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Proposals for the Regulation of Venture Capital and Private Equity after the Financial Crisis

von Silvia Weißmacher (Autor)

Seminararbeit 2010 31 Seiten

BWL - Investition und Finanzierung

Leseprobe

Table of Contents

List of Figures

List of Attachments

List of Abbreviations

1.0 Introduction

2.0 Impacts of the Global Financial Crisis on Private Equity and Venture Capital

3.0 Overview of the Present Regulatory Activity
3.1 Germany
3.1.1 The „Unternehmensbeteiligungsgesellschaft (UBG)“
3.1.2 The Capital Investment Company and the „Investmentaktien­gesellschaft nach dem Investmentgesetz (InvG)“
3.2Europe
3.2.1 The Markets in Financial Instruments Directive (MiFID)
3.2.2 The Alternative Investment Fund Managers Directive (AIFMD)
3.3 United States
3.3.1 The Investment Company Act (ICA)
3.3.2 The Investment Advisors Act (IAA) and the Securities and Exchange Commission (SEC)
3.3.3 The Securities Act and the Securities Exchange Act
3.3.4 The Dodd-Frank Wall Street Reform

4.0 Proposals for the Regulation of Private Equity and Venture Capital after the Financial Crisis
4.1 Germany
4.1.1 Regulatory Interest Groups
4.1.2 Regulatory Framework
4.2 Europe
4.2.1Regulatory InterestGroups
4.2.2 Regulatory Framework: The AIFM Directive
4.2.2.10versightandControl
4.2.2.2 Operating Conditions
4.2.2.3 Disclosure to Regulators
4.3 United States
4.3.1 Regulatory Interest Groups
4.3.2 Regulatory Framework
4.3.2.1 Establishment of a Systemic Risk Regulator
4.3.2.2 Interdiction of Investment in PE Funds by Banks
4.3.2.3 Taxation of Private Equity Firms

5.0 Estimation of the Alternative Investment Fund Management

Directive by the European Private Equity and Venture Capital Association (EVCA) , the “Bundesverband Deutscher Kapital­beteiligungsgesellschaften (BVK)” and the International Press

6.0 Evaluation and Assessment
6.1 Evaluation ofPresent Regulation
6.1.1 Germany: The “Unternehmensbeteiligungsgesellschaft(UBG)” and the “Investmentgesellschaft nach dem Investmentgesetz (InvG)”
6.1.2 Europe: The Markets in Financial Instruments Directive (MiFID)
6.1.3 United States: The Frank-Dodd Wall Street Reform
6.2 Evaluation ofProposed Options
6.2.1 Germany: Self-Regulation, Skill-enhancement, Acting in Concert and the “Risikobegrenzungsgesetz”
6.2.2 Europe: The AIFM Directive
6.2.3 United States: Skill-Enhancement, Protective Mechanisms, the Financial Services Oversight Council, Interdiction of Investment in PE Funds by Banks, Taxation and the Regulationof Banks

7.0 Executive Summary

Appendix

List of References

List of Figures

Figure 1: Private equity funds raised - evolution

Figure 2: Total volume of private equity and venture capital deals worldwide

List of Attachments

Appendix 1: List of main proposals

Appendix 2: Das Risikobegrenzungsgesetz

Appendix 3: Proposed AIFM Directive

Appendix 4: Statement from the European Private Equity Industry on

today’s agreement on the AIFM Directive

Appendix 5: Krisentyp versus Handlungsalternativen

Appendix 6: Die neuen EU-Aufsichtsbehörden

List of Abbreviations

illustration not visible in this excerpt

1.0 Introduction

Private equity (PE) and hedge funds (HF) are the two of the most significant types of alternative investment funds worldwide. The most common investment strategies in private equity are venture capital (VC) and leveraged buyout (LBO). By a VC investment, the private equity firm invests in young or emerging companies and rarely obtains majority control. For definition-based delimitation to a LBO, the PE firm buys majority control of an existing or mature firm. HF investments are lightly regulated funds that are opened to a limited rage of investors who pay a performance fee to the fund’s manager.

