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Marketing private equity funds in Europe01/08/2007. Source: SJ Berwin. Simon Witney
 Last year, notes SJ Berwin, the European Commission undertook a detailed review of alternative investments, and established an Expert Group on Private Equity. Their report highlighted the need for a better framework for marketing alternative investment funds across European borders, arguing that we need "a common understanding of what constitutes a private placement", so that fully informed, sophisticated investors are given access to funds being raised in other European countries without unnecessary transaction costs.
In the White Paper on investment funds published in November 2006, a commitment was made to "undertake a systematic analysis of the national barriers to private placement".
Whatever the objectives of the European Union, one of them is clearly to create a single market across its member states. The lack of a "common understanding" on private placements - which certainly makes it harder than it needs to be to market a fund across the whole of the EU - obviously represents a single market failure.
So, in April 2007, the European Commission issued a "call for evidence", to which a number of interested parties have now responded. While the London Stock Exchange, for example, takes issue with the premise of the consultation - arguing that there is no "lack of common understanding of private placements", those with the interests of the private equity industry at heart (including the European Private Equity and Venture Capital Association) are concerned that the increased transaction costs of accessing target investors are hindering fundraising activity.
EVCA, in its response to the call for evidence, points to the relatively static level of cross border European investment in funds in recent years (despite the overall increase in fund raising), and argues that the need for managers to navigate "up to … 27 different sets of legal requirements and legislation when approaching and eventually concluding private placements with 'eligible investors'" is one factor restraining that.
As EVCA says, these problems are more likely to concern funds whose domestic market is small - either because they are based in a market with few local investors, or because they have a narrow investment focus for their fund and need to cast a wider net. It is also true that smaller funds are less able to absorb the transaction costs and so are likely to suffer most.
There is a lot of evidence that the European Commission is sympathetic to the industry's concerns on private placement, and wants to move towards a common understanding of "eligible investors" - who can be admitted to (unlisted) private equity funds no matter where in Europe they are based.
That would no doubt be helpful, although more so to those managers based in countries without access to a deep pool of domestic capital - provided (and this is an important qualification) that it is not done in a way that restricts access to some potential investors, or adds bureaucratic complexity. That remains the clear danger of harmonisation, and one that must be strongly resisted.
If those with relatively flexible regimes (like the UK) were forced to tighten their rules, that would be a perverse and unhelpful result.
Simon Witney
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on its services to the private equity industry please contact Jonathan Blake or Simon Witney in its London office +44 (0)20 7533 2222 or visit our website at www.sjberwin.com
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