The EU should to co-finance independent investments with equity in growth enterprises by guaranteeing public funding as pooled at EU level, write Christian Motzfeldt, Erika Mann and William Stevens.
Christian Motzfeldt is the former CEO of the Danish Growth Fund); Erika Mann is a former MEP; and William Stevens is the CEO of Tech Tour.
The Covid-19 crisis puts a double challenge to Europe and its leaders. We need smarter solutions for our health, elderly care, education, travel, leisure, manufacturing and of course still for our planet and climate. At the same time, we need to save and renew millions of jobs and enterprises as the base of our prosperity as the digital transformation of our societies fast forwarded.
The European Union (EU) future budgets aim in good part to address this double challenge. There are five formidable levers that the EU decision makers should keep in mind and in focus when taking positions and making decisions: entrepreneurs, equity, independent investors, co-financing and returns.
It is the tens of thousands of smaller innovative growth enterprises all across the Union who can create and will grow most of the sustainable new jobs. They are part of the ever-stronger community of tech start-ups and growth enterprises across Europe which has been carefully nurtured over the past decades. From Lisbon to Helsinki, they are ready to deliver world class innovative solutions and making the digital transformation happen.
These growth enterprises need mostly equity or risk bearing finance and not loans. There is plenty of credit now available in the market. But loans are not the right instruments if you need to pivot or leap forward as an enterprise. These companies need long term capital ready to shoulder their future and growth. If they do not raise equity capital, these home-grown innovative enterprises risk to be acquired by global technology enterprises, taking the knowledge, profit and returns outside Europe. In reverse, our enterprises with ambitious funding can provide a necessary digital alternative to the rising domination of these giants.
There are hundreds of professional independent investors across Europe who can readily lead such equity investments. Due to the fragmentation of the European market, these independent investors have insufficient access to capital although the performance of the top European venture capital and private equity investors is now very attractive. Their experience and capacity should be utilized by levelling up their funding as well as their investments by EU co-financing facilities. Such bottom-up EU-level co-financing facility will best ensure market conformity and leverage. The facility can be topped up in countries or regions with less active investment markets.
The great news is that the Invest EU scheme already planned in the future EU budgets can deliver such a co-funding facility mechanism. It operates through a guarantee which can leverage up 10 times a public funding investment. So, EU grants composing a guarantee of €50 billion could enable half a trillion of public investment. This could progressively co-finance independent funds and their investments, triggering in excess of €2.5 trillion into our most promising innovative companies. The EU institutions could also efficiently govern and monitor these pooled EU facilities with minimal cost and administrative transparency. Such a Union approach also makes much more sense than the divisive further fragmentation of budgets, investments and markets.
Finally, and most importantly, this pooled investment approach can deliver attractive long term returns to taxpayers and savings who are now asked to come to the rescue of our economies. So, instead of asking how EU budgets can be repaid, we should aim for appropriate and due returns for the next generation. It would also offer the safest and shortest path to an equitable and sustainable economic recovery and provide a welcome boost to our stalled capital markets union.
We know that there is significant divergence between Member States mostly on the allocation of the €750 billion of the NextGeneration budgets. Our Group advocates for a small fraction or €50 billion of the proposed €750 billion NextGen to be pooled at EU Level as a guarantee for am equity co-financing facility powered by Invest EU. That could trigger in excess of €2.5 trillion of equity investments into our most promising home-grown enterprises delivering the new solutions our societies need now for a sustainable and equitable future.