Communication from the Commission to the Council and the European Parliament on implementation of the risk capital action plan (RCAP)
Date: 2003-11-04
Institutions: European Commission
Subjects: action programme, capital market, economic development, financial legislation, financial statistics, innovation, investment promotion, tax system, type of business, venture capital

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 4.11.2003
COM(2003) 654 final

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT

ON IMPLEMENTATION OF THE RISK CAPITAL ACTION PLAN (RCAP)

1. EXECUTIVE SUMMARY

This  Communication  reports  on  progress  in  the  implementation  of  the  RCAP
for the year 2002 and, where possible, for the first three quarters of 2003. It is
the  fifth  since  the  adoption  of  the  RCAP  in  1998.  It  is  also  the  final  one  as
various  European  Councils  had  set,  and  confirmed,  2003  as  the  deadline  to
complete the Risk Capital Action Plan.

This is the
fifth and
final annual
report

The  year  2002  has  been  a  period  of  adjustment  to  the  prolonged  downturn.
Whereas  the  total  amount  of  EU  private  equity  investment  has  slightly
increased over 2001, and is the second largest ever, there has been an important
shift  towards  less  risky  buy-outs  and  more  focus  on  follow-on  investments
leaving investment in early stage, particularly for seed investment in a difficult
situation.

Important differences between Member States still persist - one illustration of a
highly  fragmented  market  in  Europe.  The  same  can  be  said  of  the  Accession
Countries where risk capital is clearly underdeveloped.

The gap with the US remains. Investment in the US is still double than that in
Europe. However this is better than in 2001 when investments in the USA were
more  than  three  times  bigger  and  in  2000  when  investments  were  four  times
bigger, but still, in accumulated terms, there is  a  long  way  to  go.  In  addition,
more money is still going in the USA to the (politically sensitive) companies in
early stage.

The EU regulatory framework has improved considerably. Tax issues being its
weakest side. The growing awareness of the importance of entrepreneurship is
fuelling  a  heavy  Community  agenda  for  the  coming  years.  The  same  can  be
said  of  R&D  where  important  measures  are  being  developed  for  the  2010
horizon.  Also  public  funding  has  been  consistently  approved,  with  State  aid
policy for the risk capital sector proving successful.

When  taking  the  RCAP  period  as  a  whole  considerable  progress  can  be
reported, with all political, as well as many technical, objectives attained. The
European  risk  capital  industry  is  now  much  larger,  more  mature  and
professional  than  in  1998.  Awareness  by  enterprises  and  public  authorities
about  the  strategic  importance  of  this  sector  and  the  possibilities  provided  by
this type of financing is now well enshrined in Europe. The RCAP has played a
political role in  supporting those directly  or  indirectly  involved  in  risk  capital
activities.  The  philosophy  behind  the  RCAP  is  already  permeating  other
regional,  national  and  Community  policies  and  programmes.  There  has  also
been  strong  support  from  the  European  Parliament.  This  is  an  important
achievement in itself.

In order to keep up the momentum, the Commission will continue to follow the
European  risk  capital  markets  closely.  It  will  further  analyse  the  areas  where
there 
forward
recommendations and proposals, as appropriate, with the Lisbon 2010 deadline
in mind.

inefficiencies  with  a  view  of  putting 

remain 

still 

Of  special  concern  is  the  situation  of  specialised  stock  exchanges  for  high-

2

Important
shift towards
buy-outs

Highly
fragmented
market

The
investment
gap with the
USA persists

Considerabl
e progress in
most areas

Most of the
RCAP
objectives
have been
attained.

A possible
follow-up
will be
analysed

growth companies. Once the Accession Countries join the Community in May
2004,  the  EU  will  have  so  many  exchanges  that  their  long  term  commercial
survival is unsustainable. In the US for example there are basically 2 large ones
(NYSE + NASDAQ) plus a few successful ATSs.

So  many  exchanges,  mostly  small,  fragments  the  liquidity  available  for  small
growing  firms  in  the  EU;  driving  up  the  cost  of  capital  ;  and  reducing  exit
opportunities for venture capitalists. The time has surely come for the smaller
European  exchanges  to  formally  link  together  –  creating  a  common  pool  of
European liquidity for European fast growing companies – based on a common,
rigorous  set  of  pan-European  trading  and  corporate  governance  rules  –  which
are  being  developed  in  the  FSAP.  Regional  exchanges  could  also  link  to  this
pan-European  specialised  network  –  and  hence  to  the  larger  exchanges.  The
Commission would welcome a strategic initiative by the industry in this sense.

2. INTRODUCTION

Since  the  adoption1  of  the  Risk  Capital  Action  Plan  (RCAP)  in  1998  the
Commission  has  published  annually  a  Communication,  addressed  to  the
Council and to the European Parliament, on the degree of progress achieved in
its implementation. This fifth progress report2 covers the year 2002 and, where
possible, the first three quarters of 2003. It also includes an overall evaluation
for the whole RCAP period (1998-20033) as well as a framework for possible
further action.

The RCAP was launched with the objective of eliminating persistent regulatory
and  administrative  barriers,  at  Community  and  national  levels,  which  may
impede  the  creation  of  a  truly  single  market  in  the  risk  capital  area.  In  this
regard  the  RCAP  is  an  important  component  of  structural  reform  as
acknowledged at the Lisbon Summit.

This  Communication  has  been  prepared  by  the  Commission's  Risk  Capital
Working  Group  which  includes  representatives  from  the  EIF.  Close
consultation  with  the  industry  (EVCA  and  others)  has  continued  and  their
opinions have enriched the debates.

Section  3  contains  relevant  market  analysis  and  the  outlook  for  the  medium
term.  Section  4  reviews  regulatory  issues.  Section  5  refers  to  tax  matters.
Section 6 focuses on entrepreneurship developments. Section 7 refers to R&D
issues.  Section  8  describes  different  aspects  of  public  funding.  Section  9
contains  conclusions  for  the  whole  RCAP  period.  Section  10  proposes  a
framework for possible further action. Finally, the document is enriched with a
number of relevant annexes.

Too many
exchanges in
the EU

The infra-
structure for
high-growth
companies
will have to
be improved

This is the
fifth and
final RCAP
progress
report

The
objective is
to have a
single
market in the
risk capital
area

Continuous
contacts
with the
industry

The
document is
made up of 9
sections and
the annexes

1
2

3

Based on “Risk Capital: A key to job creation in the European Union”, SEC(1998)522, April 1998
The  previous  ones  were  COM(1999)493  of  20  October  1999,  COM(2000)658  of  18  October  2000,
COM(2001)605 of 25 October 2001 and COM(2002) 563 of 16 October 2002
This date for the completion of the RCAP was requested at the Lisbon Summit (March 2000) and has
been confirmed at subsequent Spring Summits (Stockholm and Barcelona)

3

                                                
3. MARKET DEVELOPMENTS4

3.1. The EU private equity industry in 2002

In 2002, total EU private equity investment, including both venture capital and
buy-out  investment,  amounted  to  €27  billion  or  0.29  %  of  GDP.  A  slight
increase  over  2001.  The  number  of  companies  that  received  a  private  equity
investment was approximately 7.800 of which one third were high-technology
companies.

Slight
increase in
private
equity over
2001

Funds raised, investments and exits (at cost)  
i n Europe 1993-2002  
(in €  billions) 

50   
40   
30   
20   
10   
0   

1993   

1994   

1995   

1996   

1997 

1998 

1999 

2000 

2001 

2002   

Funds raised  Investments  Exits 

Whilst the investment volume held up well, there was a shift away from venture
capital towards buy-outs. More specifically, the overall positive growth in EU
private equity investment in 2002 was accounted for by buy-out investment that
increased 57% from €10.7 billion to €16.8 billion or 0.18% of GDP last year.
Venture  capital  investment  contracted  from  €12.7  billion  to €10.1  billion  or
0.11%  of  GDP.  Venture  backed  high  technology  investment  (annex  4)  was
particularly hardly hit, reducing by 41% from €5.7 billion to €3.3 billion.

Venture
capital
contracted,
buy-out
expanded

V e n t u r e  c a p it a l in v e s t m e n t s  2 0 0 0 - 2 0 0 2  
(in  %  o f G D P )

1 ,2

1

0 ,8

0 ,6

0 ,4

0 ,2

0

E L

P

A

D

IR L

I

B

F

E

D K

U K

F IN

N L

S

E U 1 4

U S

2 0 0 0

2 0 0 1

2 0 0 2

4

EU figures are derived from the survey conducted by PwC for EVCA and published in EVCA’s 2003
Yearbook; US figures derive from the survey conducted by PwC and Venture Economics  for NVCA
(Money Tree Survey). These sources have been preferred to others as they give data consistent across
countries (even if EU and US figures are not entirely comparable) for several years.

4

   
                                                
In  2002,  as  in  previous  years,  there  were  significant  differences  at  Member
State  level  in  the  growth  of  private  equity  investment.  Growth  was  strong  in
France  (78%),  Finland  (78%)  and  the  UK  (52%).  In  contrast,  investment
activity  fell  significantly  in  Greece  (-56%),  Germany  (-43%)  and  Portugal  (-
37%).  In absolute  terms, the  UK private equity  industry  was  the largest5  with
total  investments  amounting  to  €10.4  billion.  The  UK  also  had  the  highest
investment  level  in  private  equity,  as  %  of  GDP,  at  0.63%  but  was  closely
followed by Sweden with 0.58% of GDP. Other countries with high investment
levels were France (0.39 %), the Netherlands (0.39 %) and Finland (0.33 %).

