FoFs position paper

8/9/2019 FoFs position paper

1/32

/

Carlos Moedas

European Commission

Rue

de la

Loi

Wetstraat 200

1049 Brussels

13

November

2014

Dear

Commissioner

Moedas,

I

would

like to congratulate you on your

appointment as

Commissioner for Research, Science and

Innovation.

As the Commission begins

its

mandate it is

clear

that delivering growth and jobs

will

remain

a

key challenge for the

next

five years.

With

the public

finance

position in many Member

States

likely

to remain constrained,

delivering the

investment

that

Europe

needs

will be

a key

challenge.

President

Juncker's plan

to launch a 300 billion

investment

package for Europe

is

therefore a

welcome

initiative and one that the

EVCA

is

keen to engage with.

The

EVCA represents

the European

private

equity

and infrastructure industries. Our membership

covers

the full range of private equity activity, from

early-stage

venture

capital to the

largest

private equity

funds,

and

includes those

funds investing in

infrastructure.

W e also

represent

professional investors

such

as

pension funds and insurance companies, who are

a

key source

of

long-term financing in

Europe.

EVCA members are

active and

committed long term investors in Europe, helping

to

provide both

the capital and the management expertise that businesses need

to

grow, develop and innovate.

Over the last decade the industry has invested over 474 billion in over

30,000

European

companies, 85%

of which are

SMEs, many of them

highly innovative

start-ups.

During your confirmation

hearing

before the

European

Parliament

you

stressed

the importance

of

attracting private investment into European innovative businesses and the role risk-finance can

play

in that

regard. It is

crucial that

we

find

ways

to encourage the

private sector

to

mobilise

additional

sources of financing for those emerging

companies,

technologies and processes

that

have th potential to grow significantly.

In particular

we

believe that there is

a

real opportunity to use funds already available under

Horizon 2020 to develop

a public-private partnership for

venture capital.

Such a partnership,

managed by

a

private

sector fund

manager with access to

global investors, would use

capital

from Horizon 2020 to leverage

investment

from those

large global

institutional

investors.

VAT:

BE

0424

557 716

IBAN:

BE33

3300

5785

0046

BIC/SWIFT: BBRV BE BB


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Many of these global investors face difficulties

committing capital to Europe

as

their

minimum

investment

size exceeds

the absorption capacity of

European

venture

capital

funds, which tend

to

be much smaller than their American competitors.

Using resources from

Horizon 2020's a new

fund-of-funds investment vehicle could be

created,

generating

sufficient scale

to

be a viable and

attractive

option

for

those

global

investors

that

are looking

for

a

way

to

invest

in

European

start

ups. I have included with this

letter

a paper

setting

out our

thinking

on this issue

in greater

detail and

would

be very

happy

to discuss this

with

you or members of your cabinet.

As

Commissioner for Research, Science and

Innovation,

you

have

the opportunity to sh pe an

agenda

that will have

extensive implications

for

the European economy. With

over

30 years of

active engagement with the Commission the

EVCA

is

keen to

continue making its contribution to

the debate

and

to the delivery of growth for innovative

companies

in Europe.

I very

much

look forward

to

working

with

you

on these

shared

challenges to ensure that

public

and private

sector actors are both able

to play their part.

Yours sincerely.

Anne Glover

enc.


3/32

Position

Statement

European Private Equity & Venture Capital Association

Bastion Tower, Place du Champ de

Mars

5

B-1050

Brussels, Belgium

+32

2

715 00 20

F +32

2

725 07

04

[email protected]

www.evca.eu

Transoarencv Resister ID: 60975211600-74

Accelerating Innovation

Delivering Growth: Using

the

Jobs,

Growth and

Investment

Package

to Attract Private Sector

Investors

to

the

European Venture

Capital Industry

\

November 2014

Executive

Summary

The European venture capital

industry

provides high-growth companies and SMEs with long

term

financing,

sparking innovation

and driving

S M E growth.

Additional

private

sector investment into

European

SMEs

is needed

to facilitate their

growth, as President Juncker

has

recognized in

setting the

outlines

of the

forthcoming

Jobs,

Growth and Investment Package

European venture

capital

needs to

reach

international investors

who

have

access

to large

pools of capital and

a

potentially

higher

risk appetite.

