PRINT THIS PAGE 2006 EVCA benchmarking study20/12/2006. Source: EVCA. 
Better tax and legal initiatives needed to support entrepreneurs in private equity and venture capital environment in Europe, finds the EVCA in their latest piece of research. The European Private Equity and Venture Capital Association has now presented its third Benchmarking Study. The study enables comparisons to be drawn between tax and legal environments across 25 European countries, to the extent that they affect the development of private equity and venture capital and encourage entrepreneurial activity.
The aim of the survey is to highlight national practices, and engender more efficient tax and legal frameworks across Europe, since fragmentation inhibits economic growth.
It has focused on three main areas considered important for the private equity and venture capital industry:
- The tax and legal environment for limited partners (investors) and fund managers;
- The environment for investee companies;
- The environment for retaining talent in investee companies and management funds.
The collection of data was carried out by the KPMG M&A Tax network, and the study evaluates seven criteria important to the development of private equity and venture capital, which are further split into 29 variables. Information gathered reflects the situation in each country surveyed up to July 1, 2006.
The results of the survey can be used to evaluate countries' evolution compared to previous years. Based on the scoring system used (where 1 is positive and 3 is negative), the main findings are as follows:
A slight overall improvement in the tax and legal environment for private equity and venture capital and entrepreneurship across Europe, with an average composite score this year of 1.84, compared to 1.97 in 2004.
There is still a wide divergence between top- and bottom-ranked countries: this year Ireland is at the top, with 1.27, and Romania (included for the first time) at the bottom, with 2.35. But the gap between the best-ranking and the European average has slightly narrowed.
Most of the countries have adopted an appropriate domestic fund structure to attract capital from domestic as well as international investors. The tax and legal environment has also improved with respect to pension funds and insurance companies investing in entrepreneurial projects. But very few countries provide incentives to invest in private equity and venture capital, scoring only an average 2.04.
Likewise, tax and performance-related incentives to retain talent, within both investee companies and investment funds, are still not sufficient. Moreover, company incentivisation and fiscal R&D incentives achieve the lowest score of all, at 2.36 and 2.13, respectively.
Ireland, France and the United Kingdom rank as the countries with the most favourable environment for the development of the private equity and venture capital industry, with composite scores of 1.27, 1.36 and 1.46, respectively. In all three surveys, the United Kingdom and Ireland have consistently been ranked within the top three countries, whereas France has moved into this band for the first time.
Together with France, Belgium and Spain have moved to above-average composite scores since the first survey in 2003, indicating a relative willingness to reform.
There is a wide divergence between the countries which have performed below the European average, with very different criteria for poor performance. Norway, Sweden and Germany have been ranked below average since the first survey in 2003.
New EU countries and accession countries tend, unsurprisingly, to be below the European average, but they are making good progress.
Commenting on the research, EVCA Secretary-General, Javier Echarri said, "It is encouraging that the European tax and legal environment has improved overall, but the differences between the countries at the higher and lower end of the ranking should be noted. It is worth highlighting those countries that have clearly focused on improving their competitive positions in this area, namely France, Belgium and Spain, where the most important progress of the last two years is to be found.
At the same time, there are still a number of tax and legal impediments across the global landscape and inadequate regulation creates high entry costs and low levels of cash flow. We would like to see a level playing field for domestic and international investors, but a domestic focus is all too evident across most countries.
EVCA's benchmarking survey is intended as a stimulus for change. Private equity and venture capital drives growth and, as many studies show, makes economies competitive, creating and developing businesses and jobs and encouraging entrepreneurial talent by rewarding the most successful venturers. We hope that the lower ranked countries can see the benefits of such change."
Indication of the tax and legal environment for the development of private equity and venture capital (1 = more favourable / 3 = less favourable).
Methodology
For the research, a standardised procedure was followed based on detailed definitions of individual variables. The KPMG M&A Tax network provided the detailed information on the 29 variables in 25 countries. The objective was to continue the discussion on the fragmented policy environments currently in place in European countries, as well as to highlight those areas where improvements to the tax and legal situation could positively affect the development in private equity and venture capital, as well as entrepreneurship.
The report does not claim to be an exhaustive comparison and there are of course more factors contributing to a favourable private equity and venture capital environment than have been selected for this analysis. An effort was made to select those aspects that are most relevant for a healthy private equity and venture capital industry. Neither the effectiveness of an initiative nor the ease of using it were reflected in the final analysis of this paper as it would have been difficult to come to a neutral evaluation.
To allow comparison to be made between different national environments, information on seven criteria (focused on the areas outlined above) was collected based on 29 variables and across 25 European countries. The cut-off date of the information collected was 1 July 2006.
As in previous years, for each country, a score was allocated per variable: '1' representing the best score, accorded to a favourable environment, through to '3', indicating less favourable conditions with room for improvement. Subsequently, an average was calculated per criterion, based on the scores for the underlying variables. Finally, a composite score per country was calculated by calculating the average score across all seven criteria. The country's composite score enables an assessment of the current conditions across all countries analysed. It is important to emphasize that equal weight was accorded to each of the seven criteria when calculating the country's composite score, meaning that no weighting was applied regarding the relative impact of the individual criteria on the overall environment.
The results from the previous assessments, 2004 and 2003, are also shown in the table. Please be aware that a strict comparison between the three sets of results is not possible, as some variables have been changed or further developed (for example, topics have been introduced such as young innovative company schemes, and the ability of pension funds and insurers to invest in this asset class has been assessed). In addition, while four new countries (Estonia, Latvia, Romania and Slovenia) have been included, Bulgaria, Cyprus Lithuania and Malta have not been included this year due to difficulties in gathering information.
Please note that the document does not attempt to outline specific situation in each country and is in no way designed to influence private equity or venture capital fundraising or investment decision making.
The European Venture Capital Association's mission is to promote globally and to facilitate the development of the European private equity and venture capital industry through active lobbying and development initiatives. It seeks to help create an entrepreneurial environment in Europe and promote European private equity and venture capital to institutional investors worldwide. For more information, please visit www.evca.com
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