Differences
between
Member
States
persist

Buy-out investments in Europe 2000-2002 
(in % of GDP)

0,8

0,7

0,6

0,5

0,4

0,3

0,2

0,1

0

EL

P

A

D

IRL

I

B

F

E

DK

UK

FIN

NL

S

EU14

2000

2001

2002

Examined further in terms of number of investee companies (annex 5), a more
complex picture of private equity investment patterns emerges. The number of
buy-outs supported by EU private equity houses grew by 13% suggesting that
the 57% growth in investment volume may have been the result of a number of
multi-billion  euro  transactions.  The  number  of  companies  targeted  by  for
venture capital investment also grew, even if marginally, despite the 26% drop
in investment volume in 2002.

The  amount  of  funds  raised  by  European  private  equity  houses  in  2002
amounted to €27.5 billion, just below two thirds of the amount raised the year
before,  representing  a  further  decline  from  the  peak  year  of  2000.  However,
despite the downturn, the  funds  raised  in 2002  still  significantly  exceeded  the
amounts  raised  in  1997-1998,  the  years  corresponding  to  significant  genuine
growth of  the  European  private  equity  market.  This  seems  to  suggest  that  the
European private equity industry has reached a certain maturity.

Funds raised
decreased

During  the  past  decade,  banks,  pension  funds  and  insurance  companies  have
provided the bulk of funds raised for private equity investment contributing €50
billion, €40 billion and €25 billion, respectively, in 1993-2002. Combined they
have accounted for between 67% (1997) and 56% (2002) of total funds raised.
With  the  exception  of  government  agencies,  all  investor  categories  reduced
their  commitment  to  private  equity  in  2001  and  2002,  with  pension  fund
investment reducing most sharply. In 2002, pension funds provided €4.3 billion
of  private  equity  funding,  down  from  €10.2  billion  in  2001.  Insurance

Strong
reduction of
private
equity
investment

5

EVCA  figures  attribute  investments  to  a  country  on  the  basis  of  investments  made  by  local  private
equity houses irrespective of the location of the investments. Figures for some countries thus include an
element  of  outward  investment.  In  the  case  of  accession  countries,  significant  inward  investment  has
been attributed to the home country of the relevant private equity funds.

5

                                                
companies  invested  €3.6  billion  in  private  equity  in  2002,  down  from  €4.7
billion  the  year  before.  The  amount  of  funds  allocated  by  banks  to  private
equity  in  2002  amounted  to  €6.8  billion,  when  in  2001  the  figure  was  €9.2
billion.  It  may  be  assumed  that  most  of  the  funds  provided  by  banks  were,
however, for their captive private equity companies.

from pension
funds

In 2002, funds raised for venture capital investment amounted to  €8.5 billion,
sharply down from the €15.0 billion of 2001. Fund raising for buy-out activity
fared  better,  €18.3  billion  raised  last  year,  whereas  in  2001  €23.3  billion  was
allocated for this purpose.

In  2002,  the  total  €10.7  billion  of  European  venture  capital  investment
consisted of €3 billion of early stage investment and €8 billion expansion stage
investment (annex 6). Early stage investment was broken down to €305 million
of seed investment and €2.6 billion start-up investment, down 43 % and 28 %,
respectively, in comparison to the year before. In excess of 500 seed companies
received  an  investment  which,  on  average,  amounted  to  €570.000.  More  than
2.700  start-up  companies  received  funding  with  average  transaction  size
approaching  €1  million.  Almost  3.900  companies  in  the  expansion  stage
received a venture capital investment that averaged €1.8 million.

Seed
investment
more
affected by
the
downturn

As  an  indicator  of  the  growth  and  maturity  of  the  European  private  equity
industry,  at  the  end  of  2002,  there  were  just  over  5.500  private  equity
executives in the EU (annex 7), down by 6.6 % from the year before, but 68 %
above the 1998 number of 3.275.

Number of
executives
consolidated

Since 2001, the volume of write-offs (annex 8) calculated on the basis of cost
of investment has moved to a different scale from where it was in 1993-2000.
In 2002, 31% of exits, calculated at the cost of the original investment, were by
write-off.

Write-offs
have
increased

3.2. The private equity industry in the Accession Countries

The private equity industries of the Accession Countries are at different levels
of  development.  In  terms  of  investment  as  %  of  GDP,  the  Hungarian  is  the
largest.  In  2001,  the  Hungarian  private  equity  investment  by  local  private
equity houses amounted to 0.23% of GDP, close to the EU average of 0.27 %
of  GDP  that  year.  However,  in  line  with  the  overall  European  market
developments,  it  contracted  severely  in  2002  to  0.03%  of  GDP.  In  absolute
terms, investment contracted by 88% to €17 million from €143 million the year
before.

Different
levels of
development
in Accession
Countries

The Polish market remains relatively very small in terms of investment in % of
GDP, which amounted to 0.06 % in 2002 and 0.08 in 2001. In absolute terms,
the  2002  investment  volume  of  €137  million  was  comparable  to  some  of  the
small  Member  States.  The  Czech  and  Slovak  private  equity  markets  may  be
considered as having reached critical mass.  In  2002, investments amounted to
€27 million and €5 million, respectively.

Consistently  with  the  smaller  markets  in  the  Member  States,  the  Czech,
Hungarian,  Polish  and  Slovak  private  equity  investment  was  venture  capital
oriented with buy-out investment playing a minor or no role at all. Overall, in Absence of

6

2002, banks were the  most important source of  funding,  although  in  Slovakia
government agencies played a major role. In 2002 private equity investment in
Estonia,  Latvia,  Lithuania  and  Slovenia,  taken  together  amounted  to  less  than
€5 million. No information was available for Cyprus and Malta.

buy-outs

3.3. Private equity in the EU in comparison to the US

The European venture capital investment has contracted less severely than the
American one with the result that the difference in the level of venture capital
investment is now more balanced. However, the venture capital investment gap
is still there. Despite its nearly 50% decline, the US venture capital investment
(annex 2) still corresponds 0.2% of GDP, as compared to 0.1% of GDP in the
EU. In absolute terms, in 2002, the volume of US venture capital investment
(€20 billion) was twice that of the EU (€10 billion).

Stronger
contraction
in the US

Venture capital investments in Europe 
and in the US 1997-2002 
(in € billions)

100

80

60

40

20

0

1997

1998

1999

2000

2001

2002

Europe US

In  Europe  early  stage  investment  accounts  for  a  slightly  higher  proportion  of
venture  capital  investment  than  in  the  US.  This  appears  to  contradict  the
generally held view that in the US it is easier for early stage companies to raise
equity  than  in  Europe.  However,  as  the  relative  volume  of  venture  capital
investment  in  the  US  has  exceeded  investment  in  Europe  many  times  over  in
the past, the venture capital funding for early stage was higher in the US.

Total early
stage
funding
higher in the
US

Inversely, 

Moreover,  in  the  US,  around  60%  of  the  companies  that  receive  a  venture
capital  investment  belong  to  the  early  stage  category,  whereas  in  Europe  the
corresponding  figure  is  approximately  40%.  In  the  US  around  20%  of  the
volume  of  venture  capital  investment  goes  to  companies  that  receive  venture
capital  for  the  first  time  and  80%  to  companies  already  backed  by  venture
figures  are  75%  and  25%
investment. 
respectively..This may suggest that the US venture capitalist is in general more
experienced  and  more  willing  to  follow  a  long-term  strategy,  i.e.  to  provide
investments  in  many  sequential  tranches  as  opposed  to  just  one  large  capital
injection  which  is  more  common  to  the  seemingly  less  experienced  one-time
venture  capital  investor  in  Europe.  Given  that  every  disbursement  would  be
subject to a review of the investee company, the US venture capitalist could be
more  likely  to  combine  his  investment  with  a  commitment  in  terms  of
monitoring and management support.

in  Europe 

those 

The US market has also experienced a steep downturn in fundraising for private

7

The US more
focused on
follow-on
investments

equity. In 2002, US$ 30.9 billion were raised, down from US$ 82.6 billion in
2001 and US$ 180.2 in the peak year of 2000. The backlog of funds raised, but
not  invested  is  very  much  in  evidence.  The  funds  raised  for  venture  capital
amounted to just US$ 6.9 billion in 2002, down from US$ 40.7 billion in 2001
and US$ 106.9 billion in 2000. Concurrently with the low new fund raising for
venture capital in 2002, 26 venture capital funds cancelled approximately US$
5 billion of commitments received, for lack of attractive investments. The 2002
net funds raised for venture capital investment were thus only US$ 1.9 billion,
an  amount  that  corresponds  to  venture  capital  funds  raised  as  far  back  as  in
1991.

Huge
backlog of
funds to be
invested

3.4. Exits and high-growth stock markets

In 2002, private equity investors in Europe exited 4.911 companies, down from
6.293  in  2001.  Trade  sales  accounted  for  821  and  1233  companies,
respectively.  In terms of  investment  at  cost,  trade  sales  accounted  for  17%  of
total 2002 divestments, down  from 34%  the  year before.  In  2002,  in  terms  of
investment  cost,  private  equity  backed  IPOs  (including  buy-out  flotations)
amounted to €703 million, up from € 250 million in 2001. In 2002, 41 private
equity  backed  companies  were  floated  in  European  stock  exchanges,  down
from 47 the year before. In 2003, the markets became even less receptive.

Decreasing
number of
exits

As seen in annex 9, in the last three years, Frankfurt’s Neuer Markt, Euronext’s
Nouveau  Marché,  London’s  AIM  and  Nasdaq  Europe  have  lost  most  of  their
value.  A  loss  more  severe  than  that  experienced  by  the  main  European  stock
markets.  Moreover,  none  of  the  high  growth  markets  had  yet  (mid-2003)
reached  the  starting  level  from  the  beginning  of  1998.  Low  trading  volume
caused  by  lack  of  investor  appetite  in  small  growth  companies  resulted  in
decisions to close the Neuer Markt and Nasdaq Europe. The European growth
exchanges  are  often  compared  to  Nasdaq,  which  was  however  established
already in 1971 and  lists  in excess of 4000  companies,  including  some  of  the
largest global companies that will always figure prominently in the portfolios of
investors.  This  may  explain  why  Nasdaq  lost  proportionately  less  of  its  total
market  capitalisation  after  the  crash  of  early  2000  and  why  its  recovery  has
been stronger.