Until the global financial crisis, there was a trend within the alternative investment sector toward the convergence of private equity and hedge funds. The role of the private equity industry as an important contributor to investment into European companies and innovations (in Germany, the total investments in private equity add up to EUR 3.31 milliard until the third quarter of 2010 (until the third quarter of 2009: EUR 1.48 milliard)[1] ) have faced an even more hitting financial crisis since the Great Depression. These challenges have forced the national governments to take actions and to rebuild the global financial system. The impact of the financial crisis on private equity and venture capital has been noticeable world-wide. In 2008, the value of private equity investments decreased by two-thirds.[2] This has caused a plethora of governmental and regulatory actions. In 2010, when the financial market began to gain strength, governments have the ambition to protect this positive development. Weaknesses in the supervision and regulation of financial firms were challenges to the government’s ability to prevent risks as they built up in the system.

In this seminar paper, I demonstrate and evaluate proposals for the regulation of VC and PE including HF in Germany, Europe and the United States (US) after the global financial crisis. In the first chapter of the main part, I describe the impacts of the financial crisis on PE and VC. In the second part, a short overview of the present regulatory framework in Germany, Europe and the United States is presented. The core of this seminar paper will be chapter 4, 5 and 6 in which proposals and its assessment for a regulation of PE and VC after the financial crisis are exposed, especially the so-called Alternative Investment Fund Manager

Directive (AIFMD), an European initiative to regulate fund manger’s activities. Further, the estimation of the AIFMD by the European PE and VC Association (EVCA), the “Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (BVK)” and the international press will offer an all-embracing appraisal. With an executive summary, I conclude my seminar paper.

2.0 Impacts of the Global Financial Crisis on Private Equity and Venture Capital

The PE market has been harmed by the financial crisis as per enclosed charts. Two basic issues can be derived in this context as an aftermath of the financial crisis: “First is the effect on ongoing P2P transaction, where definitive buy out agreements had already been entered into and secondly the role of PEs in distressed buyouts of financial institutions.”[3]

illustration not visible in this excerpt

Figure 1: Private equity funds raised - evolution (Industry statistics - incremental closings during year)[4]

In 2007, several PE firms suffered when deals that have been struck under favourable credit conditions now failed to make commercial sense. The impact on deal making was multidimensional. “Fundraising was down, fewer funds were raised and existing deals were sought to be scuttled”[5] as can be seen in figure 1.

Consequently, the firms and the whole PE market incurred some flaws in the activity of deal making and also in its reputation. As a result, the PE firms have not had the possibility to abandon these deals completely because of their goodwill in the market, an interminable vicious circle.

illustration not visible in this excerpt

Figure 2: Total volume of private equity and venture capital deals worldwide[6]

Another point to be considered is the raised interest of PE fund providers in ailing financial institutions in dire need of capital. From 1990 to 2007, PE transactions increased to more than 40 % (figure 2). [7] “Sharp drops in highly volatile asset prices, less investor capital available for equity investments and investors seeking to withdraw their funds in response to fund losses”[8] are results of the increased interest ofPE funds in the aftermath of the crisis.

The global financial crisis is hard hitting and has been long drawn and intense. The systemic risk based on the interdependency of the financial institutions world-wide. Nevertheless, the importance of PE in the global financial system is worth exploring. In this light, ‘regulation’ appears to be the buzz word in conjunction with the present financial climate and how imminent changes in the regulatory framework influence the structure of the PE market.

3.0 Overview of the Present Regulatory Activity

In this chapter, I present the present regulatory frameworks using the example of Germany, Europe and the US. For demonstrating the proposals for the regulation of PE and VC after the financial crisis in chapter 4, this section will be a required basis.

