Europe’s private equity industry stands ready to finance the recovery and contribute toward climate neutrality and digital leadership.
Eric de Montgolfier is the CEO of Invest Europe.
How has your industry been coping with this health and economic crisis?
With speed, strength and responsibility: the result was a short, sharp shock in 1H 2020, as we moved to protect portfolio companies and their employees, before a rebound in deal activity in 2H 2020. With the exception of 2019, the private equity industry has never invested more capital into Europe’s businesses than it did in 2020: a total of €88 billion of equity invested in over 8,000 European companies.
How do you explain these numbers?
We learnt a number of painful and valuable lessons from the global financial crisis of 2007-2008, building up our resilience, viability and attractiveness as an investment opportunity for institutional investors – and a reliable financing opportunity for businesses of all sizes and types.
This ability to withstand the pandemic is also due to the inherent benefits of the long-term private equity model: an ability to protect businesses and their employees by providing follow-on equity investments. These represented €26 billion last year. For over half of the European companies invested in by the industry during the year, the 2020 investment included a follow-on.
Does this put private equity in an ideal position to help the recovery?
There’s nothing ideal about fighting uphill to move from crisis to recovery! However, the long-term nature of our asset class not only makes it more resilient to massive shocks like the pandemic – it also allows our members to invest more rapidly and easily when times are hard.
Our industry will retain and potentially increase its commitment to innovation – after all, a record of €26.5 billion were committed last year to fast-growing, entrepreneurial companies through venture and growth funds.
Many of our members will also commit to companies that have been in difficulty during the crisis. For these firms, often now struggling with high amounts of debt, private equity support will not only mean much needed long-term equity support. It will also ensure the active involvement of experienced private equity professionals committed to putting a company back on the path to success. The European Systemic Risk Board is absolutely right when it said in its recent report on insolvencies that private equity has a role to play here. The key here is viability.
The recovery is one of the challenges Europe faces but is not the only one. What is the private equity industry doing to contribute to the so-called twin transition?
As a continent, we can only grow if we do so digitally and sustainably. There is no alternative pathway forward. We believe that innovation will drive the green and digital transitions – and it is in our industry’s DNA to finance projects that have the potential to be transformative.
The interest of our members in the transition has never been this high. As an association, many of the initiatives we are taking contribute to this agenda. Let me just name two. The first is our recently published Climate Change Guide, which is designed to provide members with a unique resource on how to implement climate change considerations in their investment decisions. The second is our active participation in the Scale-Up Europe initiative that will be presented by the French government ahead of the Presidency next year, aiming at creating the right environment and ecosystem for start-ups to become scale ups, and for scale-ups to become European Unicorns.
Can public finance play a role in supporting the transition?
Yes, of course – and its role can even be greater.
Today, venture capital and growth fund managers benefit from the much-needed support of public institutions such as the European Investment Fund or national promotional banks. This is particularly important where market gaps remain – either in smaller European markets where the industry still has the potential to further develop, or at the late-stage end of the market, where we are still falling behind the US. An increased focus on equity instead of debt, and on viability of the companies rather than just solvency, however, would benefit not just venture capital and growth funds as well as the companies invested in, but the economy at large.
Besides public finance, what role can EU policymakers play in ensuring private equity helps support the recovery?
EU policymakers are aware that the re-equitisation of the economy relies on the development of strong European equity markets – which can only be done under the appropriate regulatory framework.
In short: please don’t substitute regulation in the place of creating the right framework for our industry to play its part in the recovery. For example, the potential AIFMD review should be a case of leaving good things be … good enough. This means translating the narrative into concrete actions. The Capital Markets Union 2.0 already contains some solid initiatives that will potentially foster equity investments from institutional and retail investors into long-term equity funds. The review of the EU prudential framework for banks and insurers must ensure that capital charges do not disincentivise investments in long-term equity. The MiFID investor categorisation rules must be revised so that experienced long-term investors are more easily able to be classified as professional clients. And further initiatives can be taken, such as the ELTIF review, for more retail investors to invest directly or indirectly into long-term funds.
Ensuring Europe’s private equity industry continues to play its role in backing the continent’s companies and people will require the right balance of proportionate legislation and the creation of a fit-for-purpose framework.
Note: Private equity in this interview encompasses: Buyout, Generalist, Growth, Mezzanine, and Venture Capital.