Web Site: www.bvca.co.uk
Principal Contact: Mark Fox, communications chief
Chief Executive: John Mackie
Address: 3 Clements Inn, London, WC2A 2AZ U.K.
Regulatory Authority: Private equity and venture capital are regulated in the United Kingdom by the Financial Services Authority (FSA). The BVCA is the first line of oversight and regulation, but FSA is perceived as increasing its oversight role.
BVCA Guidelines Available at:
Membership Structure and Reach: The BVCA was founded in 1983 and has over 300 members from among private equity companies, and professional and services firms. In addition to the organizations’ Council which is actively involved in issues important to its members the BVCA provides training courses, communications research, publications and events.
The British Venture Capital Association (BVCA) says that it represents the largest, best-organized body of private equity in Europe, accounting for 28% of the total annual private equity investment in Europe for 2001 and second in importance only to the United States. This is based upon $9.7 billion having been invested in more than 1,500 companies ($7.4 billion of which was in the United Kingdom). The BVCA has 300 members divided almost equally between private equity firms and service providers.
Most importantly, except for Singapore, “the U.K. is one of only two regulated private equity markets in the world,” says Michael Queen, chairman of the BVCA and director of finance at 3i. Hence the nation’s focus on higher transparency and accountability. That regulation comes from the Financial Service Authority (FSA), created from several agencies in 1997 to oversee and regulate banking and investment activities in the United Kingdom.
“The FSA allows the private equity industry to self-regulate, but [given the state of the financial markets] there is a threat of intervention in the industry if it doesn’t [take an active policing role],” says Michael Mills, portfolio development director for 3i and a member of the draft committee for the BVCA.
Like the EVCA, the BVCA has embraced the topic of valuating portfolio companies as vital to its membership. It issued its original valuation guidelines in 1991, two years before the EVCA. Its new proposed guidelines incorporate much of the EVCA’s proposed guidelines. The comment period closed in January, and the BVCA is expected to publish new guidelines or recommended practices this year.
One might expect the BVCA and its draft proposal for Reporting and Valuation Guidelines would be more similar to U.S. venture industry guidelines than European proposals. Not so. The draft document, completed in November of 2002, is more like that of AIMR and the EVCA. The BVCA is forthright in pointing out that the private equity industry must be proactive in “demonstrating to investors and potential investors in private equity the soundness of the industry’s vlauation practices.”
The BVCA proposal takes the strongest position on the need for its guidelines to be consistent with GAAP practices (specifically International Accounting Standard 39: Financial Instruments). Beyond that, the BVCA document incorporates the EVCA Level One provisions with only minor amendment. It actually incorporates as a footnote the Valuation Guidelines and formula of the EVCA guidelines.
The first emphasis of the BVCA guidelines is for the timing of reports and calls for twice yearly reports and concomitant re-valuation of investments. The second emphasis is on reporting of fund performance, and it gives detailed lists of data for inclusion in the reports: commitments, draw downs, reserves and host of other totals. The 12 bullet points of the fund performance reporting guidelines are the most comprehensive of the three proposals underway and a world away from the spare guidance offered in earlier U.S. guidelines.
Unlike the AIMR or EVCA, the BVCA treats IRR calculations as a footnote, instead stressing the text nature of the report that venture capital firms should provide. “It’s probably fair to say that our guidelines are driven by principles, whereas the EVCA guidelines are more rules-driven,” says 3i’s Mills, “for the reason that in the post-Enron era people have said that rules-based practices lacked substance,” compared to more subjective principle-driven guidelines.
For that reason, while the BVCA document includes presentation standards taken from the EVCA guidelines, it stresses that a more subjective evaluation is needed over the EVCA’s more formula driven reporting. -J.B.