European Scrutiny Committee Contents

9 Financial services: European social entrepreneurship and capital venture funds




+ ADDs 1-2

COM(11) 862




+ ADDs 1-2

COM(11) 860

Draft Regulation on European social entrepreneurship funds

Draft Regulation on European capital venture funds

Legal baseArticle 114 TFEU; co-decision; QMV
DepartmentHM Treasury
Basis of considerationMinister's letter of 30 January 2012
Previous Committee ReportHC 428-xlvii (2010-12), chapter 15 (18 January 2012)
Discussion in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested


9.1 The Commission promotes, partly in the context of the Europe 2020 Strategy, the value of the Single Market Act, the Small Business Act and the Innovation Union in support of small and medium-sized enterprises (SMEs).[45]

9.2 One of the levers identified in 2011 by the Commission in re-launching the Single Market Act was the encouragement and development of social entrepreneurship. It defines a social business as an enterprise with the primary objective of achieving a social impact rather than generating profit for owners and shareholders, which operates in the market through the production of goods and services in an entrepreneurial and innovative way, and which uses surpluses mainly to achieve these social goals.

9.3 One of the priority initiatives identified in the Single Market Act was the "setting up of a European framework facilitating the development of social investment funds" so as to contribute to a favourable financing framework for social businesses. The aim is to improve the effectiveness of fundraising by investment funds that target these businesses. In July 2011, the Commission launched a consultation on promoting social investment funds,[46] as part of its Social Business Initiative.[47]

9.4 In April 2011 the Commission said it would consider adoption of new rules to ensure that by 2012 venture capital funds established in any Member State could operate and invest freely throughout the EU. In June 2011, it launched a consultation on a European venture capital regime.[48] The aim was to address the fragmentation of the EU's venture capital markets along national lines, that the Commission considered could limit the overall supply of capital for innovative SMEs, and to create a real single market for venture capital funds in the EU.

9.5 Currently the managers of social enterprise and capital venture funds have to comply with the Alternative Investment Fund Managers (AIFM) Directive, Directive 2011/61/EU.[49]

9.6 With the draft Regulation, document (a), the Commission has proposed, in order to encourage the growth of social entrepreneurship across the EU, uniform requirements for the managers of collective investment undertakings that would operate under a designation "European Social Entrepreneurship Fund". With the draft Regulation, document (b), the Commission has proposed, in order to encourage the growth of venture capital across the EU, uniform requirements for the managers of collective investment undertakings that would operate under a designation "European Venture Capital Fund".

9.7 Managers of collective investment undertakings that operated under the designations "European Social Entrepreneurship Fund" or "European Venture Capital Fund" would benefit from uniform requirements for registration and an EU-wide passport. Social enterprise and capital venture funds that did not wish to operate under those designations would not have to comply with the requirements of the Regulation and would not benefit from the EU-wide passport, unless the manager were authorised within the scope of the AIFM Directive.

9.8 When we considered these proposals we noted, in relation to the proposal on social enterprise funds and amongst other matters, that:

  • the Government welcomes the Commission's consideration of measures to facilitate EU investment funds targeting social businesses, while also working to ensure EU investors seeking to invest in such funds are better able to do so;
  • it broadly supports the Commission's proposals to introduce a "European Social Entrepreneurship Fund" designation and to allow such funds access to an EU-wide passport;
  • it believes that exempting listed funds from the investor eligibility criteria would further stimulate the EU social investment market while retaining appropriate consumer protection;
  • given eligibility would be extended to beyond professional investors, the Government considers there to be a case for considering whether further protection, for example in assessing whether operators are fit and proper, is desirable beyond the minimum proposed;
  • it agrees, in relation to delegated acts that objective criteria should be adopted, but given the diversity and nascent stage of the social investment sector, considers that a permissive and flexible approach should be taken — a non-prescriptive approach to the articulation of principles or basic standards for social impact reporting would be appropriate; and
  • it notes that it would be helpful to clarify the interaction between the operation of this proposal and the AIFM Directive and to determine whether funds bearing the European Social Entrepreneurship Fund designation whose assets under management grow beyond €500 million could continue to benefit from that designation.