In 2002 the number IPOs reduced again.  In the Nouveau Marché, only 2 new
companies were listed in 2002, down from 10 in 2001 and 52 in 2000. One new
company was listed on the Neuer Markt in 2002, compared to 11 in 2001 and
133 in 2000. On the Nuovo Mercato there were no new listing in 2002 against 5
in  2001,  down  from  30  in  2000.  There  were  no  new  listings  in  the  Nuevo
Mercado  in  2002,  in  comparison  to  6  in  2001.  On  AIM,  there  were  60  new
listings in 2002, down from 94 and 179 in 2001 and 2000, respectively. At the
end of 2002, the AIM list included 704 companies (up from 629 at the end of
2001), the Nouveau Marché 135 (164), the Nuovo Mercato 45 (45), the Nuevo
Mercado 13 (13) and the Neuer Markt 240  companies (down  from  326  at the
end of 2001). For trading volumes see Annex 10. Available data for 2003 is not
encouraging. By midyear there were only one  IPO in the Nuevo Mercado and
12 new listings in AIM.

NASDAQ
fares better
than EU
high-growth
markets

Even more
reduction in
the number
of IPOs

The  on-going  integration  between  the  European  stock  markets,  national  and
regional,  will  increasingly  allow  investors  to  efficiently  trade  shares  cross- Recovery to

8

border. The  liquidity of the European  market will increase.  This  will improve
conditions  for  the  listing  of  growth  companies,  but  it  cannot  replace  investor
confidence  in  the  future  prospects  of  newly  listed  growth  companies  as  the
driving element in investment decisions.

be driven by
investor
confidence

3.5. Outlook for the European private equity industry

Total  private  equity  investment  in  2002  was  the  second  highest  level  ever
recorded (annex 1),  and  nearly  three times that of 1997, the  first  year of very
high growth in Europe market. This suggests that the European private equity
has reached a level and a maturity that has allowed it to weather the recent set-
backs reasonably well.

2002 second
highest year
ever
recorded

In 1997, both venture capital and buy-out investments amounted to €4.8 billion.
In 2002, venture capital investments in the EU amounted to €10.1 billion, down
from €12.7 billion the year before, whereas buy-out investment reached €16.8
billion, its highest ever level.  It appears that venture capital investment is still
contracting,  although  at  a  reduced  rate,  whereas  buy-out  investment  is  again
expanding.

Shift
towards buy-
outs

Whereas,  during  the  period  1997-2001,  the  funds  raised  for  new  investment
substantially  exceeded  investments,  in  2002  funds  raised  was  equal  to
investment volume, as it was the case for the period before 1997. In 2003 fund-
raising  has  become  progressively  more  difficult  even  for  well  established
private equity funds with excellent track records.

Fund raising
more
difficult

The  year  2002  saw  a  clear  trend  of  banks  starting  to  dispose  of  their  captive
private  equity  operations.  During  the  last  five  years,  banks  have,  on  average,
been the source of 26% of all funds raised in Europe. After the severing of ties,
the banks’ interest in taking care of the future funding of these entities is likely
to  wane  and  is  it  not  evident  whether  the  buy-out  or  venture  capital  segment
would be more adversely affected.

Banks
disposing of
some of their
private
equity
operations

The share of funding provided by pension funds during the last five  years has
also remained stable in the growing market, averaging 23%. Diversification to
an  equity  type  asset  that  has  a  different  cycle  from  quoted  equity  is  seen,
generally, as beneficial. However, due to the  collapse in quoted  equity prices,
the  proportion  of  private  equity  in  their  portfolios  now  often  exceeds  target
allocations  and  in  the  near  term  they  may  be  unwilling  to  allocate  additional
funds to private equity investment. Whereas, in the medium and long term, the
increasing funding of European pension liabilities could increase the supply of
private equity considerably, the trend in some Member States towards defined
contribution schemes could have the opposite effect.

More
balanced
investment
from pension
funds
foreseen

There is some evidence that private equity is gaining acceptance as a separate
asset  class.  The  necessary  benchmarking  presents,  however,  considerable
challenges.  At  industry  level  encouraging  efforts  are  being  made  to  develop
generally  accepted  conventions  and  statistics  for 
the  measurement  of
profitability of this type of investment.

Appropriate
benchmarks
being
developed

9

The  lack  of  exit  opportunities  is  generally  perceived  as  the  single  most
important  factor  holding  back  the  recovery  of  the  European  private  equity
markets,  especially  venture  capital  investment  in  early-stage  and  technology
companies. The low level of exits is particularly worrying against the back-drop
of  the  high  investment  levels  in  1998-2000  which,  in  normal  circumstances,
should  be  mature  for  divestment  in  the  very  near  future.  Companies  are
therefore  increasingly  dependent  on  follow-on  venture-capital  investments,
raising temporarily the demand for this type of financing6.

Lack of exit
opportunitie
s seen as the
main
problem

4. REGULATORY ISSUES

Since  the  inception  of  the  RCAP  in  1998,  building  an  appropriate  regulatory
framework,  both  at  Community  and  national  levels,  has  been  a  top  political
priority. This acknowledges the fact that without a  modern and flexible set of
legal and administrative rules reflecting the needs of risk capital operators (the
supply  side)  and  enterprises  (the  demand  side)  risk  capital  markets  will  not
flourish  in  Europe.  As  described  below  (see  also  annex  11)  considerable7
progress, since 1998, has already been achieved in attaining that goal.

Considerabl
e progress in
setting-up an
appropriate
regulatory
framework

4.1. Measures included in the FSAP8

The  completion  of  the  FSAP  proceeds  relentlessly9  and  is  expected  to  be
finished, as requested by the Brussels Spring European Summit, by April 2004.
This  coincides  with  the  final  session  of  the  current  European  Parliament  and
allows  for  enough  time  (normally  18  months)  for  transposition  of  the  last
adopted  measures  into  national  legislations  before  the  end  of  2005.  Once
completed  the  negotiation  of  the  remaining  FSAP  measures,  the  focus  of
Community  action 
into  ensuring  common
implementation  and  enforcement  at  European  level,  including  in  the  new
Member  States.  Regarding  in  particular  the  RCAP  measures  also  included  in
the FSAP, the progress has been substantial :

logically,  move 

should, 

Measure:  “Upgrading  of  directives  on  prospectuses  to  facilitate  companies
raising cross-border capital” (e.g. IPOs)

The  new  directive  on  prospectuses  has  been  adopted  on  15  July  2003.  As  a
result, once transposed, it will be easier and cheaper to raise capital all over the
EU  on  the  basis  of  a  seal  of  approval  granted  by  a  Member  State  regulatory
authority.  This  will  facilitate  risk  capital  exits  (IPOs)  and  the  introduction  of
companies in high-growth stock markets.

Measure  “Adoption  of  prudential  rules  to  allow  institutional  investors  to
invest in venture capital”

The RCAP is
on track for
its full
completion

The
prospectus
directive has
been
adopted in
the Summer
2003

6

7

8

9

This  applies  in  particular  to  life  sciences  companies  with  long  product  development  times  and  large
capital needs
In  this  regard,  see  point  8  of  the  Presidency  conclusions  of  the  Brussels  Spring  European  Summit
(20/21 March 2003)
These measures affect primarily the supply side of risk capital.
See  "Eight  Report  –  Financial  Services/Nine  months  left  to  deliver  the  FSAP",  3  June  2003,
www.europa.eu.int/comm (internal market, financial services)

10

                                                
The  directive  on  supplementary  pension  funds  was  adopted  on  13  May  2003.
Once transposed (24 months) it will provide additional opportunities to the risk
capital industry. In this regard the Brussels Spring European Summit explicitly
invites the Council and the Commission to examine obstacles for investment by
pension  funds  in  venture  capital  markets  (point  31,  second  indent,  of  the
Presidency  conclusions).  On  the  other  hand,  the  new  2001  UCITS  directives
should have been transposed by August 2003.

The long
awaited
directive on
pension
funds has
been finally
adopted

Measure: “Assess of existing accounting and auditing requirements”

In addition to the  adoption, already  reported, of the Council regulation on  the
application  of  international  Accounting  Standards  (IAS),  the  Commission  has
adopted  on  19  May  2003  a  directive10  allowing  Member  States  partially
exempting more SMEs from financial reporting rules. Also, the 4th and the 7th
accounting  directives  have  been  modernised11.  On  the  other  hand,  in  view  of
the recent financial scandals, the Commission has adopted a Communication12
on  21  May  2003,  prioritising  actions  on  statutory  audit,  necessary  for
reinforcing the audit quality and the auditor's independence.

The
accounting
and audit
frameworks
have been
modernised

Measure: “Dissemination of best practices in corporate governance”

In  order  to  avoid  the  damaging  effect  on  the  highly  publicised  financial
scandals the Commission has adopted on 21 May 2003 a Communication13 on
Company Law and Corporate Governance which includes an action plan. After
completing  a  consultation  process,  specific  measures  are  expected  to  be
proposed by the Commission in the Autumn 2003.

An action
plan is
already
underway

4.2. Measures outside the FSAP14

For  the  RCAP  legislative  measures  not  included  in  the  FSAP  there  has  also
been some progress.

