIFs is clear, while now some products which are not complex (e.g. some social funds) are still AIFs. The participant asked for a review of the UCITS, to include EuSEF as eligible assets.

Another participant summarised the three main incentives: (i) access to a broader investor base, including some retailers; (ii) lower administrative costs and regulatory burdens; and, (iii) the value of the brand.

A participant highlighted the main problems which would arise if EuVECA had to comply with the full AIFMD requirements: (i) the minimum own funds, which differe considerably between Member States; (ii) the depositary; (iii) the valuation process; and (iv) the control. Another participant mentioned that a more harmonised and lighter process for registration would be better to avoid goldplating.

There was a general consensus that given the small size of the venture capital market and of the social investment market, they do not pose financial stability issues.

A couple of participants mentioned the example of ELTIF, where the AIFMD rules apply to the mangers, but there are specific rules on the funds.

It was concluded that there is general consensus that AIFMD-authorised mangers should be allowed to set-up and manage EuVECA and EuSEF funds. If the managers grows beyond the AIFMD threshold, the full AIFMD requirements should apply, to avoid regulatory arbitrage.

Workshop 2. Who are the investors? Does the €100,000 minimum work and what are the consumer protection implications of the alternatives 

A participant mentioned that in some Member States, notably France, there are unregulated entities with lower minimum investment requirements, but overall the participant judges this a "little price to pay" for the EuSEF label.

Another participant argued that EuVECA take-up would be easier with a lower minimum investment, but the reduction would not be worth if more restrictions are imposed on the managers. For instance the 70% requirement for unlisted SMEs is a bigger constraint.

Another participant mentioned there is growing interest for smaller retail investors in social investments. Some Member States allow some AIF to be marketed also to retail investors with lower minimum requirements. If EuSEF is open to AIFM, there is the need to consider this aspect to avoid regulatory arbitrage.

Another participant suggested that some employee pension scheme should be allowed to invest in EuSEF, and that would considerably increase the take-up.

Another participant presented some results of a survey of the social investment industry where out the 24 mangers, the average fund size is below € 14 million. The minimum investment is not a limitation today, but it may become one day if the sector grows.

Another made the examples of 90/10 social funds in France, which invest ten per cent of their capital in social non-listed organisations. These funds are not UCITS, but they are more than € 500 million invested in France alone. The participant argued that allowing UCITS to invest in these funds would be a stronger incentive than reducing the minimum investment for smaller retailers.

Participants agreed that if the minimum investments have to be reduce, other requirements would need to be put in place. For instance, minimum diversification requirements, like the one in ELTIF. Other participant asked to make it voluntary for the managers who do not want to offer to smaller retails, so that they can avoid the extra rules.

It was concluded that the minimum investment requirement is appropriate, as it is also consistent with the MIFID definition of professional investors. A lower minimum investment would possibly increase the investor base, but the new requirements to ensure adequate investors protection would introduce costs which will be higher than the benefits.

Workshop 3. Eligible assets. Are the current definitions too restrictive. What are the consequences of widening them and possible overlaps with ELTIF?

A participant asked to open EuSEF eligible undertakings, not only having a social objective, but also a social impact. Another participant asked to remove the "exclusivity" requirement to provide financial support to social undertakings. Having a lower requirement (e.g. minimum 70%) would allow more banks to become eligible to EuSEF funds.

Another participant focused on EuVECA, where the limit of 250 employees is too restrictive. The limitation does not allow the fund to follow-on on growing investments once the companies increase above the SME definition. Also, the fund should be able to invest in projects or products, not only in undertakings. The participant mentioned the example of a VC fund in Finland which invested in a computer game, not in the company.

Another participant confirmed that the 70% minimum for eligible assets is not a problem for EuSEF. The SME definition in EuVECA is instead a limit: imagining a funds with an average size of € 40 million, doing 10 investments, the average investment size is € 4 million. This amount could be enough to target companies above the SME definition. However, is difficult to open the definition, as the sectorial (e.g. R&D focused, technology focused etc.) or stage limitations (e.g. pre-profit companies) are also too restrictive not a workable alternative.

Other participants asked for more access to debt investing for EuVECA, i.e. increasing the maximum 30% debt investment. A participant claimed that this could induce more wrappers and saving schemes to invest in EuVECA.

It was concluded that more rules are added, more complexity is added and less attractive is the framework. The EuSEF definition has little restrictions. The EuVECA definition has more issues. In particular the SME definition seems too restrictive.

