PRINT THIS PAGE Experts report on private equity12/07/2006. Source: SJ Berwin. Simon Witney 
When policy makers take an active interest in private equity it is hard not to get worried, says SJ Berwin. The industry is still not well understood by politicians, the media or the public, so it is rarely good news when it is put under the spotlight. But not only has private equity had to get used to that spotlight, it is now starting to invite it. As speaker after speaker made clear at the European Private Equity and Venture Capital Association’s annual Symposium last month, it is vital to make sure that these important audiences do understand the industry. They must think carefully about it before leaping in with well-intentioned - but often unnecessary - regulation.
So it was significant that, when the European Commission set up a panel to report on the environment for investment funds in Europe this year, it established a sub-group on private equity. The industry - shrewdly - threw a lot of resource into that group, and the result is that the “expert report”, which was published this week, is a very welcome step in educating policy makers.
The impact has been enhanced by the wide publicity the report has received, and the endorsement of Charlie McCreevy, the European internal market Commissioner. He said that “private equity could make a stronger contribution to the European economy if the regulatory costs were lower”.
The European Commission’s summary of the conclusions of the group (which will be debated at an open meeting in Brussels on 19 July) explains that the industry has contributed positively to European competitiveness and innovation, to corporate governance and management, and to preparing companies for further growth and IPO. But it highlights the difficulties that private equity has in operating across borders, and the need for greater understanding of the industry on both a national and a European level. These are very welcome observations.
The concern - of course - is that legislators who see a problem reach instinctively for the first tool in their toolbox: legislation. The report eschews that approach - arguing that “the current mix of self-regulation and light-touch supervisory oversight remains a viable basis for the continued development of the industry and its business model”.
It also calls for national governments to take a “consistent and light touch approach” to implementation of European laws that affect private equity, and to do so in a way that does not put obstacles in the way of professional investors accessing private equity funds. It is acknowledged that, without proper consideration, regulation can generate unintended consequences for the “unique business models that underpin Europe’s private equity industry”.
The report highlights two specific areas worthy of special attention. The first is private equity fund structures, where national governments are asked to respect each other’s fiscal and regulatory environments to avoid double taxation and legal uncertainty. The second is cross border private placements of private equity fund interests. It is argued that this should be easier, and that the starting point is a clear recognition that funds are invariably dealing with investors who are “capable of understanding the nature of the bargain, including any attendant risks”. Again, the call is a de-regulatory one.
It is easy to be cynical about initiatives like this, and certainly it would be foolish to predict any immediate, concrete results. But the process of educating and persuading policy makers is a slow one, and an opportunity to put the case forcefully is rare. The industry has exploited that opportunity very effectively, and argues strongly for no new regulation. That may be counter-intuitive to regulators, but - combined with a change of attitude, and some simplification - it is precisely what the industry needs.
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 our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.
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