9.9 As for the proposal on capital venture funds we noted that:

  • the Government welcomes the Commission's consideration of measures to improve access to venture capital by EU SMEs with high growth potential;
  • it broadly supports the Commission's proposals to introduce a "European Venture Capital Fund" designation and to allow such funds access to an EU-wide passport;
  • it considers there to be a case for broadening the scope of eligible investments to ensure European Venture Capital Funds can thrive and channel their investment better while retaining the focus on SME investment; and
  • this could include allowing funds of venture capital funds to be invested in and considering whether the proposed minimum 70% level of qualifying investments is appropriate and how it is best applied.

9.10 We heard that:

  • the Government had been consulting informally with industry the two proposals since the Commission's consultations were announced;
  • stakeholder groups were being established and as part of its consultation with these groups, the Government would be seeking further information on the likely impacts on affected sectors from UK firms; and
  • the Government's provisional assessments of the impact of the proposals would be coming to us.

We commented that, although these proposals appeared unexceptionable we would defer further consideration of them until we had the Government's promised impact assessments and information about the views of the stakeholder groups. Meanwhile the documents remained under scrutiny.[50]

The Minister's letter

9.11 The Financial Secretary to the Treasury (Mr Mark Hoban) tells us, in relation to the draft Regulation on social entrepreneurship funds, that the Treasury and the Cabinet Office consulted stakeholders — 14 organisations participated and stakeholders included Big Society Capital, Big Issue Invest, Investment Management Association, the Social Investment Business, Social Finance and UK Sustainable Investment and Finance. He says that the key issues to emerge were:

Likely use of the Regulation

  • most stakeholders were broadly supportive of the aims of the draft Regulation, however some adjustments would be needed to ensure the definition and distribution of profits would cater to market needs over the next few years, as set out below;
  • stakeholders questioned how this draft Regulation would interact and complement other EU initiatives such as the European Social Fund and European Regional Development Fund;

Definition of a qualifying portfolio undertaking (that is social business)

  • the proposal defines social enterprises quite narrowly as supporting marginalised or vulnerable groups;
  • there was a strong view from the group that the definition of qualifying portfolio undertaking was too narrow to ensure broad uptake — examples given included a concern that some community cohesion enterprises would be excluded;
  • the draft Regulation could be read as not permitting profit distribution before sale of a social enterprise;
  • stakeholders considered strongly that this could limit use of the scheme unless some profits were able to be distributed;
  • they considered that investors who put their funds at risk should be able to generate a reasonable level of financial return, alongside the social return;
  • the proposal places limits on annual turnover and annual balance sheet totals for a social business that were generally regarded as too low and could be seen to penalise successful social businesses;
  • there was some concern over how social impacts would be measured and how social businesses would demonstrate they were making a "measureable" impact;
  • stakeholders expressed a strong preference for broad principles only to be outlined, given that methodologies were at an early stage;

Eligible investors

  • the proposed Regulation limits investors to professionals and semi-professionals;
  • a number of stakeholders expressed a desire for retail investors to be included, however they understood the Commission's decision of limiting investors as this is an emerging market and considerably more protection would be needed if the scope were to be broadened;
  • stakeholders welcomed the potential for retail investors to be included in the future;
  • some stakeholders who currently manage social investment funds said that their limits on investors were similar to the Commission's proposal.

Social impact bonds (SIBs)

  • many stakeholders believe SIBs or public service delivery contracts to be supporting growth in the sector;
  • these are contracts with public authorities where the public authority pays if the social enterprise achieves a certain outcomes, for example, reducing reoffending rates; and
  • stakeholders felt it is important that funds are able to invest in these contracts, with SIBs included as a qualifying investment in the proposed Regulation.

