Fund chief: Public finance changes role in crisis
Worsening finance conditions for smaller companies have highlighted a growing need for strategic pan-European efforts. This is why the European Investment Fund is now expanding its role as investor, says Richard Pelly, EIF chief executive.
Richard Pelly has been the European Investment Fund chief executive since 2008, during which time the EIF has expanded its role to stimulate growth and innovation. He spoke to EurActiv's Jeremy Fleming. Read a related news story here.
What evidence do you see of the continuing downturn in availability of funding for the SME sector, which recent statistics indicate is continuing to struggle?
There is clearly a deterioration in the availability of loan finance provided to SMEs. Banks have become quite cautious, also due to the increase in regulatory requirements.
We sense that from the middle of the year to autumn there has been a slight slowing down of confidence. Looking at the equity market, statistics reveal that the shortage of risk capital continues.
Overall, the situation of SMEs is really tight when trying to access finance so that there is an unresolved flight to quality.
How are you rolling out angel financing co-investments to try and improve this form of financing in Europe?
With each of our operations, we are not only committing own resources or resources that we manage on behalf of a broad range of mandators – we are striving to also mobilise private investments in order to stimulate the market.
Business angels are important and active market players. They have efficient investment processes and long-term visions, and as individual investors they are generally less likely to pull out in a downturn. The European Angels Fund which we have launched this year as a €70-million pilot project in Germany provides business angels the opportunity to invest into innovative SMEs and to obtain a 50% co-investment through the European Angels Fund.
The particularity of this scheme is that the investment decisions are exclusively taken by the business angels, based on a pre-agreed co-investment framework agreement. As the market response has been very positive, we are currently working on expanding this scheme and launching similar initiatives in Spain and Austria in the upcoming months.
How do you see the role of your organisation changing over the next couple of years, both in terms of budget and organisation for investments?
The EIF has a counter-cyclical role: over the past four years, since the collapse of Lehman Brothers ushered in the crisis, we have tripled our equity commitments and doubled our guarantee volumes. Talking in figures: We have committed €1.1 billion in equity in 2011 which catalysed €6 billion in new risk finance for Europe`s SMEs. We have also committed €1.4 billion in portfolio guarantees which resulted in stimulating new loan portfolios of €7.6 billion.
EVCA Statistics demonstrate that the share of public resources has increased significantly since the onset of the crisis, and the EIF contributes about 50% of the public money currently invested in Europe.
As the effects of the financial crisis are likely to continue, we are striving towards achieving a balanced and sustainable equity ecosystem by stimulating private sector investments. This also includes investments with new partners, such as corporate investors, to target specific sectors and helping them to leverage their own investments.
How much do you see that the type of business opportunities that the EIF wants to foster are being directed to existing needs in European business? Are your investments ending up in the types of business that will help to support the societal challenges of health and a shifting demographic and the need for more hi-tech companies that have been identified as lacking in Europe?
The investment world itself is becoming more sector-focussed, as funds are keen not to spread themselves too thinly. Societal issues are driving this focus. A greater degree of specialisation is evident, for example in the digital life space and internet mobile software sector.
EU policy initiatives focus on these societal issues, and financial instruments are being developed to address them. Under the Competitiveness and Innovation Framework Programme, for example, we are very active in investment vehicles that cover clean technology. I expect that that this trend will continue in view of COSME and Horizon 2020.
How is the role of the EIF likely to evolve over the next couple of years?
Our main role is to act as a catalyst for core venture capital and growth capital investments, the latter targeting companies that have already started up but need an injection of equity to grow.
We also provide mezzanine finance, which is a hybrid form of debt investment; due to the fact that banks have become less likely to provide this type of finance, we are expecting to see more activity in this area. There are also new trends and initiatives where we expect to play a key role, such as social investment models and funds, corporate venturing and business angel investments.
As indicated, we will continue to leverage public money by broadening not only our scope of activities but also intensifying our collaboration with EU member states. So far, we have been successfully managing various fund-of-gunds at national level, for example ERP in Germany, Neotec in Spain, iVCi in Turkey, PVCi in Portugal and UK FTF in the UK.
We intend to build on these partnerships and are currently assessing new models to leverage public resources in various member states (e.g. in the Netherlands, in the three Baltic states and in Luxembourg) to address local market needs and to help stimulating growth and innovation.