Workshop 4. Other issues: cross border distribution, notifications, possible incentives

It was asked if EuSEF can be a compartment of an umbrella funds. Also, the leverage, which is allowed only for short term, was mentioned by a participant as a limitations for EuSEF.

Another participant mentioned the different fees imposed by regulators, where some guidelines could be helpful for national competent authorities. The same comment was made in respect to the requirement of own funds to set-up the funds, which varies considerably across the Member States. Also, the distributors face different treatment among different Member States.

Another participant mentioned that in the case of social investments outside the EU, the managers have to make sure that tax regimes - for instance of 5 Africa countries where they want to invest- are compliant with all the EU Member States where they want to market the EuSEF.

A participant underlined that the EIF never required social funds to be EuSEF and venture capital funds to be EuVECA. Another participant mentioned that investor protection is one aspect, however it is more important the investor education.

On allowing third countries manager to manage EuVECA and EuSEF there was consensus that it is too early to open the frameworks to foreign managers.

Finally, tax incentives would be a great incentive, but this would require a pan-European approach.

15.Annex 8 (The SME life cycle and financing need)

Table 5 - SME finance. intermediation through financial institutions and financial markets as % of GDP (2013, 2014 or 2015)

Source: EC (2015), European Semester Thematic Fiche. SME's Access to Finance.

The financial needs and the financing options open to SMEs vary depending on the stage in a firm’s lifecycle. The types of financing sources that are used on average by SMEs during their life cycle include internal equity finance, represented by owner-manager personal savings, internally generated profits; venture capital; external equity, i.e. business angels; debt financing, e.g. mezzanine; trade credit; bank funding; and securities market or governmental and international funds.

Chart 6 - SME life cycle

Source: http://ec.europa.eu/research/innovation-union/pdf/competitiveness-report/2011/data-and-statistics/analysis/part-iii/analysis_-_figure_iii.2.3.pdf , access on 10-02-2016.

At the initial stages, promoters of SMEs often rely on their own resources, loans or equity provided by family and friends. Loans from banks and other financial institutions can be tapped into.

At the second phase of survival during the start-up stage, external sources of funding become necessary. At this stage, the investment in SMEs is still regarded as high risk and the business is not large enough to attract the attention of venture capitalists. Wealthy individuals like business angels can step in.

Chart 7 - Changes in the need for equity capital (April to September 2015) for SMEs in the EU.

Source: DG GROW, Survey on the access to finance of enterprises (SAFE), 2015.

At the later stage, venture capitalists play a role in alleviating financing obstacles. Venture capitalists scrutinize such firms intensively before providing capital and then monitor them closely afterwards. At this stage the SME does not qualify for debt financing due to its reliance on intangible assets, inability for investors to assess its future growth prospects, low profitability and short track record.

15.1.1.Structural issues behind the lack of equity financing

The primary reason for SMEs lack of access to finance, and in particular its lack of equity capital, is the lack of information pertaining to innovative start-up SMEs as an asset class. Therefore, in addition to the tightening of credit standards in general, another problem is the discrepancy between borrowing costs of SMEs vis-à-vis those of large enterprises which has recently widened significantly. 65 As knowledge about these companies, their strategies and their prospects is more difficult to research, potential investors face higher transaction costs when investing in SMEs as compared to more mature assets. Transaction costs are indeed mostly due to difficulties in gathering reliable information on the business prospects of a particular SME and the absence of financial intermediaries that can perform a valuable screening function. This leads to a wide spread risk aversion among potential venture capital investors.

Chart 8 - Types of external financing preferred to realise growth ambitions for SMEs in the EU-28, for the period 2009-2015.

Source: DG GROWTH, Survey on the access to finance of enterprises (SAFE), 2015.

The existence of a general financing gap creates an environment in which innovative undertakings are also prone to having a less than optimal financing structure. This, in turn, will make it difficult for undertakings to create and capture the value of their new and/or innovative idea. A theory put forward in late 1980s’ 66 predicted that firms with highly specific assets and low amounts of equity relative to debt will suffer from poor performance. A more recent study builds on this concept 67 and empirically confirms its thesis. The study provides evidence which shows a correlation between firms’ lack of equity capital and its poor, sub-optimal performance or even failure. Concretely, it finds that as the misalignment between a start-up firm’s capital structure and its asset specificity increases, the firm is more likely to exit/fail to capture its idea or to experience lower profitability.

