The European Venture Capital Association (EVCA) has welcomed the new third Capital Adequacy Directive (CAD III) published this week. The organisation supports the initiative, which has significantly improved the levels of capital European-based banks will have to hold for private equity and venture capital investments compared to the Basel II Accord.
CAD III is the European Union directive, which will implement the recently published Basel II Accord in the EU and is designed to reflect specific European economic objectives. As a result, whereas the Accord requires levels of capital to be set aside for private equity and venture capital investments at between 24 per cent and 32 per cent of a total investment, CAD III capital requirements are set at between 13 per cent and 17 for private equity exposure in a sufficiently diversified portfolio.
‘The improvement in the levels of capital under CAD III, compared to those in the Basel Accord, is a significant achievement for the private equity and venture capital industry in Europe,’ said Herman Daems, EVCA chairman. ‘The excessive capital requirements in Basel II would have had a negative impact on the ability of the industry to raise funds from banks and other investors, invest in companies and act as a key driver for European economic growth.’
Across Europe, banks play a crucial role as a significant source of funding for the European private equity industry, representing nearly E5.5bn or 21.5 per cent of all funds raised in Europe last year alone. Over the last five years, the average amount invested by banks per year is E7.5bn or 25 per cent of all funds raised. In some member states, banks involvement as a source of finance is even higher including Spain at 44.7 per cent, Germany at 40.7 per cent, France at 36.5 per cent and the Netherlands at 33.3 per cent.
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