Measure: “Reform of the legislation on insolvency and bankruptcy”15

The fifth and last meeting of the expert group of the Best Project Restructuring,
Bankrupcy  and  a  Fresh  Start  took  place  on  16  May  2003.  The  Final  Report
concerning  this  Best  Project  will  be  published  in  the  Autumn  2003  and  will
provide, based on the work of the expert group, a set of indicators for each of
the  discussed  topics  (early  warning  ;  legal  system  ;  fresh  start  ;  stigma  of
failure) and a strategy for improvement by giving examples of best practices.

A Best
Project has
been
completed

Measure: “Reform of the European Patent System”

After more than three decades of deliberations the Council of Ministers reached The

availability

10

11

12

13

14

15

Directive 2003/38/EC of 13 May 2003, L120, 15/05/2003, p. 22-23
Directive 2003/51/EC of 18 June 2003, L178, 17/07/2003, p. 16-22
COM(2003) 286 final
COM(2003) 284 final
These regulatory measures are intended to boost the demand side of risk capital.
For an overview of the subject see “The European Restructuring and Insolvency Guide 2002/2003”,
White Page, 2002 ; and “Bankrupcy and Insolvency”, EVCA, May 2002

11

                                                
a political agreement on a Community Patent on 3 March 2003. Once in place,
the  Community  Patent  is,  among  other  things,  expected  to,  on  average,  halve
the translation costs. Also, a single, centralised Community Court will rule on
disputes arising from Community Patents.

of a
Community
Patent
already on
track

5. TAX ISSUES

Tax  issues  are  of  paramount  importance  to  the  development  of  risk  capital
markets.  That  is  the  case  of  corporate  tax  (on  dividends  and  on  capital  gains)
and personal income tax (on dividends, on capital gains, and on stock options).
Also important are the conditions for innovation and R&D tax incentives. While
the overall picture is still far from satisfactory, important advances can be also
reported.

The overall
picture is
improving

5.1. Developments in Member States

As taxation remains largely a national competence, pan-european operators face
a  fragmented  system  :  disparity  of  effective  corporate  tax  rates,  many  tax
inefficiencies and high tax compliance costs. They also find a general pattern of
treating  worse  equity  financing  than  debt  financing.  The  differences  in  the
relevant  tax  regimes  provide  an  explanation  for  the  different  performance  of
Member  States  in  the  field  of  risk  capital,  something  policy  makers  are
becoming increasingly aware of. In particular, it seems it has become generally
acknowledged  that  both  an  appropriately  designed  general  tax  policy  and
specific  tax  incentives  (including  those  on  R&D  and  innovation)  can  play  an
important role in this context. As indicated in previous Communications, many
Member States have already enacted appropriate legislation in recent years (e.g.
annex 12), a trend that has continued in 2003.

Many
Member
States has
enacted
appropriate
legislation

5.2. Developments at Community level

Tax initiatives at Community level are necessary for the good functioning of the
internal market. As already reported, a Commission study16 found that industry
is often subject to high tax compliance costs and international double taxation in
areas  such  as  transactions  within  multinational  groups  of  companies,  cross
border flows of dividend, interest and royalty payments, cross-border loss relief
and business restructuring. The final policy goal would be to eliminate all these
obstacles.

Cross-
border
obstacles
should be
eliminated

The tax package adopted by the ECOFIN Council during its June 2003 session
included  the  directive  on  the  tax  regime  applicable  to  interest  and  royalty
payments  between  associated  companies  which  will  be  applicable  from  1st
January  2004.  Also  the  tax  package  included  a  code  of  conduct  for  business
taxation in the EU area. The aim is to guarantee a level playing field in order to
avoid  unfair  tax  competition,  leading  to  losses  in  tax  revenues,  and  distort
efficient economic decisions.

Unfair tax
competition
should be
avoided

16

17

"Company Taxation in the Internal Market", SEC(2001) 1681 of 23.10.2001
"Proposal  for  a  Council  Directive  amending  Directive  90/435/EEC  on  the  common  system  of
taxation  applicable  in  the  case  of  parent  companies  and  subsidiaries  of  different  Member  States",
COM(2003) 462 final of 29.07.2003

12

                                                
On  the  other  hand,  the  Commission  has  recently  adopted  a  proposal  for  a
Council  Directive17  aiming  at  the  improvement  and  extension  of  the  scope  of
the Parent-Subsidiary Directive. It provides for the elimination of international
double  taxation  of  dividend  payments,  which  will  lead  to  the  reduction  of  the
international cost of capital.

The parent-
subsidiary
directive is
being
modernised

As  for  specific  risk  capital  related  initiatives,  the  Commission  idea  of
developing  the  concept18  of  "Home  State  Taxation"  into  a  pilot  project  for
small and medium-sized enterprises deserves particular attention. Under this
approach a business can opt to compute its entire EU tax base, including foreign
subsidiaries or permanent establishments, according to the rules of the Member
State  where  its  headquarters  are  based.  This  project  is  expected  to  provide  in
particular  a  significant  reduction  of  tax-related  compliance  cost  for  the
internationalisation of SMEs in the internal market.

A pilot
project for
SMEs could
provide for
major
benefits

5.3 Tax policy in the international context

The interplay of individual measures, which may be coherent and justifiable at
national  level,  and  the  different  approach  when  applying  international  tax
principles  can  lead  to  situations  of  double-taxation  when  residents  of  more
than  one  Member  State  are  involved.  This  is  unfortunately  often  the  case  as
regards, for instance, stock options when the issuing company and the receiving
employee are resident in different countries. In this regard it is encouraging to
observe that these issues  receive increasing  attention,  inter  alia  also  at  OECD
level. It is obvious that from a Community perspective, it would be important to
show a co-ordinated approach among the Member States in these international
fora.

Member
States
should
coordinate
their
positions in
international
fora

6. ENTREPRENEURSHIP

Best  Procedure  projects  (based  on  the  identification  and  exchange  between
Member  States  of  best  practices)  have  provided 
the  entrepreneurship
framework  for  the  RCAP.  Project  reports  are  available19  on  the  transfer  of
business, on education and training for entrepreneurship, on benchmarking the
management of incubators, on business angels, on bankruptcy and a fresh start,
and  on  other  subjects.  However,  whereas  the  importance  of  entrepreneurship
for  job  creation20,  innovation  and  economic  growth  is  already  widely
recognised, Europe does not fully yet exploit its entrepreneurial potential.

The
entrepreneur
ial potential
in Europe is
not yet fully
exploited

With  a  view  to  launch  a  wide  public  debate  on  the  future  agenda  for
entrepreneurship  policy,  the  Commission  adopted  a  Green  Paper  in  January
200321.  As  a  follow-up,  and  at  the  request  of  the  Brussels  European  Spring

An action
plan is under

18

19

20

21

22

See the result of the consultation published on 7 July 2003 at :
http://europa.eu.int/comm/taxation_customs/taxation/company_tax/index.htm
See http://europa.eu.int/comm/enterprise/index_en.htm.
In  the  new  employment  guideline  Nr  2  on  job  creation  and  entrepreneurship  (see  Council  Decision
2003/578/EC  –  OJ  L  197,  5.8.2003,  p.  13)  emphasis  is  placed  on  the  need  for  facilitating  access  to
capital  for  start-ups,  new  and  existing  SMEs  and  enterprises  with  a  high  growth  and  job  creation
potential
"Green Paper – Entrepreneurship in Europe", COM(2003) 27 final of 21.01.2003
See point 23, first indent of the Presidency conclusions

13

                                                
Summit22, 
Entrepreneurship to be presented at the end of 2003.

the  Commission 

is  now  working  on  an  Action  Plan 

for

preparation

The  2003  Report23  on  the  implementation  of  the  European  Charter  for  Small
Enterprises concludes that progress is encouraging. Many Member States have
put education for  entrepreneurship high on the national agendas and efforts to
support entrepreneurial skills in schools have been considerably stepped up in
2002. The first Report24 on the implementation by Accession Countries of the
Charter shows that these countries are on the right track. Their main challenge
now is to build an entrepreneurial culture. Access to finance for SMEs remains
difficult and venture capital is not yet developed enough. Therefore an effort on
education in this area would be necessary. At the Thessaloniki Summit in June
2003, the Western Balkans countries endorsed the Charter.

6.1. Informal investors and community venture capital

The number of business angels networks has continued growing (Annex 3). Of
special  relevance  is  the  explosion  in  the  number  of  networks  in  France  and
Germany which now match the number of networks in the UK.

As the European risk  capital  markets  mature,  wider objectives have  started  to
emerge.  In  several  Member  States  regional  venture  capital  funds  have  public
participation  and  pursue  the  objectives  of  community  development  like  job
creation or local development. E.g. in the UK, the government is participating
with 50% Bridges Community Development Venture Fund, which will invest in
the  most  deprived  areas  in  England.  Such  funds  also  benefit  from  the  UK
community investment tax relief.

6.2. Employee financial participation

The Charter
for small
enterprises
shows
encouraging
progress

Networks of
business
angels
continue
growing

Venture
capital is
being used
in
community
development

Following  the  Commission  Communication  on  the  promotion  of  employees
financial participation25, various actions and projects have been financed in the
area,  (conferences,  benchmarking  exercises,  studies,  etc.).  Meanwhile,  an  ad-
hoc expert group26 set up by the Commission examining transnational obstacles
to the application of various schemes, is expected to render its report by early
Autumn 2003.

