Venture capital impetus to counter SME finance malaise

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SPECIAL REPORT / Pan-European venture capital and US-style 'angel investors' are set to be boosted to fight a continuing malaise in Europe’s small and medium-sized enterprises (SMEs) sector, along with measures to reduce red tape.

A report on innovation published in late September by the European Commission noted that since 2009, access to bank loans has deteriorated in more than half of EU member states.

Access to credit was the easiest in Finland, followed by Latvia, Sweden, Poland and Austria. But it remained ''relatively difficult'' or has worsened in Ireland, Italy, France, Luxembourg, Hungary, the United Kingdom, the Netherlands and Spain, the report said.

That reflected the 17-country survey by the European Central Bank earlier this year, which showed a worsening predicament for SMEs seeking access to finance, with 27% recording deteriorating profits between October 2011 and March 2012.

This was almost twice as many as the 15% which recorded falling profits during the previous six months. Over the same period there was a 2% rise in need for banking finance, up from 17% to 19%.

Hardening conditions for accessing finance

“There is clearly a deterioration in investment as witnessed by the statistics. But also a hardening in the conditions being required by banks. The banks are looking at the impact of increased regulation and planning for that accordingly,” said Richard Pelly, chief executive of the European Investment Fund.

With a faltering access to finance, the Commission will attempt to open up more venture capital and US-style financing methods, and to revisit the age-old problem of burdensome red tape.

The EU executive aims to simplify the process through which venture capitalists raise funds across the region – for the benefit of start-ups – under the banner of a European Venture Capital Fund.

The proposal will make it easier for venture capitalists to raise funds across Europe for the benefit of start-ups. Once a set of requirements is met, all qualifying fund managers can raise capital under the designation "European Venture Capital Fund" across the EU.

In search of 'angels'

No longer will they have to meet complicated requirements that are different in every member state.

The regulation is awaiting formal adoption by the European Parliament and the Council, but agreement is expected in the next couple of months.

In addition, ‘angel’ investors – individuals who invest cash and expertise in start-up ventures in return for equity – are being encouraged by the European Investment Fund, Europe’s venture capital ‘fund of funds’.

“It is well known that angels have processes and vision that is longer term, and as individual investors they are less likely to pull out in a downturn. Such angel investors are playing an important role in US and elsewhere,” Pelly told EurActiv.

The EIF has brokered a deal to enable angel finance in partnership with the German Federal Ministry of Economics and Technology, in which each matches the others investment resources.

“We are looking at creating similar schemes within Spain and Austria,” Pelly said.

Red tape still an issue

Meanwhile, the struggle to reduce red tape continues following a Commission request for ideas before the SME Week Summit (see background). The EU executive wants feedback from smaller businesses on the top-10 burdensome laws.

The European Parliament' industry committee recently published a report on competitiveness and business opportunities for SMEs. It calls for a 'fitness check' to be done to existing rules, with the aim of removing obsolete and ineffective EU laws.

Positions: 

“At a time when European banks can’t lend to the region’s small and medium-sized enterprises – except at unsustainably high rates – the opportunity for alternative sources of external funding to set out their collective stall, has never been more clear and present,” said a statement from the European Private Equity and Venture Capital Association.

“EVCA wholly supports any action to tear down barriers to growth, innovation and enterprise for businesses, and we will continue to make the case behind the scenes to the policy makers shaping the landscape for the small and medium-sized business in particular,” the statement said.

“Not only would the economy feel the direct impact of a boost in employment, but a quarter would also use finance to increase stock, supporting businesses throughout their supply chain,” said James Meekings, co-founder of innovative finance provider Funding Circle, in relation to worsening SME finance conditions in the UK.

“With the right support, these frustrated businesses could be the future drivers of our economy, with the ripples of job creation being felt throughout UK industry. Instead, they risk becoming a lost generation of 'caged tigers' stifled by a lack of business finance,” said Meekings.

"The adoption of this report is a step in the right direction, both for SMEs in Europe and for our SME campaign. Small businesses hold the key to providing the growth we need to restore Europe's global competitiveness," said MEP Kent Johansson (Alliance for Liberals and Democrats for Europe; Sweden) said of the the parliamentary report calling for a red tape ‘fitness check’.

Timeline: 
  • 15-21 Oct.: European SME Week
External links: 

European Institutions

Federations

  • European Private Equity and Venture Capital Association: Website
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