RealDeals Interview with EVCA Chairwoman Uli W. Fricke
(The RealDeals Magazine, July 15 2010)
July 15, 2010
As wrangling over the AIFM directive nears the finishing line, the new EVCA chairman lays out her manifesto for an industry still under attack.
You are taking over the mantle at EVCA just as the AIFM directive that has dominated the organizations agenda has almost run its course. With this crucial piece of regulation moving into a technical stage, what will be the primary focus of your tenure as chairman?
It is a myth that EVCA has been dealing almost exclusively with the AIFM directive. It has taken up resources from Javier Echarri [the soon to depart secretary general of EVCA] and the public affairs team, but EVCA's activities go way beyond that one piece of regulation.
For example, on venture capital-specific issues, we have managed to get a strong foothold in the EU 2020 innovation agenda, which means substantial sums of additional money will be coming the way of European venture. We have produced a white paper for policy support on better cross-border venture investment and exit frameworks. These things have taken up a lot of resource and have been a major success, unbeknownst to the wider industry.
We are also working on the production of data on the SME sector of European business, which is supported by mid-market buyouts and expansion capital. For LPs, we have launched a training programme at the Said Business School in Oxford. We also have teams that deal with training, professional standards and events.
There are also other key regulatory threats on the horizon - not least Solvency 11, which is likely to have a real impact on investment in private equity and venture capital funds - and other changes to capital requirement directives that are coming our way.
Are you hoping these other activities will get more air time once the AIFM is no longer hogging the limelight?
That is certainly what I want. I also hope to encourage members to better understand the scope and breadth of what the association is doing on their behalf.
So what are the key objectives for your tenure as chairman of EVCA?
I have three main objectives. The first involves building on the strength of EVCA as a unified voice for the whole private equity and venture capital industry in Europe, that also recognizes the diversified needs of its member segments - be it venture, the mid-market, large buyouts or LPs. I want to make sure we target our services to the specific needs of those groups, and that we manage to understand what they think they require from an association and deliver accordingly. So number one is targeted member services.
My second priority involves resetting the public image of private equity and venture capital - that is an ongoing project. Across all market segments, the public perception of the asset class isn't in line with reality, and fails to recognize the role the industry plays in the global economy.
That is as true for venture capital, where there is an assumption that the industry is not generating attractive returns; to buyouts, where the great misconception, I believe, involves the value of the buyout industry for companies in Europe.
So here again, it is important that the work we do on the asset class's public image is in line with the specific challenges that the various member groups have. Work needs to be done on performance data for venture, for example, while for the buyout industry the bigger opportunity involves data on socioeconomic impact, and LPs want to see more done in the area of responsible investment.
My third objective is to issue a call to action to the industry. EVCA already provides strong representation of the private equity and venture capital industry in Brussels.
But now it is clear that this is going to be a regulated industry, it would be tremendously helpful if we presented a few additional faces: those who are willing to speak openly with politicians and trade unions, in the wider context of setting the corporate agenda in Europe, whether that be regarding green Europe, corporate governance - which is something Brussels is going to be interested in - or the AIFM directive.
That call to action was also central to Jonathan Russell's manifesto when he took the reins, just as private equity was first coming under attack. Has the industry failed to answer that call, and how big an impact has that had on the fate it now faces?
I think the industry has learnt over recent years that this type of engagement is of increasing importance, and we are now in a better position to make it happen.
There was certainly criticism, back when Jonathan became chairman, that the industry was unwilling to stand up and be counted. But I have been active in EVCA's public affairs executive, representing the venture industry, since its inception. So I am fully aware of the level of industry engagement in that process, and it has been significant. I am confident I have the support of the industry behind me.
Nonetheless, the EVCA chairmanship - and that of other industry associations - has seemed a thankless task at times. Why have you decided to take it on?
It is not a thankless task. It is interesting, rewarding, and you can learn a lot. There are two approaches that a person can take to challenges. You can complain that others are getting it wrong, or you can do something yourself to try and change the situation. I have always been a proponent of the second approach.
I also believe it is vital that the industry is represented not only by the management of the associations, but by the industry incumbents, and that every segment of the industry needs to have a strong and distinctive voice. It is good, therefore, that after Richard Wilson of Apax and Jonathan Russell, there is someone who will be representing the overall industry but who has a venture capital background.
Where do things stand with the AIFM directive, and just how damaging does it threaten to be?
Things are changing all the time, so anything I tell you now may no Ionger be the case by the time Real Deals is published, but at the moment we are in a "trialogue". A draft directive from the council was published at the end of March. A draft directive from the ECON committee was published at the end of May. Since then, the council and the commission have been trying to work out a compromise.