To remedy this information and equity gap, venture capital operators can act as intermediaries between the supply and demand of capital resources and, through specialisation, facilitate the flow of appropriate capital to SMEs. 68 Indeed, the classical 'venture capitalist' business model aims to decrease the information gap between investors and entrepreneurs and/or SMEs and can play a crucial role in reducing the equity financing gap that currently plagues young, innovative and high-growth start-up firms. 69

16.Annex 9 (Key characteristics of venture capital and social venture market )

Venture capital funds remain a niche player in the fund industry largely on account of their focus on SMEs at the very riskiest stage of their development. Due to their focus on small and innovative SMEs, it is often challenging for venture capital funds to create returns that would mobilise average investors' interest.

Table 9 – Venture Capital – Fundraising geographic breakdown

Source: EVCA, 2014 European Private Equity Activity

Chart 10 - All Private equity fundraising, investments and divestments (2000-2015)

Source: Invest Europe

Venture capital funds invest in order to provide equity start-up capital for a new but uncertain technology or business idea. A typical private equity fund, on the other hand, is much more diversified and consists in investments in more established and commercially successful companies. Private equity focuses on companies in a later stage of their development, in restructuring and in buyouts of established suppliers. A private equity investment thus entails a lower risk than an investment in venture capital. The steep rise and success of certain private equity fund strategies, such as leveraged buy-outs, during last decade did not help to boost the attractiveness of venture capital funds' attractiveness (see Private equity and venture capital fundraising and investments (2003-2010)). In addition, European venture capital funds consistently generate lower returns than European or US buy-out funds (see Performance of venture capital vs. private equity).

Table 11 – Performance of venture capital vs. private equity

As a result, the past decade has seen less investment flow towards European venture capital funds. In consequence, venture capital fund managers are experiencing difficulties in attracting investors' interest in new venture capital funds. While this trend will have certainly produced negative effects on already underperforming venture capital funds, it also represents a serious challenge to the prospects of newly launched venture capital funds. Furthermore, existing venture capital funds, on account of the lower returns associated with venture capital, may be tempted to shift their investment focus toward investments in more developed undertakings at a much later stage in their business cycles.

Venture capital funds remain a niche player in the fund industry largely on account of their focus on SMEs at the very riskiest stage of their development.

In 2015 the total fundraising reached €47.6bn, nearly matching the level of 2014. The number of funds raised (274) reduced by 15% compared to 2014, but is still above the level of 2012 and 2013. European private equity and venture capital raised in the past three years (2013-2015) was 70% more than in the years 2010-2012.

Table 12 – 2015 Investments – Market statistics – Amount and number of funds

Institutional investors, led by governement agencies (30%) represent the vast majority of the funds raising in 201. Private indivudals and family office represent less than 15%.

Chart 13 – Funds raised by types of investors 2007-2014

Source Invest Europe

Social venture funds

The number of social investment funds is increasing. Some of these funds are independent while others are affiliated with large banks or development institutions. Funds might focus on certain sectors, geographies or investment stages. They typically target market returns, investing through a mix of grants, subsidized loans and equity investments. 70

Chart 14 - Total assets under management by stage of business

Source: Saltuk, Y., A. Idrissi, A. Bouri, A. Mudaliar, and H. Schiff (2014), “Spotlight on the Market: The Impact Investor Survey”, Global Social Finance, J.P. Morgan

Chart 15 - Growth of European managed funds incorporating environmental, social and governance factors (€ billion)

Source: World Economic Forum (2014), “Charting the Course: How Mainstream Investors can Design Visionary and Practical Impact Investing Strategies”, GACR = compound annual growth rate.

Social venture funds also act as key intermediaries - they minimise the information asymmetry. The problem of social businesses is that it does not speak the language of traditional investors. Investors are increasingly seeking to achieve positive social or environmental or other goals with their investments. As the Global Impact Investing Network (GIIN) puts it, social investments "aim to solve social or environmental challenges while generating financial profit". The focus on 'social returns' by some investors makes the funds a natural target for these investors.

Investments in social business aim to generate positive social or environmental consequences. These externalities can be characterised in a variety of ways – environmental, social, or ethical impacts, such as reduced use of pollutants, jobs for excluded sections of society. 71 While all business activity produces a range of impacts on society, social businesses specifically target positive social or environmental outcomes. These 'social businesses' offer a focal point for investors seeking social returns.

Chart 16 – Source of Funds for Impact Investment Fund Managers

Source: World Economic Forum (2013), “From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors”.

