Michael Collins / Nov 2015
Jonathan Hill, European Commissioner for Financial Stability, Financial Services and Capital Markets Union. Photo: European Union
The European Commission put venture capital at the heart of its new Capital Markets Union (CMU) because it recognises the industry’s role in spotting and nurturing innovative young companies. Through changes in regulation and new incentives, this important initiative may better connect large institutions managing €12 trillion of capital with dynamic enterprises that have the potential to become global leaders and big European employers.
The CMU Action Plan was eagerly awaited by European investors as it promised to set the tone for future EU policy affecting large swathes of the financial services sector and the businesses they service. Its aim was to lay out a series of practical measures to provide a broader range of financing options for Europe’s companies, particularly small and medium-sized enterprises, thus enabling them – and the European economy – to grow.
The resulting 31-page document released in September made innovation a key theme. It focused on measures to boost equity funding for start-ups and SMEs, as well as loans for growing businesses. It also sought to stimulate long term investment by large institutions, particularly insurers, make initial public offerings easier for small businesses, and break down barriers to cross-border investment.
It is an action plan that is achievable and recognises the benefits that long term investment can foster in businesses and the wider economy – as well as the constraints that investors and investment managers currently face.
Europe is now producing more successful start-ups than ever before. There are large numbers of European companies valued at over €100 million and it’s just as common to see innovative businesses born in Berlin, London or Stockholm as Silicon Valley. There are also significant number of so-called “unicorns” – companies like Shazam or Spotify that have become global champions in music, as well as in gaming and other sectors.
Europe’s challenge is not generating bright ideas or getting companies off the ground, rather it is the lack of capital to propel these businesses onto the global stage. As a result, too many companies choose to relocate to the US to access funds from large venture capital firms (and to access the US’s giant digital single market), while others that do stay in Europe see their expansion stifled by a lack of capital.
The Commission appreciates the problem and is looking at ways to increase the flow of funding to young companies at later stages of growth. This might be achieved through tax incentives, encouraging more fund managers to establish funds under the EU Venture Capital Fund Management Regulation (EuVECA) umbrella, or the creation of pan-European public-private venture capital funds-of-funds – all of which could draw in more investors and increase the amount of funding available.
At Invest Europe, we strongly believe that public money can be used as a catalyst to draw in private capital. Venture capital funds of funds, seeded with EU or government funds and managed by professional investment teams, could help global institutional investors access the best managers and create a diversified, lower risk portfolio than many could manage themselves.
Of course, it’s not just young companies that spark creative new ideas. Larger, established companies are more likely to invent original products and processes when they are backed by private equity – this investment of capital and expertise increases their number of patent citations by around 25%. In fact, patents granted to private equity-backed businesses in Europe between 2006 and 2011 were worth up to €350 billion.
Invest Europe’s members have long made innovation part of their investment strategy. For example, Fondo Italiano di Investimento (created by the Italian government and leading banks) and Xenon Private Equity supported Italian waste management company Eco Eridiana’s development of a pollution-free, energy-producing waste plant. Meanwhile, Ardian established a bio-technology arm at French human and animal nutrition group Diana to look for new uses for plant cells, including possible cures for cancer.
The Commission’s steps to boost access to capital and innovation for companies must be delivered in a way that works for investors, fund managers and entrepreneurs alike. Any changes to EuVECA rules must encourage more funds to raise capital from investors across European borders. And we would like to see the Commission’s willingness to review the Solvency II risk weightings for insurers’ infrastructure investments extended to venture capital and private equity. If we persist with regulatory requirements that mis-calculate the risk of investing for the long term we won’t get capital flowing where we need it most.
With its Action Plan, the Commission is recognising the importance of long term investment and of private capital in supporting European innovation. Invest Europe’s members will continue to support fresh ideas in companies of all sizes through the combination of capital and expertise that they can bring. Working together with the EU institutions we can ensure that Europe’s savers, investors, and entrepreneurs can all succeed in building a more dynamic economy.