Internal Market Commissioner Frits Bolkestein said: "The RCAP has got rid of many obstacles to European risk capital markets. By doing that it has helped new and growing companies create jobs. It has become a benchmark for policy makers across the EU and has helped strengthen the European risk capital industry. But if we want to make Europe the most competitive and dynamic economy in the world we need to break down remaining barriers at European and national level".
Commissioner for Economic Affairs Pedro Solbes added: "In spite of recent difficulties, the positive effect of the RCAP is already felt. There is some evidence that private equity is gaining acceptance as a separate asset class in many Member States. The gap with the USA in venture backed investments is still there but is decreasing. As an important component of the structural reform called for by the Lisbon Summit, the modernisation process should be continued and extended to also cover the new Member States."
Summary of the main points of the Fifth and Final Progress Report on the Risk Capital Action Plan
Market developments
Private equity investment in the EU in 2002 slightly increased over 2001, and reached the second highest level ever. But there was an important shift towards less risky buy-outs, which increased by 57%, and more focus on follow-on investment. Investment in the early stages of companies' development, and especially seed investment, was much less healthy. Venture backed high technology investment was particularly badly hit, falling by 41%, in the wake of the bursting of the internet bubble which led to low trading volumes in the specialised stock exchanges for high-growth companies and the consequent closure of several of those exchanges.
Altogether, €10.1 billion (0.11% of GDP) were invested in venture capital in 2002 and €16.8 billion (0.18% of GDP) in buy-outs.
The gap with the US in venture capital investment remains. Despite falling by nearly 50%, US venture capital investment in 2002 was €20 billion, double the EU volume. Nevertheless, this comparison is better from an EU point of view than in 2000 when this type of investment in the US was four times higher and 2001 when it was more than three times higher.
Whereas the total private equity investment volume held up well, important differences between Member States persist. Growth was strong in France, Finland and the UK. In contrast investment activity fell significantly in Greece, Germany and Portugal. Private equity in the Accession Countries remains undeveloped with buy-out investment playing little role.
|
Value in million euro of | 1998 | 1999 | 2000 | 2001 | 2002 |
| Investment in Early stage (seed + start-up) | 1 566 | 2 991 | 6 405 | 3 988 | 2 699 |
| Investment in Development capital (expansion + replacement) | 5 172 | 8 242 | 13 226 | 8 758 | 7 405 |
| Total VENTURE CAPITAL invested | 6 738 | 11 233 | 19 632 | 12 746 | 10 104 |
| Total VENTURE CAPITAL as of % GDP | 0.09 | 0.14 | 0.23 | 0.14 | 0.11 |
| Buy-outs | 7 333 | 13 154 | 13 917 | 10 743 | 16 845 |
| Total PRIVATE EQUITY invested | 14 071 | 24 387 | 33 549 | 23 489 | 26 949 |
| Total PRIVATE EQUITY as of % GDP | 0.19 | 0.30 | 0.40 | 0.27 | 0.29 |
| Funds Raised for PRIVATE EQUITY Investments | 19 663 | 24 613 | 45 633 | 36 915 | 26 779 |
The current lack of exit opportunities for the risk capital industry to unload its investments either through trade sales or, more importantly, through flotation on specialised stock markets is perceived as the most important factor holding back the return to growth of the EU private equity market. The unfavourable situation can be expected to improve with economic recovery and the return of investor confidence.
Regulatory issues
The development of a modern and flexible regulatory framework catering for the needs of risk capital operators (the supply side) and enterprises (the demand side), both at EU and national levels, has remained in 2002 and 2003 a top political priority.
In particular, several important measures included in both the RCAP and the FSAP have been adopted or made progress. These include:
- the new Directive on prospectuses adopted on 15 July 2003 (see IP/03/1018) which will facilitate risk capital exits via initial public offerings of securities and the listing of new companies on high-growth stock markets
- the Directive on supplementary pension funds (see IP/03/669) which is expected to provide additional funds for the risk capital industry
- the endorsement of International Accounting Standards, which will make financial reporting more transparent and help investors (see IP/03/1297)
- the adoption of the Commission's Action Plans on company law and corporate governance (see IP/03/716, MEMO/03/112) and on audit (IP/03/715).
However, pan-European operators face still a fragmented tax system, characterised by disparities between effective corporate tax rates, inefficiencies and high compliance costs.
Entrepreneurship, research and innovation
Best Procedure projects, based on the identification and exchange between Member States of best practices, have provided the entrepreneurship framework for the RCAP. Relevant project reports are available see
http://europa.eu.int/comm/enterprise/enterprise_policy/best/best_projects_2001.htm
on the transfer of business, on education and training for entrepreneurship, or on business angels private individuals who invest directly in new and growing businesses.
But Europe does not yet fully exploit its entrepreneurial potential. At the request of the Heads of State and Government at the Brussels Spring 2002Summit, the Commission will present by the end of 2003 an Action Plan for Entrepreneurship which will build on the result of the public debate which followed the Commission Green Paper on Entrepreneurship in January 2003 (see IP/03/87).
On the research and innovation front, a number of important initiatives relevant for risk capital, such as "Gate2Growth Initiative" and the "Biotech and Finance Forum", which started under the EU's 5th Framework Programme, will continue under the 6th Framework programme.
The 6th Framework Programme (see MEMO/02/152) will also put increased emphasis on the integration of innovation in the design and implementation of research projects. Associations of SMEs will be able to participate in the programme on behalf of their members.
In spring 2003, the Commission adopted a strategy to attain the goal set by the Barcelona Summit of increasing EU investment in R&D to around 3% of GDP by 2010, with two-thirds from the private sector. That strategy includes measures to improve access to financing for research and innovation and to promote the creation and growth of new technology-based firms, thus increasing the demand for risk capital.
Public funding
Public funding has in 2002 and 2003 continued to play an important role in attracting private capital to potentially high-growth companies where market failures are perceived to have occurred:
- Member States have set up innovative risk capital schemes, compatible with EU state aid rules for risk capital, mainly for companies in depressed areas or active in high-tech services sectors, or as part of other projects of EU interest
- The European Investment Fund (EIF, see http://www.eif.eu.int/) has continued investing in technology-based, regional, and pan-European funds. It has expanded its scope to cover also later stage investment, in order to compensate for the reduction in capital supply for such investment as markets continue to adjust in the wake of the bursting of the Internet bubble
- EU structural funds will over the period 2000-2006 supply about € 1.4 billion to risk capital funds and guarantee funds, more than double the amount for 1994-1999.
Next steps
Building on the RCAP, the Commission will continue to follow the risk capital markets closely. It will further analyse the areas where inefficiencies still remain with a view to putting forward recommendations and proposals, as necessary, on for example:
- obstacles faced by institutional investors who wish to invest in venture capital
- further improving the regulatory framework including the possibility of creating a harmonised European legal structure capable of ensuring tax transparency all over Europe
- fostering exit mechanisms, with special attention to specialised stock exchanges and lists for growing companies, and to boosting investor confidence
- closing the information gap between financiers and companies/entrepreneurs seeking investment
- focusing EU support on safeguarding the supply of funds for early stage investment and on counterbalancing the effects of the present reduced supply of development stage financing. In the new Member States, full advantage should be taken of the EIF's experience in the establishment of new funds in locations outside financial centres.
The full text of the Report is available on the Commission's Europa website:
http://www.europa.eu.int/comm/internal_market/en/finances/mobil/risk-capital_en.htm