While investors in social businesses are seeking social returns, this is not to the exclusion of financial returns. For instance, while social businesses will typically not offer dividends to investors, but will re-invest any financial surpluses in the business, this does not mean that there will be no financial return for investors over and above the return of capital. Social impact investors invest in various stages of the social enterprise life cycle. Investors in social businesses are happy to make a 'trade-off' between expected financial returns and 'social returns' (which can be characterised as taking on more risk for the same returns or lower returns for the same risk).

By way of comparison, VC assets under management were around €50 billion and private equity (PE) assets under management were around €500 billion at the end of 2010 (social ventrue funds are mostly a subset of these figures). Even the most aggressive assessment of the size of the social investment market puts it at less than 10% of the size of the ventrure capital market, and less than 1% of the size of the PE market; a more realistic assessment would be around 2% and 0.2% respectively.

It is also important to note that social venture funds have a more targeted focus on investing in a select group of social enterprises which makes them different from the more general set of funds that claim to be supporting 'socially responsible investment' (SRI). Average sizes of social venture funds are small. The largest funds are clustered in either France or the United Kingdom. For example, BridgesVentures (€115 million) is located in the UK, Alter Equity, Citizen Capital, NEF Capital éthique (€30-50 million) are all located in France, and BAC Partenaires, Catalyst, and the Social Enterprise Investment Fund (€15-25 million) are located in France (BAC) or the UK. The only substantial social investment fund domiciled outside these two countries that Commission research indicates as exceeding the €25 million threshold is Karmijn Capital in the Netherlands (€50 million). It appears that the largest Italian venture capital fund is Oltre Capital with only €10 million in assets under management while all the examples for Germany (BonVenture, Social Venture Fund) do not exceed €10 million. Member States with a smaller investor base generally have no social investment funds of any notable size domiciled in their territories (there are exceptions, such as a fund operating in Hungary).

The following table shows some of the most important EU social venture funds and the range of their investment activities:

Table 16 – some of the most important EU Social venture funds

Source: EIF

The investor base is currently largely professional rather than retail, though retail funds that in part target social businesses are sold, for instance, in the French, Luxembourg, Dutch and Belgian markets. The French retail market is large; while the funds are not limited to targeting social businesses, in practice fond solidaire often act as conduits for social businesses.

Stakeholders and consultation respondents suggest that existing inflows are mostly derived from high net worth individuals (HNWI), who traditionally have been a mainstay of the philanthropic sector. The social business' need for 'patient capital' sits at the core of its demand on capital markets, yet such capital exhibits low degrees of liquidity and long time periods before returns are likely.

17.ANNEX 10 (Venture capital business model)

The term "venture capital" does not always have the same meaning. Differences are observed in the main venture capital markets: the US and EU. 72 The US has a more distinctive approach to venture capital funds as comprising nearly exclusively investments in seed, start-up and expansion stage of a company. US understanding of venture capital does not include any form of buy-out activity, this is a preserve of private equity investment strategies. This has just been confirmed by the US Securities and Exchange Commission adopting rules that define venture capital. 73 In Europe, due to its development, venture capital is understood as more of a subset of private equity and as a concept it includes commitments to unquoted companies, with financing focus on their early stages of development. However, other forms of investments and other stages of companies are not excluded. 74 It is thus not an exception to find a European venture capital fund investing portion of funds' capital in buy-out transactions 75 .

The remainder of this chapter though tries to identify the key aspects and characteristics of the funding activities that, in the EU, are generally grouped under the heading of venture capital and how these activities differ from other types of financing, mainly those of private equity – especially buy-outs.

A venture capital fund's engagement follows several financing rounds. Each financing round is conditional upon the target or "portfolio" company achieving certain milestones. Usually these financing rounds correspond to the evolution of the portfolio company:

-the very first round of financing is supplied to a company that aims to prove the value of a new idea (also known as seed financing);

-the next round of financing is linked to marketing and product development (usually referred to as start-up financing);

-a subsequent round of financing aims to provide working capital is to companies who start selling product but are not yet turning a profit.

