Editorial: Commercial spirits support the state

There appears to be counter-intuitively plenty of support for government activity even at a time of relative global economic buoyancy.

More than 20 years after the creation of the European Investment Fund (EIF) as a public-private partnership (PPP) there are signs that commercial partners are paying more attention to the opportunities being created by the government.

Last week, European Union finance ministers voted to support the creation of the European Fund for Strategic Investments (EFSI). France, Germany, Italy and Spain have also committed an aggregate €25.5bn to co-invest in EFSI projects, while the European Commission (EC) is guaranteeing €16bn to launch EFSI and the European Investment Bank (EIB) a further €5bn.

The EIB is the majority owner of the EIF, which has broadly decided to equally split its €5bn commitment to EFSI between equity – primarily venture capital - and guarantees on debt, according to an insider last week.

There is, however, still a lack of clarity about how much new money is going into EFSI. The EIF’s own operational plan for 2014 to 2016 expected there to be a cumulative €14.9bn invested by end-2016, with a 4.4 times multiplier effect from private capital.

Still, behind the scenes there are promising signs. One large commercial bank privately said it was finally increasing its support to the EIF as a shareholder.

The EIB became majority owner of the EIF in 2000 (up from 40%), with the EC retaining 30% and financial institutions 10%. But by its 2012 commission review, the financial institutions were down to 8% and the report said: “A further decline in the share of financial institutions (over time, for example, the share of commercial banks has declined to a mere 2%) would have a detrimental signalling effect (signalling a lack of confidence in the PPP structure) and would diminish the benefits associated with industry knowledge, relationships and presence.”

Now, it might be the increased interest just reflects political savvy by the bank to support public institutions after the last set of bailouts and before the next lot undoubtedly occur.

But as the support had noticeably failed to occur over the prior 20 years it is a welcome sign that at least the bankers think there is money to be made from helping the capital being distributed or even from the projects funded.

One potential new source of earning fees will be with the review of a mooted new fund of venture capital funds, which is set to complete next month and about the time the European Venture Capital (EuVECA) Funds Regulation is reviewed to see if the rules could be expanded to non-EU domiciled funds.

The funds review on behalf of the EC will tackle a long-held belief that competition to the EIF as effectively Europe’s sole continent-wide fund of funds is needed. The Brussels-based trade body European Private Equity and Venture Capital Association (EVCA) in its March 2010 white paper – Closing gaps and moving up a gear – said: “The EU should consider developing a new, additional, and specifically dedicated scheme for stimulating the demand for high-quality venture funds by launching a multi-annual programme for private sector asset managers.

“The scheme’s objective would be to demonstrate that a properly managed portfolio of European venture funds can be attractive to private investors by generating appropriate financial returns. It would propose to do so by promoting funds of funds with a significant allocation to European venture capital.”

Exactly a year later, the European Venture Fund Investors Network (EVFIN) was created by public sector investment agencies to boost the industry and also called for a fund of venture capital funds to be set up using public money to encourage private money to also commit.

There are a number of effectively privately-managed funds of funds, such as HarbourVest and Adveq, operating in Europe for years and they have been recently joined by Mojo Capital, created by the former founder of the EIF’s VC operations, Matthias Ummenhofer.

The EIF is understood to be looking favourably on Mojo if it did formally approach it for a commitment, according to insiders.

But over 20 years the EIF itself has continued to play an ever-larger role in the venture ecosystem even without funding a potential peer. Overall, by the end-2011’s review period, the EIF had committed (sum of own-resources and mandates) €4.4bn or just over €20m for each of the 216 private equity and VC funds it had backed. This was an increase from a prior review’s analysis that found a cumulative €3.9bn was committed by end-2006 with €2.25bn invested.

In 2013 alone, EIF investment represented 15% of all VC fund investment in Europe, according to research by Helmut Kraemer-Eis, head of the EIF’s Research & Market Analysis (RMA), Frank Lang, senior manager in RMA, and Salome Gvetadze, consultant to EIF/RMA.

They added in the EIB’s Investment and investment finance in Europe 2015 outlook: “If we assume that the average stake in each fund ranges from 25 to 30%, the EIF invested in more than two-thirds of all VC funds launched in 2013.

“Not even 30% of VC funds in which the EIF invested from 2011 onwards managed to close with their full target size until mid-2014, and nearly 60% of the EIF-backed funds would not have had a first closing at a viable fund size without EIF support.”

The EIF’s latest operation plan expected VCs to receive €690m in 2014, €770m this year and €830m in 2016 and the EIF to support 400 funds or business angels.

At this level of activity, the EIF was already increasing its target volume across all areas by 30% to reach €1.9bn in 2016 - twice what has been committed in 2010 and equivalent to the amount committed for the full three-year period 2008-2010 – even before EFSI is factored in.

As one respondent to the EC’s consultancy working on the plan for a fund of funds privately put it last week: “I was happy to answer their questions but the question I had was what problem is the plan solving? Until you know the aim you cannot have a structure.”

Still, in the week when news provider Financial Times can headline “UK venture capitalists lifted by state bank” and the EIB’s annual outlook report said there “is a role for both ‘horizontal’ and ‘vertical’ industrial policy to address structural issues” there appears to be counter-intuitively plenty of support for government activity even at a time of relative global economic buoyancy.

See more from this Government Report: European Investment Fund

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