Obstacles to
employees
financial
participation
are being
analysed

Another  expert  group  convened  by  the  Commission  has  analysed  the  current
provisions for employee stock options and put forward conclusions to improve
legal framework27. The report finds that effective tax rates on employee  stock
options  (and  the  subsequent  holding  of  shares)  in  the  EU  range  from  around
15% to over 70% and that, due to the differences in tax systems, considerable

A report on
employee
stock options
has been
published

23

24

25

26

27

COM(2003) 21 final, 21.1.2003.
SEC(2003) 57, 21.1.2003.
"Promoting employee financial participation in the European Union – A framework for Community
action", COM(2002)364 of 5 July 2002
The  "High  level  Group  on  transnational  obstacles  to  financial  participation  of  employees  for
companies having a transfontier dimension" has met seven times until July 2003
"Employee Stock Options-The legal and administrative environment for Employee Stock Options in
the EU". Final Report of the Expert Group, June 2003 ; www.europa.eu.int/comm (enterprise)

14

                                                
problems can arise for employees who move from one country to another while
holding stock options.

7. EUROPEAN AREA OF RESEARCH AND INNOVATION

Activities  initiated  under  the  5th  Framework  Programme  such  as  those  to
promote  networking  and  clustering  between  universities,  research  centres,
entrepreneurs,  investors,  lawyers  at  European  level  will  be  pursued  under  the
6th Framework Programme28. This includes the “Gate2Growth Initiative”29 and
the “Biotech and Finance Forum” already reported in past Communications.

Moreover, under the 6th Framework Programme, increased  emphasis is put on
the  integration  of  innovation  as  an  important  dimension  in  the  design  and
implementation of a research project and in the exploitation of research results
by  the  partners  themselves,  through  the  creation  of  spin-offs,  or  through
technology  transfer.  Participants  are  therefore  encouraged  to  include  in  their
projects "innovation-related activities", which can be supported at the same rate
as research  activities, and  include  feasilibity  assessment  of  exploring  research
through spin-offs. Associations of SMEs are allowed to participate on behalf of
their members.

A number of
initiatives
will continue

Emphasis on
the
integration
of
innovation

Organisations  seeking  external  sources  of  finance  for  their  project,  other
research  activities,  research  infrastructures,  or  for  the  exploitation  of  the
research results, will receive information on the various financing instruments
of  the  EIB  (e.g.  the  EIB's  new  Innovation  2010  Initiative  with  an  indicative
envelope of €20 billion for the period 2003-2006 will provide loan finance for
innovation and R&D related initiatives) and the EIF.

Information
on financing
will be
provided

7.1. Towards 3% of GDP

In  Spring  2003,  the  Commission  adopted  a  Communication30  putting  forward
an Action Plan to attain the goal set by the Barcelona European Council (March
2002) of increasing EU investment in R&D to approach 3% of GDP by 2010,
of which two-thirds should come from the private sector. The Action Plan has
been  developed  in  consultation  with  all  the  stakeholders  concerned,  notably
industry  and 
the
recommendations  of  5  expert  groups  on  ways  to  improve  the  effectiveness  of
public financing mechanisms (including risk capital) for research.

financial  community  and 

into  account 

takes 

the 

A new
Communicat
ion has been
adopted

The  Action  Plan  defines  a  range  of  actions  involving  various  policies  and
instruments  that  should  be  undertaken  and  developed  at  European  and/or
national  levels  to  achieve  the  3%  goal.  They  include  a  number  of  actions  to
improve  access  to  financing  for  research  and  innovation:  (i)  Support  to
guarantee  mechanisms  for  research  and  innovation  in  SMEs  ;  (ii)  Support  to
risk  capital  for  research-intensive  SMEs,  and  (iii)  Availability  of  efficient,
supportive and integrated financial markets. In addition, the Action Plan defines
other measures that will contribute to promote the creation and growth of new

Actions
should be
undertaken
at both
European
and national
levels

28

29

30

"6th Framework Programme (2002-2006)", 27 June 2002, www.european.eu.int/comm (research)
See www.gate2growth.com
“Investing in Research: an Action Plan for Europe”, COM(2003) 226 final of 30 April 2003

15

                                                
technology-based firms and therefore to increase the demand for risk capital:

Pursue or initiate regulatory  and administrative reforms  and  support  measures
to  enable  public  research  institutions  to  develop  more  effective  links  with
industry;  issues  to  address  include  notably  the  establishment  of  incubators
and seed funds ;

Develop  European  guidelines  for  the  management  and  exploitation  of
intellectual property rights resulting from publicly funded research with the aim
of promoting technology transfer to industry and the creation of spin-offs; and

Encourage  a  concerted  use  of  fiscal  and  other  incentives,  notably  to  promote
the creation and early growth of research-intensive firms.

A number of
measures
will increase
the demand
for risk
capital

8. PUBLIC FUNDING

8.1. State aid and risk capital

The  Communication  on  State  aid  and  risk  capital31  is  proving  a  successful
instrument  in  supporting  public  intervention  in  the  form  of  equity  in  the
presence  of  a  market  failure  while  at  the  same  time  attracting  private  capital.
Both national authorities and the industry have appreciated the flexibility of this
instrument and its innovative approach. In particular, Member States have been
keen  to  resort  to  innovative  risk  capital  schemes  mainly  in  SMEs  located  in
depressed  areas  or  active  in  the  high-technology  or  the  services  sector,  or  as
part of other projects of EU interest. The success of a number of public/private
partnerships  encouraged  by  the  pari  passu  principle  has  generated  recurring
investment by private investors, along with public authorities, and has made it
easier  to  recruit  experienced  independent  managers  from  the  private  sector,
receiving  a  remuneration  linked  to  the  return  on  investment  and/or  the
performance of the investment fund.

Among the schemes approved under the Communication32 were: the UK Small
and  medium  enterprise  venture  capital  and  loan  Fund33,  focusing  on  the
provision of equity and quasi-equity as well as micro-finance loans to SMEs ;
the  Greek  TANEO  -  New  economy  development  Fund34,  a  fund-of-funds
intended to provide finance to venture capital funds investing in SMEs active in
“new  economy”  sectors  such  as  telecommunication  and  biotechnology;  the
Italian  scheme  Risk  capital  for  start-up  of  innovative  enterprises35,  aimed  at
supporting innovative enterprises in the start-up phase; and the Austrian Fund
for  the  participation  in  the  equity  of  SMEs  in  Burgenland36  and  the  Venture
capital scheme for the Land of Styria37.

8.2. The European Investment Fund

The
Communicat
ion on State
aid and risk
capital is
proving
successful

Some recent
examples

31

32

33

34

35

36

37

Communication on "State aid and risk capital", OJ C235, 21.08.2001, p. 3.
See www.europa.eu.int/comm/secretariat_general/sgb/state_aids
Case N 620/2002, Commission decision of 4/2/2003
Case N 548/2002, Commission decision of 18/9/2002
Case N 292/2002, Commission decision of 11/12/2002
Case N 677/2002, Commission decision of 4/4/2003
Case N 403/2002, Commission decision of 19/2/2003

16

                                                
The  EIF  aims  to  support  the  EU  risk  capital  markets  and  invests  primarily  in
technology-based  regional  and  pan-European  funds.  In  the  technology  area
EIF's  primary  target  has  been  early-  and  mid-stage  investments,  whilst
incorporating  later  stage  investments  following  a  recent  assessment  of  the
dearth  of  financing  preventing  promising  mid-  to  late-  stage  European
technology opportunities from receiving adequate funding.

In  2002,  the  EIF  committed  €471.5  million  in  36  risk  capital  funds.  This
decrease  compared  to  2001  (€800m  in  57  funds)  is  due  to  the  current
downwards  market  trend,  which  provides  limited  appropriate  investment
opportunities.  However,  the  EIF  remains  a  key  player  in  the  early-stage  and
high tech risk capital market, with a total portfolio of commitments comprising
185  funds  and  amounting  to  €2.45bn  (as  on  30/04/03),  of  which  73%  is
dedicated to early-stage and 61% to high-tech.

The EIF
invests in
other funds

Decreased
in new
commitments
in 2002

For its investments, the EIF uses either its own funds or those available within
the  framework  of  mandates  entrusted  to  it  by  the  EIB  or  the  European
Commission. Since the launch of the Innovation 2000 Initiative, the EIF has
managed all of the EIB’s resources devoted to risk capital. In total, 88% of the
EIF’s  risk  capital  activity  stems  from  EIB  resources.  In  this  context  and  in
response  to  calls  for  increased  action  in  the  area  of  risk  capital,  the  EIB  has
initiated  the  necessary  procedures  to  increase  by  €  500m  the  amount  made
available to the EIF.

A variety of
sources of
funds

On  behalf  of  the  European  Commission,  the  EIF  manages  the  Multiannual
Programme  for  Enterprise  and  Entrepreneurship  2001/2005,  the  successor  of
the Growth & Employment Scheme 1998-2000, under which the ETF Start-up
Facility for seed and early-stage investments as well as the Seed Capital Action
scheme of grants are set up. The ETF Start-up Facility accounts for 5% of the
EIF’s  cumulative  venture  capital  portfolio  (as  at  30/04/2003).  The  EIF
investments are made in keeping with best market practice.

The  EIF  has  recently  developed  independent  advisory  services  as  a  new  and
complementary  activity,  whereby  it  can  provide  advice  grounded  on  its
expertise as an investor and guarantor. This new, fee-payingactivity conducted
in  close  cooperation  with  the  European  Commission,  currently  focuses  on
regional entities and authorities but will likely soon apply to other sectors such
as research.

Consultancy
activities as
complement
ary tasks

8.3. Regional funds

last  year, 

the  Commission  guidelines38  for 

the
As  already  reported 
implementation of structural funds for the period 2000-2006 requested that the
traditional  subsidiaries  to  SMEs  were  partially  replaced  by  more  modern  and
dynamic methods  of  financing,  such  as  risk  capital  and  guarantee  funds.  This
has  the  advantage  that  the  public  contributions  to  these  funds  are  recuperable
(revolving  funds)  after  a  few  years,  once  the  investment  in  the  SMEs  are
liquidated.