Up until this stage of financing, the capital provided to companies in these early stages is usually equity capital. Venture capital funds are also active providers of mezzanine financing, which is used predominantly in the expansion stage of SMEs but also in start-ups and is a helpful financing structure for innovation. Mezzanine finance is a collective term for hybrid forms of finance: it has features of both debt and equity. There are various types of mezzanine finance, each having its own unique characteristics. On the positive side, choosing the appropriate form of mezzanine financing SMEs can retain control over the company without surrendering ownership rights and the cost of it for SMEs compared to pure equity is usually lower. The most common form of mezzanine finance 76 is the subordinated loan, which is an unsecured loan with a lower ranking in case of bankruptcy compared to senior debt. Participating loans are normal loans, but rather than there being a fixed return, their remuneration is contingent upon the results of the business. Silent participation is closer to a stockholding than a subordinated or participating loan. There are also equity related mezzanine finance instruments. These instruments present a greater risk profile to the lender and, in turn offer a higher rate of return. Mezzanine products with profit participation rights are more related to equity and under company law the holder is entitled to rights over the company’s profits. A further equity mezzanine financing instrument is the convertible bond. In addition to the usual right to fixed interest payments and repayment of principal, holders of convertible bonds or bonds with warrants have the right to acquire shares in the company instead of accepting repayment of the bond. Another equity mezzanine financing instrument is the bond with warrants, which in principal is similar to the convertible bond. The main difference is that the warrants (subscription rights) are separate from the bond and thus can be traded independently. Finally, venture capital funds can also provide bridge financing. It is a short term loan that usually facilitates portfolio company transition to an IPO or another stage of financing. A bridge loan can also be is assorted with an option to convert the loan into equity.

The business objective of venture capital fund as an investor is to steer its portfolio companies towards a profitable sale and thereby realise a profit that should considerably exceed the investments made to the company throughout fund's time of engagement in it. There are number of possible exit routes, including, for example, a sale to management, repayment of principal. The two most common exits are the portfolio company's listing on a stock exchange (the so called initial public offering – IPO) or the sale of the portfolio company to a strategic buyer - either a private equity firm or a corporation (the so called trade sale).

Venture capital, being a very risky type of asset class, is a preserve of institutional and qualified investors. According to the latest industry data, the share of such these investors (e.g., banks, capital market experts, endowments and foundations, government agencies, corporations, fund of funds, insurance companies, asset managers, pension funds or sovereign wealth funds) in European venture capital comprises nearly 50% of assets collected by venture capital funds. The investments by private individuals and family offices account for roughly 15% of assets managed by European venture capital funds. This percentage is double the percentage that private investors contribute to financing of private equity. 77 Most Member States allow for certain private individuals (e.g. high net worth individuals) to invest in venture capital, as long as certain conditions are met. These conditions may involve a minimum investment limit or some form of appropriateness test to ensure that such investors are aware of and accept the inherent risks associated with investments in venture capital operations.

Data shows that venture capital funds make limited use of leverage. Leverage can occur at two levels, at the level of the fund and the portfolio company. (i) At fund level, neither venture capital nor private equity funds use extensively leverage or in other terms borrow, unless for a very short period of time, and for practical purposes – usually to cover their liquidity needs between committed capital from investors that has been called but takes usually couple of weeks before the fund receives it on its accounts. (i) At portfolio company level, debt can be used for different purposes. Usually venture capital equity investment in early stages of company's life is not accompanied by debt financing from other sources as no other viable financing alternative exists at that stage. However, European venture capital funds do engage in buy-out transactions where the venture fund provides only a part of the total acquisition with the remainder being matched by borrowing from a bank whereby the assets of the portfolio company serve as the collateral to the lender. Lastly, unrelated to the venture capital investment activity, portfolio companies borrow money in the ordinary course of their business.

Based on these key characteristics of venture capital funds, multitude of fund types emerge. Some venture capital funds may be focused on investing in new ideas – in new and early stages of companies, some may prefer to invest in already more established firms that need support in order to expand or become publically traded firms. Other funds may on the other hand focus solely in certain industries and as such their financing would cut across all the stages of portfolio companies' life-cycle before their successful exit is realised. Additional dimension is funds' geographical focus, some are local/regional others national or operating world-wide. The situation in Europe is now characterised by the move from locally focused ventures towards more sector specific venture capital firms looking out for opportunities globally.

How do we define Venture Capital?

Invest Europe statistics define whether a GP (fund manager) is a venture capitalist on a firm or a fund level, and not by specific reference to the size of the portfolio companies it is investing in.

The definitions used in the statistics below (and also in the Invest Europe Yearbook) are:

Early-stage funds: Venture capital funds focused on investing in companies in their primary development stage.

Later-stage funds: Venture capital funds focused on investing in later-stage companies in need of expansion capital.

Balanced funds: Venture capital funds focused on both early-stage and development, with no particular concentration on either.

