European overview

Author: | Published: 4 Jan 2001
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It has been another landmark year for European private equity. The main headlines are a continued increase in venture capital investing (particularly in the high tech sectors), the increased importance of private equity funded transactions to the European mergers and acquisitions (M&A) market as a whole, and the level of funds raised across Europe (almost certain to set another record).

Figures recently published by the European Venture Capital Association (EVCA) show that, in the first half of 2000, a total of euro 13.5 billion ($12 billion) was invested by private equity houses across Europe, which compares with around euro 25 billion in the whole of 1999. Almost half of these investments were in high tech companies (although those companies only accounted for around a third of the total amount invested). Venture capital investment (seed, start-up and expansion capital) represented over half of the total - a significant increase from last year's 42.5% - and figures produced by Initiative Europe earlier in the year show that euro 19 billion of new money was raised for unquoted investment in the first six months - which compares to the euro 25 billion reported by the EVCA for the whole of 1999.

There have also been some very significant legal and tax developments - and many of them are good news for the private equity industry. One of these was the high profile German tax reform, which many predict will unlock buyout opportunities across Germany. The impact of the lower tax environment should also make Germany more attractive for growing businesses, and the single currency has meant that the German reform has increased pressure on other European countries to look at their own fiscal environment. Spain has also seen important tax reforms this year, and France has announced a significant overhaul to be staged over three years from 2001. In the UK, the government has frequently espoused the virtues of venture capital and some of its tax initiatives have reflected that: reductions in the long term rate of capital gains tax in the UK and the introduction of tax advantaged stock option schemes are perhaps the most noteworthy changes in the last few years. There have also been hints of more to come.

European governments have also been looking at pension fund regulation and the trend is towards increasing liberalization of the rules - and a focus on promoting pensions as a vehicle for individual saving. In the UK, an important (and continuing) review of institutional investment - and a report published by the British Venture Capital Association on institutional attitudes to private equity - might assist in diverting more funds to the industry. At the European level, liberalizing moves by the European Commission are also significant.

Company law frameworks play an important role in the environment for growing businesses - they can either be a positive benefit or a very real hindrance. Various changes across Europe have, on the whole, been helpful, and Germany has taken some real steps forward in this respect. However, the most notable moves have been the UK, where UK company law will undergo a radical shake up once a continuing review is completed in the next few years. A focus for the team reviewing this has been on simplifying the law, particularly for smaller and privately-held companies.

The profile of private equity is clearly continuing to grow - and its value to the European economy increasingly recognized. This is helping to get it on governments' agendas for tax and regulatory reform, and much that has happened this year has highlighted that.

But is has not all been good news. Proposals - which are still being hotly debated - to force all companies to account for the cost of share incentive schemes are worrying for small and fast-growing businesses. European competition law still needs looking at, to ensure that private equity-backed deals do not get hampered by unnecessary notification requirements, and much work is still needed on integrating the European financial services market - in this context some progress was made this year, including on the common framework for the regulation of takeovers, but there is still some way to go. Insolvency laws in various countries also need attention - and the financial difficulties being faced at present by various companies in the high tech sector are likely to push that more firmly into focus.

S J Berwin & Co.

222 Gray's Inn Road
United Kingdom

Tel: 44 20 7533 2222
Fax: 44 20 7533 2000