Traditional
subsidies are
being
replaced by
more
modern
financial
instruments

38

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17

                                                
The  programming  of  structural  funds  shows  that  the  guidelines  are  being
followed  and  that,  as  a  result,  the  interventions  in  risk  capital  funds  and
guarantee  funds  will  reach  in  the  period  2000-2006  to  about  €1,4  billion,  i.e.
more than double  for the  1994-1999 period.  Around  two  thirds  in  the  regions
under objective 1 and one third in the regions under objective 2. By countries,
the UK is clearly the one making more use of these possibilities.

Risk capital
and
guarantee
funds will
more than
double their
resources

On  the  other  hand,  the  Commission  Guide  to  Risk  Capital  Financing  in
Regional Policy is already available in all Community languages39 what should
become  a  practical  document  for  all  those  involved,  at  regional  and  national
levels in risk capital related activities.

The new
Guide is
already
available

9. CONCLUSIONS

The  last  18  months  has  been  a  period  of  adjustment  in  Europe  with  many
players  convinced  that  we  are  already  at  the  bottom  of  the  prolonged  down-
cycle. Behind have been left the burst of the bubble and the financial scandals
and  many  in  the  industry,  following  a  consolidation  and  a  rationalisation
process soon be completed, seem to be ready for a recovery.

A new cycle
may start
soon

When taking the RCAP period as a whole (1998-2003) important progress can
be reported. From the political point of view, risk capital issues are now at the
top of the agenda in all regional, national and Community institutions. From the
technical  point  of  view  most  of  the  measures  foreseen  in  the  RCAP  in  1998
have  been  completed.  There  are  of  course  measures  which  by  its  own  nature
(e.g.  those  linked  to  cultural  barriers)  cannot  by  subject,  in  practice,  to  a
specific deadline but where qualitative progress can also be reported.

Most of the
objectives
foreseen in
1998 have
been
achieved

The European industry has also changed considerably in the  last 5  years.  It  is
now  much  bigger  (even  though  the  gap  with  the  USA  still  persists),  more
global, mature and professional and, as a result, risk capital is becoming in an
increasing  number  of  Member  States  an  asset  class  of  its  own.  The  challenge
now would be to extend these positive developments to the whole Community
and in particular to the future new Member States.

Risk capital
should be an
asset class of
its own all
over Europe

10. WAY FORWARD

The world today,  from the  economic,  financial  and  political  points  of  view  is
very different from that of 1998. The risk  capital industry  has been subject to
important transformations, to difficult and proving experiences and to important
successes.  Therefore,  many  of  the  premises  and  objectives  foreseen  in  the
RCAP  deserve  to  be  re-examined.  Furthermore,  to  achieve  the  Lisbon  2010
objectives,  Europe  will  need  to  develop  a  modern  economy  and  a  powerful
innovative  sector,  something  that  will  require  a  much  more  efficient  and
sophisticated pan-European risk capital market.

The risk
capital
environment
has changed
radically in
the last 5
years

With  these  considerations  in  mind,  in  order  to  keep  up  the  momentum,  and
building  on  the  experience  of  the  last  five  years,  the  Commission  has  the

39

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18

                                                
intention  of  continuing  to  closely  follow  developments  in  the  European  risk-
capital market and carrying out further analysis in 2004 of aspects of the market
where  inefficiencies  remain,  taking  into  the  March  2003  Brussels  European
Council invitation for the Commission : "to work towards reducing barriers to
the creation of a genuine European risk capital market, capable of supporting
entrepreneurship,  and  examine 
investments  by
institutional  investors  (pension  funds)  in  venture  capital  markets"  (point  31,
second indent, of the Presidency conclusions.).

interalia  obstacles 

for 

Further
analysis
based on the
RCAP
experience

Whereas risk capital covers a vast variety of topics and aspects, some important
elements, likely to be included in the analysis, could be the following :

Some
possible
elements

(i) Obstacles faced by institutional investors to invest in venture capital

To fulfil the above mentioned European Council invitation.

(ii) Further improvements in the regulatory framework

This should be an on-going activity with the main purpose of ensuring that risk
capital  needs  are  taken  into  account  during  the  negotiation  (e.g.  Merger
Regulation  or  new  Capital  Adequacy  Rules-Basel  II),  implementation  and
enforcement of new rules.

A  specific  measure  repeatedly  requested  by  the  industry  is  the  creation  of  a
harmonised European fund legal structure capable of ensuring transparency,
from  the  fiscal  point  of  view,  all  over  Europe.  In  the  Communication
COM(2003) 226 final of 30 April 2003, on "Investing in research : an action
plan for Europe" page 24, the Commission has already taken the commitment
to "consider the merits and the possibility" of such a measure. Even though this
was  done  in  the  context  of  R&D,  this  is  a  horizontal  issue  which  should  be
considered for all cases where risk capital is involved.

Risk capital
should be
taken into
account in
any new
initiative

Transparent
structures
are needed
by the
industry

(iii) Fostering exit mechanisms

The availability of efficient exit mechanisms is one of the key requirements for
having  a  successful  risk  capital  market.  In  this  regard,  the  characteristics,
structure  and  role  of  specialised  stock  exchanges  and  secondary  stock
exchange  lists  for  high-growth  companies  should  be  re-examined  together
with factors determining investor appetite for venture backed companies.

A continuous
cycle of risk
capital
should be
ensured

(iv)Close  the  informational  gap  between  the  financial  community  (the
supply side) and the companies and entrepreneurs (the demand side). This
win-win undertaking has clearly two different aspects :

Availability of matching mechanisms

Risk  capital  providers  need  to  know,  in  a  readily  and  cost-effective  fashion,
which companies and entrepreneurs are looking for funding and viceversa. This
should  be  made  available  at  regional,  national  and  pan-European  levels,
depending on the size, strategy, and objectives of the different participants (see
section 6.2 of COM(2002) 563).

Investors
and
entrepreneur
s should
meet easily

19

Developing ratings of SMEs including technology rating

The  financial  providers  before  making  their  investments  need  to  estimate  the
risks and rewards associated to them. If that is expensive or difficult they, most
likely,  would  abstain  from  making  such  investments.  For  companies  of  a
certain  size,  and  a  number  of  years  in  the  market,  classical  methods  (e.g.
financial history, bank's internal ratings, feasibility studies, due diligence) may
be  used.  The  case  is  more  complicated  when,  as  it  is  often  the  case  in  risk
capital  investment,  technology  is  involved  or  when  the  company  is  new  and
innovative,  possibly  relying  on  a  single  technology-based  product  or  service,
with no history and scarce assets. For all these cases it would be important to
develop rating methodologies which are credible, reliable, and cost-effective.

Rating
mechanisms
able to value
technology
should be
developed

(v)Strategic : closing the gap with the USA

This  will  require  a  thorough  analysis  of  the  successful  private  and/or  public
policy instruments used in the USA to foster risk capital activities at all stages
of  capital  investment,  both  formal  and  informal,  and  which  may  explain,  for
instance,  why  proportionally  less  people  decide  to  become  in  Europe
entrepreneur  and  why  new  companies  in  the  USA  grow  faster  and  become
bigger than in Europe.

Successful
policies
should be
transposed
into Europe

(vi) Focusing Community support

Past Community actions channelling financial support to venture capital funds
investing primarily in early stage have been successful in fostering the growth
of the European venture capital industry. In order to safeguard the market that
has been created, this strategy should remain in place and implemented through
the  MAP.  While  the  priority  should  remain  seed  and  early  stage  investment,
Community  instruments  (notably  the  EIF)  should  also  play  a  role  in
maintaining  an  adequate  availability  of  later  stage  financing  to  potentially
successful  companies.  The  aim  would  be  to  counterbalance  the  effects  of  the
present  reduced  supply  of  development  stage  financing  as  the  risk  capital
markets are still adjusting in the wake of the bursting of the internet bubble.

Community
support
should cover
all stages

The forthcoming accession of the new Member States will merge their financial
markets  with  that  of  the  EU-15.  The  links  with  the  pan-European  market
players  are  already  largely  established.  The  widening  of  the  EU  market  will
present  increased  opportunities  for  all  concerned.  Full  advantage  should  be
taken  of  the  accumulated  experience  of  the  EIF  in  the  establishment  of  new
funds  in  locations  outside  the  immediate  beneficial  influence  of  the  largest
financial centres.