Figure 17

Private equity and venture capital fund managers (or ‘firms’ as they are called in our statistics) will very often have multiple funds pursuing multiple investment strategies. A firm that declares itself as being a venture capital firm may also manage funds pursuing more of a growth strategy; on the other hand, a buyout firm may also manage funds pursuing a venture capital strategy.

Table 2 below shows that it is not only venture capital firms that raise venture capital funds. Buyout and generalist firms can and do raise funds with a venture capital investment strategy. In fact, a quarter of the funds with a venture stage focus are managed by generalist fund managers. In terms of amount, this represents a fifth of the total capital raised by venture capital funds.

Table 18: Incremental funds raised (2011-Q3 2015 preliminary), by number of funds and by amount

Source: Invest Europe/PEREP_Analytics

Note: This covers all Europe, including Norway and Switzerland.

18.Annex 11 (Invest Europe statistics)

Note: Unless stated otherwise, all data below are from Invest Europe/PEREP_Analytics.

1.What is the size of the venture capital industry (in terms of Assets under Management, AuM) in the EU?

Table 18 shows the size and spread of the EU venture capital industry by region, both in terms of number of headquarters and assets under management.

Almost 75% of the venture capital industry in the EU, in terms of assets under management, is based in Western Europe, with an almost even split between the three main regions: Germany and Austria; France and Benelux; and the UK and Ireland. The Nordics (Denmark, Finland and Sweden) are also well represented.

While Southern Europe and the CEE region are also home to many venture capital firms, these usually have smaller amounts of assets under management.

Table 18: Overview of the venture capital industry across EU regions, by number of headquarters (HQ) and assets under management

2.What is the evolution of the venture capital market in Europe over the last 10 years?

Graph 19 shows the amount of venture capital investments in European companies from the beginning of the crisis in 2007 to Q3 2015 (preliminary only).

In this context, venture capital investments (at the level of the portfolio company) are defined as:

Seed: Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase.

Start-up: Financing for product development and initial marketing. Companies have not sold their product commercially and are in the process of being set up.

Later-stage venture: Financing for the expansion of an operating company. Later-stage venture tends to finance companies already backed by venture capital firms.

Although it is to be expected that most venture investments into portfolio companies are conducted by funds with a venture capital focus, funds with a broader strategy such as growth or generalist funds also make venture capital investments from time to time.

The amount of venture capital invested into companies has been relatively stable over the last couple of years while fundraising has differed from year to year (Graph 20), a not so surprising trend for a long-term industry where fundraising and investment cycles follow each other.

Graph 19: Venture capital investments in European companies (all Europe) - EUR million

Graph 20: Venture capital fundraising (all Europe) - EUR million

Source: Invest Europe/PEREP_Analytics

By comparison:

Graph 21: All types of private equity and venture capital investments in Europe (EUR billion)

Source: Invest Europe/PEREP_Analytics

Graph 22: All types of private equity and venture capital fundraising in Europe (EUR billion)

Source: Invest Europe/PEREP_Analytics

3.What is the number and size of managers in terms of AuM?

Table 23: Private equity and venture capital firms by location and number of headquarters, and assets under management

Source: Invest Europe/PEREP_Analytics

Note: This excludes HQs outside the EU.

Table 23 shows the breakdown of private equity and venture capital firms by number of headquarters and AuM.

As a reminder, a generalist fund is a fund with either a stated focus of investing in all stages of venture capital and private equity, or with a broad area of investment activity.

A buyout fund is a fund whose strategy is predominantly to acquire controlling stakes in established companies.

The United Kingdom, Germany and France are the “largest” venture capital countries, in terms of both assets under management and number of headquartered firms, followed by Spain and Sweden.

Many CEE countries have practically no venture capital fund managers based within their borders.

4.How many funds that are actually managed by authorised AIFMs can have the EuVECA label as it is in the actual definition?

Table 24 shows the kinds of companies (by size) that above-AIFMD threshold fund managers invested in during the period 2011 - Q3 2015 (preliminary). 51% of the companies that received investment from above-threshold managers were SMEs (based solely on the employee criterion).

Table 24: Percentage of investments by EU above-AIFMD threshold fund managers, by equity amount and number of companies, broken down by portfolio company size

Source: Invest Europe/PEREP_Analytics

5.Venture capital (cross-border) investor base: Where are the investors into European venture capital funds coming from?

There is great diversity in the base of investors (institutional and other) providing funding to venture capital funds. While most of them are based in Europe, a proportion (around 10%) of the investment into venture capital funds is coming from outside Europe.

