EU Eyes Public Money to Expand Role of Venture Capital Funds

  • Hill says sector currently lacks scale, diversity and reach
  • Capital markets union proposals seek to strengthen market

The European Union hopes public money will sweeten its efforts to expand the use of venture capital to fund growing companies, according to plans from EU Financial Services Commissioner Jonathan Hill.

Venture capital funds should face less red tape across the 28-nation EU so there can be more of them, participating in more investments and in more regions, Hill said at a Tuesday conference in Brussels. He said the EU needs to do more to help the sector grow, noting that the average European fund is half the size of its U.S. counterpart.

“European venture capital lacks scale, lacks diversification and lacks geographical reach,” Hill said. According to the commission’s analysis of trade association data, around 90 percent of all EU venture capital is concentrated in eight countries: the U.K., Germany, France, Sweden, the Netherlands, Finland, Belgium and Spain.

In the capital markets union plan unveiled last month, Hill proposes making it easier for funds to expand as part of his broader efforts to jump-start the EU economy by making it less dependent on bank loans. The plan calls for a “comprehensive package of measures” aimed at boosting venture capital, including standardizing rules across the EU and creating tax incentives.

Seed Money

The plan also calls for pan-European “funds of funds,” which could use public seed money to draw investment from around the world and channel it to EU venture capital projects. Hill endorsed the concept Tuesday as a way to break down current cross-border barriers.

The EU hasn’t said how much money or which funding sources would be involved. If the funding does come through -- perhaps from the Horizon 2020 program or similar innovation initiatives -- it could draw in a new class of investors who wouldn’t otherwise give money to small companies, said Michael Collins, deputy chief executive of Invest Europe, a trade association for venture capital funds, asset managers and other institutional investors.

Collins said investors in Asia and other parts of the world are looking to place amounts as big as $20 million, $50 million or more. Even if these investors want exposure to startup European technology or energy companies, they don’t want to take a leadership stake. A small group of funds-of-funds, seeded with EU money and run by private-sector managers, could provide the missing link, he said in a telephone interview Oct. 16.

‘Too Small’

“Most European venture capital funds are just too small,” Collins said. “No institutional investor wants to be 98 percent of the fund -- they want to be well below a dominant force, they want to be a smaller player in any given fund, they don’t want that much exposure.”

Common EU standards also would make it easier for existing fund managers to look across national lines, instead of sticking to the tried and true to avoid regulatory burdens and the costs of extra red tape.

“It’s just a question of can we get to some action and some enforcement quickly?” Collins said. Otherwise, investors will ask themselves if they should look across the EU or “just go back to my London-based investors and keep it local?” he said. “That’s a decision people will be making every day of the week.”

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