Venture Capital Sought for EU's $80 Billion SME Funding Effort

  • Katainen says European Investment Fund could channel support
  • Industry given until January to comment on rule changes

Venture capital funds may play a bigger role in the EU’s quest to jump-start 75 billion euros ($80 billion) in investment funding for small and medium-sized businesses, EU Commission Vice President Jyrki Katainen said.

The EU has earmarked a quarter of its investment plan to help smaller companies, while also seeking private investors to join forces in financing and project management. The Luxembourg-based European Investment Fund last month announced a 1 billion-euro pact aimed at helping venture capital and mid-market funds pursue new deals.

Jyrki Katainen

Photographer: John Thys/AFP via Getty Images

Katainen said the EIF has been one of the more effective channels for the investment plan and may be in line for more EU money. So far the fund, part of the European Investment Bank, hasn’t requested additional tools, he said. In the meantime, the commission is looking into how to create a venture capital “fund of funds” with EU seed money, as part of its efforts to integrate capital markets and increase cross-border economic activity. The EIF says it may be able to play a role in this project, although no concrete measures have been envisaged so far.

“It’s very important because it’s part of the single market,” Katainen said in an interview in his Brussels office. “It’s part of capital markets union, but also has a close link with the overall approach we have in the single market strategy, in order to help SMEs get financing.”

Economic Growth

Breaking free of bank financing is a top goal of EU efforts to revive economic growth in Europe. Nations have faced budget constraints that hold back fiscal stimulus, leading the commission to seek alternative ways to boost growth and make the most of public money.

Euro-area economic growth unexpectedly slowed in the third quarter, underscoring the vulnerability of the region’s recovery. Gross domestic product in the 19-nation bloc rose 0.3 percent, according to data released Nov. 13. Germany and France’s economies each grew 0.3 percent, while Italy’s expanded 0.2 percent.

EU business owners need a “mentality change” as much as a new source of funds, said Philippe De Backer, a member of the European Parliament’s liberal political group and its economic policy committee. In the U.S., he said, start-ups are willing to hand over equity in exchange for money that lets them grow fast, while European firms are more cautious.

‘Local Bank’

“If I talk to a lot of entrepreneurs from my own country, Belgium, they go to their local bank -- not banks, bank -- and they say I want a loan,” De Backer said at a conference in Brussels. “If you say to them maybe you should look a little bit broader, maybe talk to a private equity or venture capital or do some crowdfunding or whatever, there’s not much appetite.”

To win over the industry, the commission has asked for suggestions on how to overhaul the EU’s venture capital and “social entrepreneurship funds” regimes. This marks an acceleration from the normal schedule, which otherwise wouldn’t review the schemes until July 2017, because the sector is a top priority in EU financial-services Commissioner Jonathan Hill’s capital markets plan.

The consultation asks if the EU should relax its rules for who can invest in venture capital funds, how the regulations should treat funds that manage more than 500 million euros in assets, and whether venture capital firms are allowed to invest in a suitable range of companies.

“Does the delineation of a ‘qualifying portfolio undertaking’ -- unlisted, fewer than 250 employees, annual turnover of less than 50 million euros and balance sheet of less than 43 million euros -- hinder the ability to invest in suitable companies?” the consultation asks. Responses are due by Jan. 6.

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