European Single Market and the Globalisation of Private Equity Fundraising : Barriers and Determinants of Foreign Commitments in Private Equity Funds

The barriers and determinants of foreign fund raisingin Western Europe are examined using twointerlinkedapproaches.First, interviews of investment managers of severalinstitutional investors identified and analyzed problems and investmentbarriers faced by investors when making international investments in privateequity funds. Second, the determinants of the amount of foreign commitments inprivate equity funds was examined by means of econometric analyses of seventeenWestern European countries covering 1990 to 2002. The interviews indicated that the main barriers for cross-border investmentsin private equity funds are related to inefficient fundstructures.Investors are unwilling to commit capital to a fund thatpresents the potential of double taxation.This situation can arise fromforeign private equity funds that are not tax transparent or that create apermanent establishment for the investor in the home country of thefund.Also found was that small funds suffer from the absence ofappropriate domestic fund structures due to large costs of foreign structuresthat small funds find unbearable.Early stage venture capital funds arefully dependent on domestic funding if the permanent-establishment problemarises. The econometric analyses revealed that the amount of foreign commitments ispositively influenced by: (1) a liquid exit-market, and (2) a well-performingand mature fund manager base.Foreign commitments decline when fundmanagers invest large amounts of their funds in firms outside their homecountry.Lack of a tax-transparent domestic fund structure decreases thedomestic commitments in private equity funds.The permanent-establishmentproblem also negatively impacts foreign commitments.Significantdifferences in determinants of fundraising depend on the origin ofinvestors.Most differences are apparently caused by asymmetry ininformation between domestic and foreign investors. (TNM)