3.1 Germany

Up to now, in Germany, investment activities by PE are not directly regulated by law if the AIFMD is ignored. In the past, there have been some basic approaches like “Normierung der Untemehmensbeteiligungsgesellschaft” relating to the „Unternehmensbeteiligungsgesellschaftsgesetz (UBGG)“ or the Capital Investment Company in conjunction with the „Investmentaktiengesellschaft nach dem Investmentgesetz (InvG)“.[9]

3.1.1 The „Unternehmensbeteiligungsgesellschaft (UBG)“

An UBG can take form of an stock corporation („Aktiengesellschaft“), a limited liability company („Gesellschaft mit beschränkter Haftung”) or a limited partnership („Kommanditgesellschaft“).[10] Their business comprises the acquisition, the holding and the divestiture of shareholding by risk capital.[11] Furthermore, an UBG has to be admitted by the ministry of economics.[12] UGBs have to pay trade tax and to make a corporate income tax payment like all other capital companies.[13]

3.1.2 The Capital Investment Company and the „Investmentaktiengesell­schaft nach dem Investmentgesetz (InvG)“

A capital investment company are characterized as a credit institution that administrates financial assets.[14] Furthermore, the registered capital is required to be in the high of more than EUR 300.000.[15] The licensure by the „Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)” is necessary.[16]

3.2 Europe

The regulation of fund managers in Europe is currently fragmented. Regulatory framework is mainly an initiative of the European Commission (EC). In this section, the so-called “Markets in Financial Instruments Directive (MiFID)” and the AIFMD will be presented.

3.2.1 The Markets in Financial Instruments Directive (MiFID)

In the European Union (EU), investment firms are regulated by the so-called „Markets in Financial Instruments Directive (MiFID)”. This law discloses a harmonised regulation for investment services in pan-Europe. Into force since 2007, the directive aims to increase competition and consumer protection in investment services.[17] The MiFID is a part of the European Commission’s Financial Services Action Plan (FSAP) of 1999.

3.2.2 The Alternative Investment Fund Managers Directive (AIFMD)

The AFIMD was adopted by the European Parliament on November 11, 2010. The directive will come into force at the beginning of 2011. Then, the member states in the EU have to implement the directive (completed by the beginning of 2013). This novel directive will regulate European fund managers for the first time. A detailed presentation can be found in chapter 4.2.2.

3.3 United States

3.3.1 The Investment Company Act (ICA)

In 1940, the Congress passed the Investment Company Act (ICA).[18] The ICA is a regulatory directive in order “to regular investment companies, ..., and imposes on them multiple constraints, including on transactions with affiliates, leverage, derivate trading, liquidity, corporate governance, valuation of the portfolio and remuneration of mangers.”[19]

3.3.2 The Investment Advisors Act (IAA) and the Securities and Exchange Commission (SEC)

In addition, the Investment Advisors Act (IAA) of 1940 regulates investment activities by HFs.[20] An investment adviser is “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.”[21] The investment advisor has to register with the so-called Securities and Exchange Commission (SEC) if the advisor “has assets under management of not less than $30,000,000, ... ; or is an investment adviser to an investment company registered under the Investment Company Act of 1940 ... .”[22] The application for registration is directed in Rule 203-1.[23] Exemptions are determined in Rule 203A- 1b and Rule 203A-2.[24] If registered, they commit to complying with regulatory requirements, such as reporting to SEC.

3.3.3 The Securities Act and the Securities Exchange Act

The Securities Act of 1933 and the Securities Exchange Act of 1934, enacted in the aftermath of the stock market crash of 1929, contains some exceptions from being not obligated to register.[25] For example in the case of offerings of more than $ 5 million of which the SEC thinks that a registration is not necessary in the public interest and for the protection of investors.[26] Another exception is the case if transactions are not involving a public offering.[27] The Securities Exchange Act of 1934 regulates the secondary trading of securities like stocks or bonds. This act is contracted with the Securities Act. Exemptions from registration can be found in Section 13. Therein, companies are not obligated to “keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer”.[28]