Table 25: Fundraising (2011-Q3 2015 preliminary) for European venture capital funds: Geography of investors into venture capital (within and outside Europe)

Source: Invest Europe/PEREP_Analytics

Tables 26 and 27 below show the geographic origin and concentration of investors (described as LPs or limited partners) investing in European venture capital funds. The tables describe the same situation but from a different point of view:

Table 26 gives an overview of the origin (geographic location) of the different types of funding sources (i.e. investors) into European venture capital funds.

Table 27 provides an overview of the different types of investor into European venture capital on a country by country basis (i.e. broken down by origin).

There are a few conclusions that can be drawn from each table.

Table 26 gives valuable indications as to the importance of some national markets in providing specific types of funding for European venture capital funds. For example:

95% of capital markets funding into European venture capital came from the UK, with virtually no other venture capital funding from capital markets in the rest of Europe.

51% of corporate investors’ money going into European venture capital funds came from France and Germany (25% and 26% respectively), with another 24% from the UK and the United States (13% and 11% respectively).

The vast majority of funding from endowments and foundations came from the UK and the United States (54% and 33% respectively).

Pension funds and funds of funds located in the United States are the main providers of this type of venture capital funding (18% and 25% respectively).

The majority of funding provided by academic institutions (66%), private individuals (53%), insurance companies (36%) and government agencies (35%) came from France.

All funding provided by sovereign wealth funds came from outside of Europe: 74% from Australasia and 26% from the United States.

Table 27 shows which types of investors were most important to fund managers in each Member State (i.e. what is the investor base on a country-by-country basis). Not surprisingly, the bigger the venture capital market, the more diverse is the funding base.

For example:

While the investor base for European venture capital funds is very diverse, the sources of funding also differ significantly from one Member State to another.

In most cases, and with the exception of larger markets, funding into venture capital funds is mostly coming from two or three types of investors, which – again - differ from country to country.

While most capital market funding came from the UK (as shown in Table 7), only 14% of the funding coming from UK investors had its origin in capital markets.

In line with Table 7, 47% of the funding coming from Australasia was provided by sovereign wealth funds.

Table 26: Geographic origin of investors investing in European venture capital funds, broken down by investor type (2011-Q3 2015 preliminary)

Source: Invest Europe/PEREP_Analytics

Table 27: Type of investor investing in European VC funds, broken down by country of origin (2011-Q3 2015 preliminary)

Source: Invest Europe/PEREP_Analytic

6.Cross-border venture capital investments

Table 28 shows the total cross-regional venture capital investments in European portfolio companies (by amount and by percentage).

It should be noted that, as explained above, venture capital investments can also be made by non-venture capital funds.

Over the last five years, as demonstrated by Table 28, a large part of venture capital investments was regional, i.e. venture capitalists making an investment into a portfolio company located in the same region (from 66% for the UK and Ireland to 87% for France and Benelux).

Table 28: Venture capital investments in European companies (2011-Q3 2015 preliminary)

Source: Invest Europe/PEREP_Analytics

Note that this table covers all of Europe, including Norway, Switzerland, Ukraine and some non-EU CEE countries like Serbia, Montenegro, Macedonia and Bosnia-Herzegovina.

7.What is the institutional investor base, in terms of size and average investment?

Table 29 below describes the sources of funding by region.

Please also refer to Question 10 for more detailed geographical information on the investor base of venture capital funds.

Table 29: Sources of funds (LP/Investor type) by region of European venture capital funds raised (percentage of incremental amounts raised between 2011-Q3 2015 preliminary)

Source: Invest Europe/PEREP_Analytics

8.What is the retail investor base (family offices and HNWI), by size and average investment?

In 2014, family offices represented 5.9% of the incremental amount raised and private individuals 7.2%.

It is also important to remember that many academic institutions and foundations, as well as some corporate investors, will also be considered as retail investors under the MiFID II definition. While these investors are recognised as semi-professionals under the EuVECA Regulation, applying this definition to other pieces of legislation - and thereby allowing fundraising to sophisticated investors at European level - would make sense.

In the absence of a stronger EU framework for marketing to sophisticated investors, important differences between national regimes are the main reasons behind the fact that 80% of the overall amount is raised from private individuals and family offices in only 4 countries (France, Germany, the UK and the Netherlands) and 70% of the amount raised from private individuals in only two (France and Germany). Should marketing to these investors be allowed across Europe, there is no doubt that more capital would flow to venture capital funds.

