| EU Commission inquiry into VC markets highlights lack of mutual recognition |
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| The regulation and taxation difficulties facing venture capital (VC) firms that are trying to increase cross-border trade is a major obstacle to the development of a more competitive sector, according to a report released by the EU Commission. |
One of the main obstacles to Europe developing a stronger Venture Capital (VC) sector is a lack of cohesion and cooperation between member states, according to the EU Commission's report on Removing Obstacles to Cross-border Investment by VC Funds.
The report calls on individual member states to recognise VC funds from other jurisdictions, and to allow them to operate across borders without having to deal with complex parallel structures that hamper growth and competitiveness. The report claims that, as a result of these barriers, small and medium companies are failing to look beyond the traditional finance of banks for funding; it claims that, if given the opportunity to develop, the VC sector could fill this gap.
The report places Ireland with the UK in an 'advanced' country cluster. It says that these two markets have, 'performed outstandingly in terms of fund raising and attracting investors . It adds that a number of VC funds have voluntarily registered with the Financial Services Regulator to increase international respectability and make it easier to fund raise. Irish VC funds are able to invest abroad, and are largely doing so in the UK, according to the report.
The report cites the fact that the VC market does not benefit from the European single market as the main impediment to the sector's development. It claims that the industry in Europe has fallen behind its American counterpart, in part because of the legal restrictions to cross-border activity. These restrictions are limiting the scope of funds and also inhibiting the size of individual funds, because of the restricted international investment.
The report offers a number of solutions to this problem, claiming that the clear long-term solution for the VC market is to seek harmonisation at a supra-national level. However, it recognises the potential pitfalls of introducing a further layer of regulation to the market; a step which would further dampen opportunities for growth of the sector.
As a result, the report recommends that in the short term individual member states concentrate on mutual recognition of existing national structures. The main problem found with mutual recognition was that countries differ not only in their approaches to stimulate VC markets, but also in their basic definitions. A common understanding is necessary to reduce the potential waste of time and money in the sector.
According to a report in the March issue of Finance, the VC sector in Ireland is set to fall-off this year as a number of VC funds are currently out raising money and 2007 is expected to be considerably slower than 2006. Many of the largest Irish VC firms are currently in fund raising mode, with ACT, Delta and Trinity all understood to be looking to raise finance for their funds. The primary source of funds is Irish pension funds and international funds of funds. In addition to this, an increasing range of alternative investment options for start-up firms will increase competition in the sector. |
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| Article appeared in the May 2007 issue.
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