The EIF
should also
take care of
the new
Member
States

O O O O O

20

Annex 1. – Historical data for risk capital in the EU

Annex 2 – Historical data for venture capital investment in the US

Annex 3. – Business Angel Networks in Europe

LIST OF ANNEXES

Annex 4 – Total Private equity investments and high-tech investments in Europe 1993-2003

Annex 5 – Number of investee companies for venture-capital and buy-outs in Europe 1997-2002

Annex 6 – Venture capital investments in stages 2002

Annex 7 – Number of Private equity executives per million of population

Annex 8 – Write-offs (at cost) in Europe

Annex 9 – "Growth" stock market indices 1998-2003

Annex 10 – Average daily trading volume as of 09/2002

Annex 11 –Degree of Transposition of Community Law already adopted in the Field of Financial Services

Annex 12 – Summary of capital gains taxation in Member States in 2003

Annex 13 - Implementation of the RCAP (measure by measure)

Annex 14 - Acronyms used in the RCAP

Annex 15 - Glossary of terms used in the RCAP

21

HISTORICAL DATA FOR RISK CAPITAL in the EU

ANNEX 1

Value in million € of

1998

1999

2000

2001

2002

Investment in Early stage (seed + start-up)

1 566

2 991

6 405

3 988

2 699

Investment in Development capital (expansion + replacement)

5 172

8 242

13 226

8 758

7 405

Total VENTURE CAPITAL

6 738

11 233

19 632

12 746

10 104

Total VENTURE CAPITAL as of % GDP

0.09

0.14

0.23

0.14

0.11

Buy-outs

7 333

13 154

13 917

10 743

16 845

Total PRIVATE EQUITY

14 071

24 387

33 549

23 489

26 949

Total PRIVATE EQUITY as of % GDP

0.19

0.30

0.40

0.27

0.29

Funds Raised for PRIVATE EQUITY Investments

19 663

24 613

45 633

38 708

26 779

22

HISTORICAL DATA FOR VENTURE CAPITAL in the US

ANNEX 2

Value in million US$ of

1998

1999

2000

2001

2002

Investment in Early stage (seed + start-up)

Investment in Expansion and later stage

Total VENTURE CAPITAL

7 325

15 426

29 297

9 949

4 366

14 067

39 469

76 834

30 752

16 870

21 392

54 895

106 131

40 701

21 236

Total VENTURE CAPITAL as of % GDP

0.25

0.60

1.09

0.41

0.20

23

BUSINESS ANGEL NETWORKS in the EU

ANNEX 3

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
United Kingdom
EU

Year 1999
2
0
3
0
1
3
1
0
1
1
1
0
1
1
49
64 Networks

Year 2001
6
4
36
0
1
24
1
6
1
2
1
1
1
1
49
134 Networks

Year 2002
7
6
40
0
2
31
1
13
1
2
1
1
1
1
50
158 Networks

Year 2003
7
6
40
0
2
49
1
11
1
3
1
1
1
1
48
176 Networks

Source : EBAN

24

Total private equity investments and high-tech
investments in Europe 1993-2002

(in €   billions)

ANNEX 4

40

30

20

10

0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Total investments

High-tech investments

25

ANNEX 5

Number of investee companies for venture capital and 
buy-outs in Europe 1997-2002 

10.000

7.500
5.000

2.500
0

1997

1998

1999

2000

2001

2002

Venture capital

Buyouts

26

ANNEX 6

Venture capital investments in stages 2002 
(in % of GDP)

0,20

0,15

0,10

0,05

0,00

EL

P

A

D IRL

I

B

F

E

DK UK FIN NL

S

EU14 US

Early stage Expansion

27

ANNEX 7

Num be r of pr ivate  e quity e xe cutive s  pe r m illion of population

50
45
40
35
30
25
20
15
10
5
0

P

EL

IRL

A

DK

B 

FIN

NL

I

S

E

F

D

UK

1998

1999

2000

2001

2002

28

ANNEX 8

Write-offs (at cost) in Europe 
(in € billions)

4

3

2

1

0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

w rite-of fs

29

ANNEX 9

"Growth" stock market indices 1998-2003

1000

800

600

400

200

Neuer Markt

Nouveau Marché

Nasdaq Europe

Nasdaq

AIM

0
1/98 5/98 9/98 1/99 5/99 9/99 1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03

 Nouveau Marché 

Neuer Markt

Nasdaq Europe

AIM

Nasdaq 

30

Average daily trading volume as of 09/2002 
(in € millions)

ANNEX 10

160

140

120

100

80

60

40

20

0

Neuer Markt

Nuevo Mercado

Nuovo Mercato

Source: Deutsche Börse

Alternative
Investment Market

Nouveau Marché Nasdaq Europe

31

DEGREE OF TRANSPOSITION OF COMMUNITY LAW ALREADY ADOPTED
IN THE FIELD OF FINANCIAL SERVICES

ANNEX 11

Banks

10/11
11/11
11/11
10/11
11/11
10/11
10/11
10/11
10/11
11/11
11/11
10/11
11/11
10/11
10/11
94,5%

BE
DK
DE
EL
ES
FR
IE
IT
LU
NL
AT
PT
FI
SE
UK
EU

Insurance Securities Payment
Systems
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
100%

23/24
24/24
23/24
23/24
23/24
22/24
23/24
24/24
22/24
23/24
24/24
24/24
23/24
23/24
23/24
96,4%

8/10
8/10
8/10
7/10
8/10
8/10
8/10
8/10
10/10
8/10
8/10
8/10
7/10
8/10
8/10
80,0%

Company
law
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
15/15
100%

Total

58/62
60/62
59/62
57/62
59/62
57/62
58/62
59/62
59/62
59/62
60/62
59/62
58/62
58/62
58/62
94,4%

September 2003

32

ANNEX 12

SUMMARY OF CAPITAL GAINS TAXATION IN THE MEMBER STATES

Exemption

Yes

Yes

Yes

No. 35%

Yes

Reduced rate: 20.2%

No. 20%

Requirements

5% or 1,2 m. € and subsidiary subject to tax

3 years, subsidiary without financial activity and subject to tax

5% during 1 year and subsidiary with business activity

5% or 23 m € and 2 years

25%

Reduced rate: 19%

20% of voting rights; 10% on listed companies and 3 financial statements

Yes

Yes

Yes

No. 30%

No. 29%

No. 28%

Yes

10% or 1,2 m. € during 1 year and subsidiary subject to tax

5% and subsidiary subject to tax

25% during 2 years and subsidiary without financial activity and subject to tax

10% during 1 year and subsidiary is a trading company without financial activity

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

Source 
- EVCA : Taxation of Corporate Profits, Dividends and Capital gains in Europe
- Commission services from data supplied by the Member States

:

33

RCAP (RISK CAPITAL ACTION PLAN) APROVED AT THE CARDIFF SUMMIT (JUNE 1998)

LAYOUT BY TYPE OF BARRIER – SITUATION IN OCTOBER 2003

ANNEX 13

The RCAP comprises six (6) categories of barriers to be removed in the EU:

(cid:1) MARKET FRAGMENTATION

(cid:1) INSTITUTIONAL AND REGULATORY

(cid:1) TAXATION

(cid:1) PAUCITY OF HIGH-TECH SMALL BUSINESSES

(cid:1) HUMAN RESOURCES

(cid:1) CULTURAL

34

Measure

Objective

Responsibility/Participation

Situation

BARRIER : MARKET FRAGMENTATION

Develop  networks  of  business
angels  at  regional,  national  and
Community levels

Market monitoring and development
of  information  and  statistics  on  all
levels of venture capital in the EU

Round  table  on  the  impact  of  the
fragmentation  of  the  European  risk
capital market

Prompt  all  the  market  players  to
generate  synergy 
the
effects of fragmentation

to  reduce 

Private sector

Member States

Commission

EVCA

Commission

Market players

Commission

Member States

Market players

The  pilot  action  (1998-2000)
has  been  completed.  The
Benchmarking 
(2001-2002)
has been completed

On-going

The round table took place on
24 October 1998 in Brussels

Detailed  examination  of  the  cost  to
European  firms  of  raising  debt  and
equity finance

Obtain  a  clearer  picture  of 
the
difficulties  and  financial  needs  of
firms

Commission

Market players

For  tax  related  analysis  see
Commission  study  referenced
in section 5.2.

(banks,  venture-capital  funds,  capital
markets, etc..)

(regulatory  bodies,  new  capital  markets,
venture-capital funds, banks, etc.)

35

INSTITUTIONAL AND REGULATORY BARRIERS

Measure

Objective

Responsibility/Participation

Situation

Transposal  and  implementation  of
all  financial  services  directives  -
monitoring 
single  market
scoreboard

via 

administrative
Simplification  of 
formalities  for  company  formations
(including 
capital
requirements)

minimum 

Venture-capital  funds  :  Assessment
of  whether  there  is  a  need  for
covering
legislation 
Community 
specific closed-end funds

Review  of 
implementation  and
possible  amendment  of  prospectus
directive 
to  facilitate  companies
raising  cross-border  capital  (e.g.
IPO’s)

Create,  along  the  lines  of  Directive
85/611  on  UCITS,  a  European
funds
closed-end 
for 
passport 
(including  venture-capital 
funds),
enabling  them  to  raise  funds  and
offer  their  services  in  all  Member
States without restriction

In these areas, a prospectus or offer
document  approved  in  one  Member
State  should  be  available  for  use  in
all the Member States

36

Member States

Commission

Member States

Commission

(disseminating best practice)

Commission
Council
EP
Industry :
- EFIFC
- EVCA
- Small business

Commission
Council
EP
Capital  markets  (competent  authorities
and small businesses)

See table n Annex 11

Figures  and  evolution  were
made  available 
through  a
Benchmarking Exercise

UCITS  Contact  Committee
and  industry  representatives
met  on  18  November  1998  in
Brussels.  Consensus  that  an
ad-hoc  directive  was  not
needed

A new directive was adopted
on 15 July 2003

INSTITUTIONAL AND REGULATORY BARRIERS (Continuation)

Measure

Objective

Responsibility/Participation

Situation

Adoption  of  prudential  rules 
investors 
allow 
invest in venture capital

institutional 

to
to

Allow  institutional  investors,  acting
in  accordance  with  “prudent  man”
rules, to invest in venture capital

Member States

Commission  (follow-up 
Paper on supplementary pensions)

to 

the  Green

Assess  existing  accounting  and
auditing requirements

Allow  companies 
to  draw  up
consolidated  accounts  to  facilitate
access to risk capital (for IPO’s and
listed companies)

Member States

Commission

Accounting Bodies

Reduction 
of 
requirements for setting up firms

the 

capital

Reform  of 
insolvency and bankruptcy

the 

legislation  on

Facilitate the setting up of firms

Member States

Whilst  protecting  the  interest  of
creditors and consumers, ensure that
entrepreneurs  who 
gone
bankrupt can have a second chance

have 

Member States

Commission 
practice)

(dissemination  of  best

37

(cid:1)  Two  UCITS  Directives

adopted in 2002

(cid:1)  The 

Directive 

on
supplementary 
pension
funds  adopted  on  13  May
2003

(cid:1)  Obligation of using

international accounting
standards adopted in 2002.

