This article is part of our special report European Business Summit.
Europe's fledgling venture capital market has hit a ''trough'' and needs public money to stimulate its return to growth, according to the European Investment Fund – the EU's long-term investment body. EURACTIV reports from the European Business Summit (EBS) in Brussels.
Richard Pelly, chief executive of the European Investment Fund, said that while some are predicting the death of venture capital in Europe, he sees great opportunities, provided that the right kind of backing is given.
Failure to develop a well-functioning venture capital system would scupper Europe's efforts to build an innovative SME-led knowledge economy, he added.
''My personal view is that venture capital industry is quite young in Europe and that it is at the bottom of a trough. There are great ideas out there at the moment. Now support is required from public institutions,'' Pelly told the EBS.
Public money will account for between 30% and 50% of venture capital at the bottom of the business cycle in order to stimulate private capital over the next three-to-five years, Pelly said.
The EIF provided around 37% of the public money invested in venture capital last year.
Pelly says there is no shortage of bright ideas in Europe and that history suggests return on investments made at this point of the business cycle are often stronger than those enjoyed when confidence is high.
"Risk averseness often lasts too long. Investors need to be encouraged back into the market – and this is part of the role public money can play," according to the EIF chief.
Regulatory changes will 'exacerbate' crisis
However, he warned that new regulations could make life more difficult for the sector just as innovative companies are looking to invest in new ideas.
''The difficulties the venture capital industry has faced will be exacerbated by regulatory changes, for sure,'' the EIF chief said.
Pelly's comments echo complaints by industry, which has said the forthcoming Hedge Funds Directive will make venture capital less attractive (EURACTIV 07/05/10).
Venture capitalists warn that new transparency rules contained in the Alternative Investment Fund Managers' Directive (AIFMD) will force venture-backed SMEs to publish commercially sensitive information.
This could incentivise firms to choose other sources of financing, according to critics of the directive.
SMEs need funds – fast
Pelly said the time it takes for EIF funds to reach SMEs should be reduced from one year to six months. This view was shared by other panellists speaking at an EBS session on how SMEs can drive economic recovery.
The European Commission's SME envoy, Françoise Le Bail, said the EU was working to simplify funding schemes for small firms. She also suggested that Europe's flagship research fund – FP7 – is unattractive to most SMEs due to its focus on R&D and the red tape involved in the application process.
Le Bail suggested FP7 could be reoriented towards innovation, a move she said could hold greater appeal for SMEs.
There were also calls from industry leaders to find ways of helping SMEs to access capital markets without having to face the level of oversight currently demanded of publicly-listed companies.