For the most part, private equity and venture capital funds are for institutional investors. According to the most recent Invest Europe figures, less than 10% of funds raised in 2017 came from private individuals and, since that figure includes the GP’s commitment, even that overstates the importance of individuals as third-party investors. Pension funds, sovereign wealth funds, government agencies and insurance companies tend to dominate the investor lists of most European private equity fund managers.
Of course, there are certain individuals who would like to access the asset class, and European regulators have recognised that in some circumstances it is appropriate for them to do so. For example, in the UK, a fund manager is able to market a limited partnership-style fund to certified high net worth or sophisticated investors (provided that certain criteria are met and a relevant statement has been signed), and the pan-European venture capital fund regime allows a qualifying VC fund to market to private investors who can commit at least €100,000 and confirm that they understand the risks involved. Business angels and other wealthy individuals have, indeed, become an important source of funds for some smaller managers.
However, at the beginning of this year, the European Commission threw a spanner in the works. When a fund is “made available” to anyone who cannot be classified as a “professional investor”, new rules (known as PRIIPs) require the fund manager to issue a highly prescriptive (and actually quite misleading) document known as a KID (“key information document”). This is problematic for two reasons: first, because it is very hard to “opt up” individuals to professional status (the test is almost impossible to meet for anyone not working in the financial services industry); and, secondly, because the KID is very burdensome to produce and requires information (including a model of future performance) to be presented in a way that does not fit well with illiquid, private funds. A requirement to publish the KID on the firm’s website is also troubling, because it could give rise to a misleading impression that the funds are being marketed to the public.
The result, not surprisingly, is that fewer funds are willing and able to admit individuals to their funds, an outcome which seems at odds with the policy intent of previous attempts to facilitate investments by appropriate high net worth individuals. (Distribution to suitably wealthy individuals through private bank networks, which typically establish their own platform or feeder fund, to which the PRIIPs Regulation will apply, remains an option, but is not always feasible.)
These problems have not gone unnoticed: the UK’s FCA asked for feedback on the PRIIPs rules in July, and the BVCA has now published its response. Their letter details the various reasons why the requirements are not appropriate, and potentially harmful to investors, and calls for the FCA to find a way to suspend the rules in the UK. There are, of course, limits to what the UK can do on its own, given that PRIIPs is an EU law, but related concerns have been expressed by European regulators and industry associations and so there is some hope that policymakers will take another look.
In the meantime, firms who are fundraising need to think more carefully than they did in the past about whether private individuals can be admitted into their funds, and how their procedures might have to evolve to accommodate them.