peHUB sister publication EVCJ recently met up with Javier Echarri, secretary general of the European Venture Capital & Private Equity Association (EVCA). And, of couse, we asked him 5 Questions about the state of European private equity, and his problems with the Walker Report (which he comments on in more detail, in the next issue of EVCJ):
1. How have you seen the European private equity and venture capital industry evolve during your time at EVCA?
Echarri: My nine years at EVCA is a good time to look back over the industry. If I could single one thing out, it is cyclicality and the extraordinary ability of the private equity industry to adapt to cycles by testing different business models, such as fund raising, deal structuring and sector specialisations. This gives the private equity industry a permanent capacity to adapt and reinvent itself more than any other financial market.
It is a very inventive industry; it is also a very Darwinian industry. Professionals develop different strategies, but of course at the end of the day it is net returns to investors that will decide on the success and continuity – or not – of a manager.
Then again, economic cycles may favour one part of the industry versus another at different times. We have seen interest shift to venture at times of good technology exit markets, or to buyouts when underlying economics favoured them and the debt markets reinforced the potential returns. Practitioners will differentiate themselves, try new ideas and when they don’t work, you think: “Tant pis, that’s life.” And then you try again.
2. EVCA has done a lot of lobbying in support of the private equity industry in Europe. What projects do you currently have in the pipeline?
Echarri: EVCA has a strong and positive reputation in Brussels and, overall, the policies that emanate from the EU have been beneficial for the private equity industry. But, given the current political unrest surrounding buyouts, EVCA is reinforcing its contacts with political groups of the European Parliament in Brussels and participating in every relevant discussion forum. EVCA is also organising a grass roots campaign of regional gatherings between practitioners, portfolio companies, and social partners. I have to say that despite some negative initiatives largely motivated by the Trade Unions, the Parliament at large remains positive about the industry.
On the regulatory side, the EU Commission remains positive as well, as you know, and I’m very glad to say that they have recognised and praised the self regulating approach of the industry and EVCA’s Professional Standards. We will be reinforcing this angle in the coming months.
We are also launching a new initiative for the venture part of the industry, which will include concrete proposals on issues such as public procurement policies. It will also encompass a life sciences venture initiative, which we are organising with all the other associations and active players in the field. Life Science is one of President Barroso’s priorities.
3. Disclosure and transparency in the industry is a constant subject of debate. What are your views at EVCA and have you had a good response from members to your Walker Working Group consultation document on Disclosure and Transparency in Private Equity?
Echarri: I am worried that the wording in the Walker draft report about reporting documents and disclosure requirements is not sufficiently clear in excluding mid-market and venture; it is not categorised well. I also have concerns relating to the ultimate long-term effect of compliance with the Walker Guidelines being monitored by public scrutiny – I have no problem with public scrutiny, but if the guidelines themselves are unclear and interpretation of them is left to the public, then it is an issue. We have seen the public markets lose ownership of their standards and evolve in a less than optimal manner and we don’t want a Sarbanes-Oxley-type situation in European private equity. The Walker Group has set the issue of guidelines in motion, but we are uncertain in what direction and we will want to see how the recommendations affect the UK industry before proceeding with any pan-European recommendations.
On transparency, Sir David feels investors are satisfied with GP-LP transparency, which is a conviction we share. On financing deals, I would like to know why the report singles out the debt component. We all know that debt is a tool that has enabled strongly enhanced returns to investors and one that has been constantly evolving, used in a greater or lesser degree depending on availability and cost.
But it is by no means the only component of deal structuring. Singling it out as Walker does in the report is, we believe, taking it out of context and could in a worse case scenario over time induce distortion to the market.
EVCA is in favour of strong, industry-led professional standards. We regularly update our existing guidelines at EVCA: valuation guidelines, reporting guidelines, corporate governance guidelines. At the moment, we are working to finalise a code of ethics that will be mandatory for EVCA members. This code is currently under public consultation including social partners and political parties. There is of course a link between that and the Walker report.
4. How important a role do you think the press has in promoting the private equity industry?
Echarri: The profile of private equity in the press has been exacerbated by the size of some of the deals that have taken place in the last few years and also, now, by the state of the debt markets.
The private equity trade press has been very helpful for the industry – of course it can be critical, but it is also constructive. The big question today is how responsible the generalist press has been across the whole of Europe. For example, outside the UK there is less understanding of private equity. Some criticism has certainly been unjustified. The media’s portrayal of the industry is also partly dependent on our critics’ sound bites, which have been aimed at generalist media journalists and editors. Press that relies too much on sound bites is unlikely to have much credibility – certainly not in the longer run.
5. How is EVCA working under the new structure it implemented this summer?
Echarri: In June this year, we approved our new structure of three platforms comprising venture, mid-market and very large buyouts. We still have an overall structure to cover professional standards, investor relations, public affairs and other activities, but each part of the industry now has not only a voice but also some ownership of EVCA’s agenda. This enables EVCA to act in a more targeted manner for different parts of the industry within the larger structure and for shorter decision-making lines than might previously have been the case.
For venture, we will be making a case at the European institutional level so that we can withdraw certain impediments to the industry. We will also be creating a specific action line for angels to reinforce investor appetite.
For the mid-market, the team is focused on explaining the buyout business model within the grass root campaign mentioned above. Many people are losing sight of what this growth business is about and its enormous positive impact in making the European economy more competitive, so we will continue to raise awareness by arranging, for example, meetings between successful private equity-backed companies and interested parties.
The large buyout platform is going to focus on the political landscape as much as on public opinion. While the recent furore has calmed and commentary is more balanced, we believe we must build bridges for the longer term and ensure a balanced position in broad political circles.