There have been three council meetings so far, and finding a compromise has looked like a real challenge - finding one satisfactory to the private equity and venture capital industries has been even more so.
There is a strong political push towards completion of the directive before the summer break. So they hope before the end of July to have the final text, which then might be adopted in a first reading in September or October. Everyone hopes it will be adopted in the first reading because no one really expects the outcome to get any more favorable.
But if it goes to a second reading, that will mean more involvement from the commission. The commission is not an easy body to deal with nowadays. It has fewer people who understand private equity.
And if passed in a first reading, will the final result be tolerable for private equity?
The way things stand, the directive will not be good for the industry, and, particularly, it will not be good for the smaller end of the spectrum.
The council negotiated clauses that would make the directive manageable for the private equity and venture capital industries, and parliament did so as well. But they both had areas that were of concern for the asset class.
As the trialogue continues, it seems the more challenging aspects from both, rather than the most positive aspects from both, are being adopted. That is particularly true for portfolio company disclosure, which still affects businesses with as few as 50 employees, and will involve disclosing confidential information such as R&D plans and staffing plans. That is a huge issue for venture-backed companies.
Third-country restrictions are still a major threat, and lead to questions about how non-EU domiciled funds will be able to raise money and invest in Europe. And, unfortunately, the more appropriate tailoring that both the council and parliament introduced is being challenged by the commission. That's not the commission's role, so it was surprising and disappointing to see.
The tailoring that would have freed private equity from other obligations, such as compliance with an external valuation body and compliance with an external depository requirement, have also been removed, while the council's tailoring, that would have allowed smaller funds to opt into a lighter regime, has also gone.
If all these amendments are adopted in the final regulation, that would significantly hamper the capacity to fundraise and invest, and would increase costs. I believe there is still plenty of room to strengthen our position, though, and to explain to the commission just how damaging the consequences could be.
By consequences, do you mean damage to foreign investment in Europe?
Certainly, Europe needs to be careful that it is not perceived as an unattractive area for investment. The more bars that are erected and the more layers of cost and complexity added, the greater the impact will be on money invested.
When you consider that the banks are unlikely to swing back into action and lend to European companies any time soon, private equity's role in providing the capital necessary for growth, innovation and job creation is all the more important. If that capacity is diminished, the wider implications will be significant.
There are 25,000 portfolio companies in Europe. That is a huge number. And tellingly, around 87 per cent of those employ less than 250 staff.
With Javier Echarri soon to depart, what do all these new challenges mean for the type of secretary general that EVCA is looking to hire?
There are three capabilities that we need to have represented in the management team.
One is public affairs. We need someone who knows their way around the institutions in Brussels.
The second is communications. We require someone to represent the industry to external stakeholders, and to liaise with members.
The third is a strong managerial capability. The EVCA team has grown to 30 people, and that team needs credible leadership so that its services can be provided seamlessly.
Could a Brit ever take over the role? Surely the election of a Euro-sceptic to prime minister hampers UK influence in Brussels.
I don't think that would be an issue. We need someone who can navigate their way through the institutions of Brussels, irrespective of nationality.
Nick Clegg is probably a good example. There are some charming and convincing British people - and they have the advantage of language.
How much of your time does the chairmanship take up?
It varies, depending on what is going on. There is going to be a lot happening in Brussels on the AIFM directive over the next two weeks, so it will probably take up more than one day per week. But then at other times, it's fairly quiet.
That must create pressure on your day job though. What do your team - and LPs - think about that?
There is additional pressure. The schedule of an early-stage VC is already busy. But my team is absolutely behind the chairmanship. They are excited about it, and willing to roll up their sleeves and do a little more than usual.
How are EVCA and the various national associations working together now, following early tensions?
Whether you like it or not, more and more policymaking will take place in Brussels. Private equity needs to have a voice there and that voice is, and should be, EVCA's. However, as we have seen with the AIFM directive, you cannot effectively lobby in Brussels without strong relationships between member states, and those can't take place without the national associations.
EVCA's public affairs executive has proven to be a body that creates an ethos of trust in order to execute these agendas.
The national associations also clearly have services to offer firms that are single-country centric, like much of the mid-market. They also have important roles to play with domestic regulators.
Do you think members have become more demanding of their industry associations as a result of everything that has happened over the past few years?
Definitely. A harsher economic climate and a strong regulatory push mean that members are becoming more demanding, and rightly so. EVCA reacted to that demand with a change in its governance, reorganizing itself in member platforms so it could speak explicitly to its different members and react to their needs. The single biggest member demand is that their needs are heard and attended to. I intend to make sure that happens.