19 February 2016

Venture capital in Europe

Venture capital is widely regarded as key to Europe's economic growth, as it provides financing to the small and medium sized enterprises (SMEs) that are vital to a thriving economy. In launching its Capital Markets Union (CMU) project, the European Commission highlighted the importance of venture capital (as well as private equity) and set out a number of initiatives to facilitate access to growth capital.

The review of the EuVECA regime, a lighter touch regulatory regime for smaller fund managers focussed on venture investing, is one such initiative – and the industry is hoping for bold changes which will increase its uptake. But while these may help managers to market to investors throughout Europe, what is also needed is a larger pool of capital earmarked for venture and growth funds and, therefore, SMEs. Investments in venture capital funds fell dramatically after 2008 (Preqin statistics show a 68% fall between amounts raised in 2008 and 2010), but they have been rising over the last few years and 2015 saw a return to 2006 levels in terms of the amounts raised by venture funds in Europe. Outside of traditional venture capital funds, there is an increasing number of traditional buyout, hedge and sovereign wealth funds making later stage venture investments, as seen last month with the latest round of investment in Skyscanner.

But more capital is needed, and Invest Europe (previously known as the EVCA) have been in discussions with the European Commission for some time on a pan-European funds-of-funds framework, which would not only increase the capital available for venture capital funds, but also increase the number of management teams with the skills to invest in European SMEs. This initiative would use funds assigned to current EU programmes aimed at helping SMEs to attract private sector money from institutional investors and create privately managed partnerships to deliver much needed investment.

It would have a strong focus on venture capital but would not be restricted solely to this asset class. The newly created European Fund for Strategic Investment (EFSI) – established within the European Investment Bank and which aims to mobilise at least €315 billion of investment over the next few years – could be the perfect way to seed a funds-of-funds program, if its commitments to each fund of funds are then matched by private sector institutional investors. Invest Europe has been in contact with private sector fund of funds managers to gauge interest and as a result, some have approached the Commission, so it is clear that there is appetite within the industry for such a proposal. Invest Europe now expects something concrete from the Commission – perhaps not a formal proposal, but a worked up 'concept' on which they can get feedback – before the summer.

The Commission's CMU Action plan, covered in a previous edition of Private Equity Comment, while commendable and promising, could have been bolder in some of its initiatives. A European wide funds-of-funds programme would certainly be a positive step, but one that seems workable and has the backing of those in the industry. It is to be hoped that this can be accommodated within the rest of the EU's plans for venture capital.

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