However, such investors

are not easy

for

many

European

venture

capital managers to reach

for

a

range of reasons.

The E uropean

venture

capital

industry is fragmented

and

European

venture

capital

funds

are

relatively small, particularly when

compared

to their competitors in

the

US.

For

the industry

to

become self-sustaining and

globally

competitive, it

s

crucial that private

institutional investors are

attracted

back to European

venture

capital.

The EVCA proposes to

stimulate

the demand for

high-quality venture

funds via a public-private

partnership: a private sector-managed pan-European fund-of-funds

with

a

high commitment

to venture capital.

By leveraging parts of the

EU Budget

as

part

of

the Jobs,

Growth

and

Investment Package,

the

European

Commission would

play

a

catalytic role,

providing

cornerstone investment in the

funds,

with

this EU

capital (at a

minimum)

matched

by private

money.

The purpose

of

a

fund-of-funds

is

to

act as an intermediary, bridging the

gap

between

large

institutional investors and

smaller

venture capital funds.

The additional

cost

created by inserting the fund-of-funds

layer

in the financial value chain

is

justified by the access to larger pools o f international capital

that

European

venture

capital,

and the

businesses it

develops, need

The

involvement

of a

fund-of-funds

manager can also

help venture capitalists

to increase the

size

of

their funds - enabling

them

to back more

companies, for

longer periods of time.

Such

an

instrument can

be

funded

from

within the existing EU

budget.


4/32

Introduction

The

European

venture

capital

industry is capable of providing an

alternative form of

long-term

financing

to

innovative high-growth companies

and SMEs,

especially

at

times

when

bank lending is

scarce.

The specificities

of

the venture

capital business

model

-

active investment through long

term equity

stakes

inprivate

companies

-

need

investment

funds

that

can

bemanaged

flexibly

depending

upon the

phase of

the

investment cycle. Investment

fund

structures must also

meet

the

needs of both

domestic

and non-domestic

investors,

to

encourage

foreign

capital

to

flow into the

European

economy.

However,

the venture

capital

industry

is confrontedwith

obstacles

in

attracting

international

investors

and

despite investments by

public

institutions

such

as

the

European Investment Fund

(EIF),

there is

still

a

lack of available capital in

the

hands of experienced venture capital groups

in

Europe.

This results inhigh-potential companies having to curtail

their

growth

plans as they do

not

have sufficient capital to realise them.

More

funding for such companies

would

improve their

chances to grow and to compete

globally.

Sustainable

economic

growth in

Europe is directly

linked

to

creating

the right environment for high

growth

potential

companies

to

emerge

and

strive.

The link

between

innovation,

entrepreneurship, venture capital

and economic growth

is well established and

recognised,

including

by

the

European Commission.

The

venture

capital

industry

in

Europe

has

gone through

a

very large contraction over the last

decade,

and

if

this

is not arrested risks

impairing

permanentlyits capacity to help European

businesses to develop.

As investment

into venture

capital

contracts so fund sizes reduce and the

teams needed

to run

them also contract. Experienced practitioners who have the contacts and the knowledge - which

typically takes 10

years

to cquire -

are lost to the industry.

There

is urgency

for

Europe

to increase the capital available to

venture

capital professionals and

through

them to

emerging

companies.

Reinforcing the

European

venture

capital

industry

and

itscapacity to raise funds world wide will

benefit the EU economy.

Facilitating

fund raising and attracting international investors

to the

asset class as part of the 300 billion

package

will

help venture capital to f inance

the EU's

most innovative high-growth

companies and

SMEs. This

remains the

ultimate goal of

the

Jobs,

Growth and Investment Package.

In its Green

Paper on

Long-Term

Financing of

the

European Economy

1

(March 2013) the European

Commission has recognised this

problem

and

has

identified the development of the

venture

capital

sector as a

potential solution to

the

difficulties SMEs face inaccessing finance. The Commission

clearly

states

on

page 17 that: Theventure capital sector

suffers

from lack

of

resources and is

influenced by

bank

and insurance prudential regulation.