(cid:1)  The 4th and 7th directives
have been modernised on
18 June 2003.

(cid:1)  A Communication on

auditing adopted on 21
May 2003

Figures  and  evolution  were
made  available  through  the
Benchmarking Exercise

The  Final  Report  concerning
a  Best  Project  will  be
published in Autumn 2003

Themes

Issues to consider

Responsibility/Participation

Situation

Taxation of venture capital funds

Double taxation

Member States

BARRIER : TAXATION

Capital gains tax

Impact on venture capital

Member States

Tax arrangements for new firms

Fiscal environment for start-ups

Member States

measures 

have
Several 
already  been 
taken  by  a
number  of  Member  States
(see, for instance, annex 10)

Taxation  of  low-risk  capital  (e.g.
bank deposits, bonds compared with
venture capital)

Stock options

Situation in Member States

Member States

Impact on recruitment and company
performance

Member States

The Final Report of an expert
group published in June 2003

38

BARRIER : PAUCITY OF HIGH-TECH SMALL BUSINESSES

Measure

Objective

Responsibility/Participation

Situation

Development  of  networking  and
universities,
between 
clustering 
research  centres,  financial  backers,
lawyers, 
resources
human 
specialists,  etc.  and  link  them  at
European level

of 

Development 
customised
electronic  commerce  modules  for
small businesses to ease their access
to  electronic  commerce  and  the
internal market

Creation  of  a  pan-European  club  of
high-tech innovatory firms

Private sector

Member States

Commission 
disseminating 
Framework Research Programme)

schemes,
practice,  Fifth

(pilot 

best 

Private sector

Member States

Commission (pilot schemes)

(cid:1)  The Gate2Growth initiative

fosters networks of innovation
professionals, entrepreneurs and
financiers

(cid:1)  The “Biotech & Finance”

Forum continuous successfully
active

Commission adopted a
Communication on
“GoDigital” on 13.03.2001

Facilitate dissemination at European
level  of  examples  of  successes  and
good  practice  :  facilitate  contact
with investors

Market 
players 
venture-capital funds, etc.)

(small 

businesses,

Commission

The  European  Federation  of
High  Tech  Enterprises  was
created in 1999

Reform  of 
system

the  European  patent

Following on from the Green Paper,
simplify  procedures  and  create  a
genuine Community patent

Commission

Member States

Political agreement on a
Community Patent reached
on 3 March 2003

EP

39

Measure

Objective

Responsibility/Participation

Situation

BARRIER : HUMAN RESOURCES

Promotion of entrepreuneurship and
innovation  within  educational  and
training systems

Member States

Commission (disseminating best practice)

Determination  of  training  needs  for
venture-capital 
fund  managers,
market  makers,  analysts  of  high-
tech firms

Identify  training  schemes  to  be  set
up  to  make  good  any  shortages  of
skilled staff in these areas

Commission

Market players

Assessment  of  benefits  of  equity
pay 
ownership
employee 
schemes

and 

Begin  study  of  future  at  European
level

Member States

Commission

Social partners

40

With the support of the
Commission, EVCA has
developed an
Entrepreneurship toolkit to be
used in universities and
institutions of higher
education

• Training schemes have been
set up by EVCA.  Courses  are
regularly  offered  to  market
participants

•  “Seed-Capital  Action”,  to
be  managed  by 
the  EIF,
would  concentrate  on  junior
investment managers

The Final Report of an expert
group to be published in early
Autumn 2003

CULTURAL BARRIERS

Measure

Objective

Responsibility/Participation

Situation

Demonstration  of  the  advantages  of
venture  capital  and  promotion  of
entrepreneurship

Private sector

Member States

Commission

A  Best  procedure  project  has
been run with the objective of
identifying  and  comparing
initiatives across Europe

A  Communication  which
contains  an  action  plan  has
been 
the
Commission on 21 May 2003

adopted 

by 

Dissemination  of  best  practices  in
corporate governance

Facilitate 
corporate 
demanded by investors

the  dissemination  of
practices
governance 

Private sector

International bodies

Commission

Member States

41

ACRONYMS USED IN THE COMMUNICATION

ANNEX 14

AIM :

ATS :

Alternative Investment Market (www.londonstockexchange.com/aim)

Alternative Trading System

BEST :

Business Environment Simplification Task Force. Established by the Commission in September 1997

EIB :

EIF :

European Investment Bank (www.eib.org)

European Investment Fund (www.eif.org)

EVCA :

European Private Equity and Venture Capital Association (www.evca.com)

FSAP :

IAS :

MAP :

Financial Services Action Plan

International Accounting Standards

Multi-Annual Programme for Enterprise and Entrepreneurship implemented by the Commission

NASDAQ :

The American National Association of Securities Dealers Automated Quotation system (www.nasdaq.com)

NYSE :

The New York Stock Exchange

R&D :

SME :

Research and Development

Small and Medium-sized Enterprise

UCITS :

Undertakings for Collective Investment in Transferable Securities (Investment Funds)

42

ANNEX 15

GLOSSARY OF TERMS USED IN THE COMMUNICATION

 Accounting Directive:

 Directives 78/660/EEC (the 4th) and 83/349/EEC (the 7th) as amended

 Business Angels:

 Private  individuals  who  invest  directly  in  young  new  and  growing  unquoted  businesses  (seed
finance).  In may cases they  also facilitates the  finance of the next stage of the life  cycle of  young
companies (start-up phase). Business angels usually provide finance in return for an equity stake in
the business, but may also provide other long-term finance. This capital can complement the venture
capital*  industry  by  providing  smaller  amounts  of  finance  (generally  under  EUR 150 000)  at  an
earlier stage than most venture capital firms are able to invest.

 Capital market:

 A market in which long term capital is raised by industry and commerce, the government and local
authorities. Stock exchanges are part of the capital market.

 Corporate governance:

 The manner in which organisations, particularly limited companies, are managed and the nature of
accountability of the managers to the owners. This topic has been of increased importance since the
beginning  of  the  1990’s,  the  providers  of  external  finance  to  a  company  wanting  to  ensure
management is not acting contrary to their interests.

 Corporate venturing:

 Corporate  venture  capital*  whereby  a  larger  company  takes  a  direct  minority  stake  in  a  smaller
unquoted  company  for  strategic,  financial  or  social  responsibility  reason.  Predominantly  used  by
large corporates to support external technology development.

 Development capital:

 Financing provided for the growth and expansion of a company.

43

 Early stage capital:

 Financing  to  companies  before  they  initiate  commercial  manufacturing  and  sales,  before  they  be
generating a profit. Includes seed* and start-up* financing.

 Equity:

 The ordinary share capital of a company.

 Institutional investors:

 This  term  refers  mainly  to  insurance  companies,  pension  funds  and  investment  funds  collecting
savings  and  supplying  funds  to  the  markets,  but  also  to  other  types  of  institutional  wealth  (e.g.
endowment funds, foundations, etc).

 IPO:

 Initial Public Offering (flotation, going public) : the process of launching a public company for the
first time by inviting the public to subscribe in its shares.

 Management buy-out:

 Financing  provided  to  enable  current  operating  management  and  investors  to  acquire  an  existing
product line or business. Also known as MBO.

 Market capitalisation:

 The  price  of  a  stock  multiplied  by  the  total  number  of  shares  outstanding.  The  market’s  total
valuation  of  a  public  company.  By  extension,  the  total  valuation  of  companies  listed  on  a  stock
market.

 Private equity:

 Prospectus:

 As opposed to public equity, equity investment in companies not listed on a stock market. It includes
venture capital and buy-out investments.

 A formal written offer to sell securities that sets forth the plan for a proposed business enterprise, or
the facts concerning an existing one that an investor needs to make an informed decision.

 Prospectus Directive:

 Documents  drawn  up  according  to  the  rules  of  Directives  89/298/EEC  (public  offers)  and/or
80/390/EEC  (listing  particulars).These  Directives  will  be  replaced  by  the  new  one  adopted  on  15
July 2003.

 Replacement capital:

 Purchase  of  existing  shares  in  a  company  from  another  venture  capital  investment  organisation  or
from another shareholder or shareholders.

44

 Risk capital markets:

 Markets  providing  equity  financing  to  a  company  during  its  early  growth  stages  (seed*,  start-up*
and development*). In the framework of this communication, it covers three sorts of financing:
(cid:1)  Informal investment by Business Angels* and corporates (“Corporate Venturing”*)
(cid:1)  Venture capital.
(cid:1)  Stock markets specialised in SMEs and high growth companies.

Secondary market:

Market  where  securities  are  bought  and  sold  subsequent  to  original  issuance.  The  existence  of  a
flourishing, liquid, secondary market creates the conditions for a healthy primary market.

Security:

A  financial  asset,  including  shares,  government  stocks,  debentures,  bonds,  unit  trusts  and  right  to
money lent or deposited.

Seed capital:

Financing provided to research, assess and develop an initial concept.

Start-up capital:

Provided to companies for product development and initial marketing.

Stock  exchange  or  Stock
Market:

A market in which securities are bought and sold. Its basic function is to enable public companies,
governments and local authorities to raise capital by selling securities to investors.

Stock option:

Option given to employees and/or managers to buy shares at a fixed price.

Venture capital:

Investment in unquoted companies by venture capital firms managing in-house or third-party funds.
It includes  early  stage*,  expansion*  and  replacement*  finance,  but  excludes  the  financing  of  buy-
outs*.

Venture capital funds

Closed-end funds, created to provide venture capital.

(*) Word defined in the glossary or the acronyms

(cid:1) (cid:1) (cid:1) (cid:1) (cid:1)

45