9.12 Turning to the draft Regulation on capital venture funds the minister says that the Treasury consulted the British Venture Capital Association, the European Venture Capital Association, the Investment Management Association and the Association of Investment Companies on the key issues. He tells us that:

Benefits and use of the Regulation

  • venture capital fund managers have generally welcomed the proposals and are optimistic that they will be able to make use of the proposed passport and European Venture Capital Fund brand;
  • they welcomed that the proposal is not overly prescriptive and is permissive of existing national fund structures;
  • they are also happy that the proposed regime is optional, meaning that funds would not have to restructure, potentially damaging funding to SMEs in the short term;


  • venture capital fund managers consider the reporting requirements to be suitably proportionate for venture capital funds;
  • there had been particular concern at the possibility of a requirement for fund managers to appoint a depositary which they feel would be inappropriately costly;
  • they considered there was scope tightening and clarification in areas relating to some points of conduct of business to ensure certainty for industry and a harmonised approach to implementation;
  • however the more, or more detailed, the requirements, the more difficult and costly it will be for smaller fund managers to comply, and fewer funds would join the regime;

Eligible investors

  • stakeholders were pleased to see that the Commission had moved away from restricting eligible investors to those who qualify as professional investors under the Markets in Financial Instruments Directive as traditional venture capital investors rarely would qualify;
  • they were concerned, however, at the requirement that investors must commit a minimum of €100,000 in each investment;
  • they considered this figure to be higher than the typical size of a venture capital investment;
  • they recognise that reducing this threshold would compromise investor protection and were receptive to alternative qualifying criteria such as annual income or an existing portfolio of investments above certain thresholds;

Qualifying investments

  • opinions were rather more split on what funds should be allowable as investment, with some parties keen that debt financing should fit within the definition of qualifying investment;
  • however the majority were content for qualifying investment to be restricted to equity or quasi equity; and
  • the majority also felt that the Commission's proposed split of 70% in qualifying investments and 30% in non-qualifying was sensible.

9.13 The Minister says that the Government has taken stakeholders' comments on board in achieving its position on both proposals.

9.14 The Minister encloses with his letter the Government's impact assessments. That on the draft Regulation on social entrepreneurship funds says, in relation to costs and benefits:

"It is difficult to give orders of magnitude for this proposal as this affects social entrepreneurship funds, a very nascent market. However since the proposal is voluntary, only those seeking access to the new EuSEF label and associated passporting rights will incur costs. Therefore it can be reliably anticipated to have a net benefit to business of at least zero."

The assessment of the draft Regulation on capital venture funds says similarly, in relation to costs and benefits:

"While the scale of benefits is difficult to assess at this stage and is dependent upon market take-up, this measure is optional for industry, with firms only opting in if they judge benefits to them to outweigh costs. Under a staged approach in an emerging market segment, incremental benefits are expected initially but there is potential for more significant benefits over time as the market matures."


"It is difficult to give orders of magnitude for this proposal. However costs are only borne by those seeking access to the new EVCF label and associated passporting rights, thus the regime imposes no costs unless funds choose to participate. Therefore it can be reliably anticipated to have a net benefit to business of at least zero."[51]


9.15 We are grateful to the Minister for the information he gives us. We note that the views of the stakeholders have been taken into account in determining the Government's approach to the proposals. Before considering the draft Regulations again we should like to hear about progress in negotiation of the issues mentioned to us previously and of those raised by the stakeholders. Meanwhile the documents remain under scrutiny.

45   The Commission's latest documents on these policies are (32702) 9283/11 (32691) 9040/11, (32560) 7017/11 and (33505) 18244/11 + ADD 1: for the first three see HC 428-xxvii (2010-12), chapter 7 (18 May 2011) and HC 428-xxi (2010-11), chapter 6 (23 March 2011); we will be considering the fourth shortly. Back

46   For the consultation document and a summary of responses see  Back

47   (33328) 16628/11: see HC 428-xlv (2010-12), chapter 10 (20 December 2011). Back

48   For the consultation document and a summary of responses see  Back

49   See  Back

50   See headnote. Back

51   The assessments can be seen attached to the Minister's letter at


previous page contents next page

© Parliamentary copyright 2012
Prepared 9 February 2012