AUSTRIA - Private equity funds will find new domiciles unless a legal framework for venture capital investments is created in Austria within the next six to eight months, the private equity association AVCO has stressed.

Five private equity funds whose officials had wanted to start business in Austria have already chosen domiciles such as Luxembourg instead and "others will follow", the association warned a meeting in Vienna on Friday.

"That would be very detrimental to the development of the Austrian economy as start-up and seed investments, in particular, depend strongly on the physical closeness of the investor," explained Christian Kaltenegger, chairman of AVCO.

Private equity and venture capital investments in Austria are currently in a legal vacuum as a law on the financing of SME start-ups still has to be amended despite criticism by the EU.

The AVCO as well as other industry representatives have demanded a separate private equity law be created which, they suggest, should include exemption from tax on profits made from selling company holdings, as well as a lean regulatory framework.

"Non-listed private equity funds are exclusively targeting institutional investors and they only invest in a fund once they have done their due diligence check," noted Kaltenegger.

He added the market "will regulate itself" and as no private investors are targeted no added consumer protection mechanisms are needed.

"The private equity law is no tax gift for a small group of locusts but helps SMEs and the financial market place Vienna to create expertise -  as well as in affiliated fields like accountancy and consultancy - which can then be exported to Eastern Europe."

A spokesman for the finance ministry told IPE a law on private equity investments "is almost finalised" but no details have yet been revealed and the bill has not been presented to either the public or parliament.

Should the finance ministry's proposals be accepted by the private equity industry, the growth of investments in the sector reported over the last years could continue.

Investments in private equity ventures rose to €257m in 2007 while funds raised €431m over the last year for future investments.

Comparisons to figures for the previous year (€158m and €279m respectively) are difficult to make as the method of collecting the data has been changed to an online tool developed by the European Venture capital association (EVCA), to help produce a more detailed survey.

Approximately 2.6% of the capital raised by private equity funds came from pension funds last year while the largest group of investors were banks.

"The increasing number of investments by pension funds and insurance companies is a sign that the private equity market in Austria is maturing - it has passed the stage of puberty ," explained Jürgen Marchart, chief executive of AVCO.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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