Speech at European Business Summit ‘What Future for Finance’
by Uli Fricke, Chairwoman, EVCA
Brussels, June 30, 2010
“You have heard about the role that banks play in society – and for most people, the concept of debt lending is familiar territory - even if the structures used in today’s financial markets are now so complex that it is all but impossible for ordinary mortals to comprehend!
“For Europe’s companies seeking finance, the flip side to debt finance are the equity markets, commonly seen as synonymous with the public stock markets, particularly for larger companies.
“But there is another form of equity finance that supports Europe’s companies to access finance for growth and innovation, regardless of their size or sector.
“Private equity and venture capital is used by more than 25,000 European companies to support their business aspirations. 25,000 sounds a lot, but actually such investment is made very selectively, and those companies backed by us are those with the most potential – the potential to harness innovation, to support Europe’s knowledge economy and in turn, to yield sustainable economic and employment growth.
“It’s therefore seen as a pretty good thing by policymakers, which is why the EU has a number of supportive initiatives for our industry, and why the European Commission makes so many supportive pronouncements, most recently as part of the EU 2020 Strategy and the latest Competitiveness Council findings.
“I mentioned that we back businesses of all sizes. This naturally means that private equity and venture capital firms are not homogenous – but the principle behind both investments is the same: an alignment of interest that ensures that we as backers have a deep vested interest in the long term sustainable position of these companies. If we fail, we don’t make money. We aren’t dealing in tradable securities, but real businesses that require dedicated attention.. No moral hazard there.
“A few more facts about private equity and venture capital.
“It had nothing to do with the financial crisis. It has proven robust, stable, and able to function and make new investment, when the rest of the financing world was on its knees. In 2009, we backed more than 4,500 European companies with fresh equity, many of which received follow-on funding for further investment in their growth.
“We do NOT present systemic risk. This is the conclusion of every major independent report on the subject, from both academia and the EU institutions themselves.
“We support company growth and innovation, which in turn yields sustainable economic and employment growth.
“The problem is that a number of proposed regulatory reforms since the crisis threaten to destroy venture capital and harm private equity. In particular the AIFMD, but also Solvency II, the CRD and more.
“What the EU gives with one hand, it threatens to take away with another. Let’s not underplay this. Proposals on the table in the AIFM Directive for instance, would simply make life impossible for most European venture firms.
“It doesn’t have to be this way, if a few simple principles where observed. I have three, which I’d like to share:
‘Do no harm to those parts that are working!’
PE is one corner of the financial markets that is still serving Europe’s businesses in the way it is meant to, with no bail out and no systemic risk. Let us do it!
‘Do not discriminate!’ Some discriminatory rules did kick up a big storm – like the one between Tim Geithner and the EU over the so-called third country rules. But some discriminatory rules are less noticed but just as damaging.
- This Directive would impose rules on the companies I back that would not apply to their competitors, many of which would be much larger.
- Ah, the policymakers say, but what is so bad about transparency? I say nothing! So long as it is introduced fairly, with the same rules applying to all companies and through due consultation. Disclosure for some and not others is like forcing one bridge player to show his cards to everyone else.
“I think by now you will understand that PE and VC, which only back companies, are different from financial institutions that make money by trading complex instruments. We need different rules too, otherwise we will just end up with a Europe that cannot compete. Thank you.”