3.3.4 The Dodd-Frank Wall Street Reform

On July 21, 2010, the President of the US signed the so-called “Dodd-Frank Wall Street Reform” (or “Fund Manager Registration Act”). “This new legislation addresses systemic risk by requiring clearing for many derivative products and registration for most investment advisors to hedge and private equity funds. It also includes a modicum of investor protection by requiring safeguarding and auditing of custodial funds.”[29] The Dodd-Frank Wall Street Reform “envisages direct oversight by the SEC over a swath of the asset management industry whose members have long been able to structure their businesses to avoid SEC registration.”[30] In addition to the reform, President Obama proposed the so-called “Volcker Rule” in January 2010. This proposal prohibits a financial institution from owning or investing in HFs or PE funds that are not in the interest of its clients and ’too big to fail.’[31]

4.0 Proposals for the Regulation of Private Equity and Venture Capital after the Financial Crisis

As an effect of the global financial crisis, international governments and policy makers have been worried about the risk caused by the multidimensional networking of the financial markets. Due to this network, the crisis may cause failure in unpredictable dimension. PE firms as a source of liquidity are deeply connected with other financial units. It follows that PE firms and the funds they invest in create generally systemic risk. Thus, a general financial regulatory reform after the global financial crisis has two central goals: “mitigation of systemic risk and investor protection”.[32]

In this chapter, I demonstrate several proposals for regulating PE and VC in the aftermath of the financial crisis.

4.1 Germany

4.1.1 Regulatory Interest Groups

In Germany, there is no legal framework concerning the fund management or the fund managers. “[Es] spricht sowohl aus Gründen der Professionalisierung der Fonds, als auch aus Gründen des Anlegerschutzes sowie als vertrauensbildende Maßnahme Einiges für die Kodifizierung derartiger Anforderungen.”[33]

In terms of creditor protection, interests of shareholders and investors, there are several possibilities for a conductive regulation of PE and VC in the aftermath of the global financial crisis.

[...]


[1] See Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (BVK) (2010).

[2] Shadab (2009), p. 609.

[3] Lapado (2010), p. 16.

[4] Taken from the European Private Equity and Venture Capital Association (EVCA) (2010a).

[5] Lapado (2010), p. 18.

[6] Taken from Aizenman/Kendall (2008), p. 27.

[7] See Aizenman/Kendall (2008), p. 3.

[8] Shadab (2009), p. 609.

[9] See Achleitner/Kaserer et al. (2007), pp. 53-62.

[10] §2 sub. 1 UBGG.

[11] §2 sub. 2 UBGG and § 3 UBGG.

[12] §15 sub. 1 and 2 UBGG.

[13] §3 no. 23 GewStG.

[14] §6 sub. 1 InvG.

[15] §11 sub. 1 no. 1 InvG.

[16] §7 sub. 1 InvG.

[17] See European Parliament and the Council (March 3, 2008).

[18] See Securities and Exchange Commission (SEC) (2010a).

[19] Alexander (2009), p. 14.

[20] See SEC (2010b).

[21] Grenne/Adamas (2010), p 242.

[22] SEC (2010b). Rule 203A - 1a.

[23] See SEC (2010b).

[24] See SEC (2010b).

[25] See SEC (2010c). Section (3) and Section (4).

[26] See SEC (2010c). Section (3)(b).

[27] See SEC (2010c). Section (4)(2).

[28] See SEC (2010d). Section 13(b)(3)(A).

[29] Ordower (2010), p 4.

[30] Greene/Adams (2010), p. 247.

[31] Grenne/Adams (2010), pp. 248-249.

[32] Krug (2009), p. 2.

[33] Achleitner/Kaserer et al. (2007), p. 245.

Details

Seiten
31
Jahr
2010
ISBN (eBook)
9783656104964
ISBN (Buch)
9783656105770
Dateigröße
2.1 MB
Sprache
Deutsch
Katalognummer
v187151
Institution / Hochschule
Technische Universität München
Note
2,0
Schlagworte
proposals regulation venture capital private equity financial crisis

Autor

  • Silvia Weißmacher (Autor)

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Titel: Proposals for the Regulation of  Venture Capital and Private Equity after the Financial Crisis