As regards Table 30, it is important to note that we do not know how many private individuals and family offices are actually behind this. We are not therefore in a position to calculate how much a private individual/family office would normally invest on average.

We can only calculate the ‘average’ investment made by the category of investors labelled ‘private individuals’ and/or ‘family offices’. This does not tell us what a private individual/family office would invest on average.

Table 30: Commitments by family offices and private individuals to European venture capital funds raised between 2011 and Q3 2015 (preliminary)

Source: Invest Europe/PEREP_Analytics

9.EuVECA - Implications of the SME Definition & 70/30 Rule

The data suggest that the use of the EU SME definition 78 to determine whether or not an individual company is a qualifying investment for an EuVECA fund could have a meaningful negative impact on the attractiveness of the regime to a fund manager.

Across the full range of potentially eligible managers (i.e. those with total AuM below the 500m EUR threshold set out in the AIFMD) Invest Europe data show that only 55% of the capital they invested went into SMEs (as defined solely using the 250-employee criterion 79 ). In other words, 45% of the total amount invested was dedicated to non-SMEs – far above the 30% threshold set in the EuVECA Regulation.

Table 31: Percentage of investments by EU sub-AIFMD threshold fund managers, by equity amount and number of companies, broken down by portfolio company size (2011-2015 YTD preliminary)

As Table 31 demonstrates, a very large majority of the companies (85%) into which EuVECA-eligible managers invest are SMEs. But where they find an attractive investment opportunity these relatively small managers will also invest into companies that have more than 250 employees. Such investments are relatively few in number, but are likely to represent a larger proportion of the fund’s capital (unsurprisingly, as a company with more than 250 employees is likely to be bigger and to need a correspondingly larger investment).

These data underscore how arbitrary the formal SME definition is likely to appear to a fund manager who will wish to retain the flexibility to invest in companies in their fund’s target sector and/or geography without having to be bound by an SME definition that reflects regulatory rather than commercial imperatives.

With 45% of the capital being invested by eligible managers going to companies that do not meet the regulatory definition of an SME it becomes apparent that the requirement to invest 70% of an EuVECA’s capital into qualifying portfolio undertakings could limit the attractiveness of the EuVECA regime. It seems to be too far removed from the actual practice of many smaller (i.e. sub-500m EUR AuM) fund managers and therefore to represent too much of a restriction on their freedom to invest. Even those managers with a clear focus on smaller companies (as demonstrated by the sheer number of such companies they back) risk failing to meet the ‘capital invested’ criterion.

10.Comparison with the US

By comparison, as demonstrated by Table 32, US firms with assets under management below EUR 500 million (i.e. below the EU AIFMD threshold and therefore of essentially the same size as those EU funds that are EuVECA eligible) dedicated more than half of the total equity that they invested in Europe to larger portfolio companies with between 1,000 and 5,000 employees.

This further suggests that the EU regulatory definition of an SME may not capture that segment of European companies that are looking to venture capitalists for backing.

Table 32: US firms and funds (less than EUR 500m AuM) investing in European companies (2011-Q3 2015 preliminary) by employment size of the company

Source: Invest Europe/PEREP_Analytics

19.ANNEX 12 (Stakeholders' Contribution to the Public Consultation)

Appendix: statistical tables

Considering the period 2012-2014, data based on the National Venture Capital Associations statistics showed that the Italian venture capital market is the smallest (both in terms of amount invested and companies financed) among the main European ones: UK, France and Germany are the most developed countries in the venture capital activity.

In 2014, the amount invested in Italy was equal to 43 Euro Mln involving 84 companies (figure 32 and 33). In line with the above considerations, another noteworthy aspect is that, in the same year, the average invested amount in the most developed VC markets (UK, France and Germany) was double the Italian one (figure 34). Concerning the number of players, in 2014, 25 venture capitalists were active in our market, with respect to 151 in UK, 110 in France, 160 in Germany and 154 in Spain (figure 35).

Figure 32: Amount invested in venture capital (Euro Mln)

*£ Mln

Source: AFIC (France), AIFI-PwC (Italy), ASCRI (Spain), BVCA (UK), BVK-PEREP_Analytics (Germany)

Figure 33: Number of venture backed companies

**Number of investments

Source: AFIC (France), AIFI-PwC (Italy), ASCRI (Spain), BVCA (UK), BVK-PEREP_Analytics (Germany)

Figure 34: Average amount invested (Euro Mln, 2014)

*£ Mln