If ever the UK body politic needed reminding why European institutions make terrible -- even dangerous -- legislation, surely the imminent 'hedge fund bill' is the last straw. As early as Monday the new Con-Lib government's George Osbourne will fight passage of this legislation in the European parliament, with nary a chance of defeating it.
Officially known as the Directive on Alternative Investment Fund Managers (AIFM), this misguided reaction to the financial crisis by the EU's demagogues risks doing more long-term damage to the European economy than the Greek financial crisis.
The nub of it is this:
In their populist hunt for a bogeyman, the Eurocrats have latched onto hedge funds, blaming them for various aspects of the financial crisis (CDO trading, shorting bank stocks, etc), and even for the Greek debt crisis. In spite of scant evidence, Brussels declared these funds to pose a 'systemic risk' to the financial sector, and drafted new rules to curtail and control them.
So far, so mediocre. But the real disaster is that the politicians have failed to understand the structure of the equity financing markets, and have lumped into this legislation not only hedge funds, but also private equity firms, real estate funds and hundreds of venture capital firms.
Not only does this directive do nothing to address systemic risk (neither PE-backed nor VC-backed companies pose any, and arguably hedge funds don't either), it threatens to throttle the one potential engine of growth in Europe: entrepreneurship.
If passed in its current form, the AIFM directive will:
- require VC-backed companies with 50 or more employees to disclose their financial performance, capital structure, divestment plans, research spending and strategy;
- increase the compliance burden on venture funds and (probably) require them to hold additional regulatory capital; and,
- discriminate against non-EU investors in European funds, making it more difficult to raise new funds. This is likely to lead to retaliatory action from the US, further reducing the flow of capital to innovation.
It is estimated that the cost of complying will set portfolio companies back €30k or more per year. But more insidious is the loss of competitiveness that results from revealing so much to the market. Many growth companies will be required to disclose more confidential information than divisions of large public companies or foreign companies with which they compete! Score one for big business against the little guy...
European venture capital is still a relatively young industry, and one that is going through tumultuous times. But the growing number of high-growth technology and Internet ventures, and the development of a real class of repeat entrepreneurs, remains one of the few bright spots. And they arguably represent one of the few export industries that can help pull this continent out of the doldrums.
This legislation has too much political momentum to be stopped, although there is some hope of it being watered down as it goes through the approval process. If only the Eurocrats invested as much time in thinking about the real systemic risks to the economy, like the structure of the banking industry or the lack of control over national budgets... and left the innovation sector alone.
I used to be a real Europhile and advocate of the UK joining the Euro. But if this kind of legislation is the best our 'European government' can do, then we had better steer well clear.