Funds-of-funds

could be efficient

instruments to increase the volumeof venture capital. A fund of guarantees for institutional

investors could

further

reduce

the

constraints

in

this market.

1

http://eur-lex.

europa.

eu/LexUriServ/LexUriServ.do?uri=COM:2013:0150:

FIN:

EN:

PDF

2
http://eur-lex/http://eur-lex/


5/32

Virtuous Financing Cycle

Venture capital is at

the

core of achieving

the

European objectives of growth, competitiveness

and innovation: energising

the European economy

by

actively

investing

in

and supporting

businesses with high-potential in existing industry sectors, as

well

as creating new innovative

enterprises,

sustaining

growth,

job creation and innovation.

Venture capital invests in

the real

economy, i.e. businesses which produce products and

services and in so doing generate employment. In stark

contrast

to speculative activity on non

real economy

based

assets venture

capital

nvestors

are patient

investors in

thousands of

real

businesses.

Venture capital

has

a vital

role

in

sparking innovation

a primary

driver of economic

growth. A

Frontier Economics report

2

shows that private equity

builds

businesses that are

more

innovative

than

non private equity-backed firms. Patents granted to private equity-backed businesses

between

2006 and 2011

are

expected to

be

worth

up

to 350 billion'. Private

equity

participation

increases the

number

of patent citations

by

25% . With

increased

numbers of citations

corresponding to greater economic value, this suggests it uses resources more effectively to

deliver higher returns

on

investment.

Venture

capital

funding drives SME

growth, thanks

to the

experience,

smart capital

and

contacts these equity investors bring. Venture capital firms not only fund but also proactively

support

the

development

of high-potential companies in the early stages of their development

and

growth, often creating highly skilled employment

innew

and innovative

areas

where

other

sources

of finance are hard

to

access.

The

industry provides a

'virtuous' financing cycle within the

European

economy

(see Figure

1).

Investors provide funds to venture capital

firms,

which in

turn

invest to launch, grow or support

high-potential companies. When these venture capital backed companies succeed, they become

important engines of growth in the economy. The (financial) returns

provide the incentive

and

capital

to

redistribute

the money, thus funding future cycles of investment. The whole sequence

of

raising

capital

from

institutional

investors, investing

that capital

via long-term,

closed-ended funds

(typically

for

ten

years or more) into

companies

and then providing returns to investors, is

one

inter-connected

investment chain.

2

Exploring

the impact of private equity

on

economic

growth

in

Europe, May

2013

(http://www.evca.eu/publications/frontier_econonnics_report.pdf)

3
http://www.evca.eu/publications/frontier_econonnics_report.pdfhttp://www.evca.eu/publications/frontier_econonnics_report.pdf


6/32

Figure

1

: he

Virtuous

Financing Cycle

of

Private

Equity

and Venture

Capital

(/VC

Investment

Individuals' pension

plans, saving

accounts, insurance

contracts,

etc.

Income withdrawal

Institutional investors

(Pension

funds,

banks,

insurance compan ies,

etc.)

Repayments

+

Capital gains

/VC funds

/VC

funds

Investmen

High-potential

companies

High-

Divestments

Fundraising

barriers: Challenges for raising venture capital

funds

The venture

capital industry

has a

long-standing commitment

to

encouraging and facilitating

long-term

investing.

As recognised

by

the European Commission in its Green

Paper

on

Long-Term

Financing

of

the

European Economy,

given

the

longer

time

horizons

of their

business

models,

institutional investors

- such

as

(life)

insurance compan ies,

pension

funds,

mutual

funds

and

endowments - represent suitable providers of

long-term

financing. Together, they hold an

estimated total of 13.8

trillion

of

assets, equating

to

more than 100%

of

EU GD P

3

. Other

institutional investors, such

as sovereign wealth funds,

have

also emerged as providers

of

long

term

capital.

However, in spiteof this large amount of available capital, European innovation continues to be

faced

with a lack of private sector investorsin venture capital.

Between 2007 and 2012,

pension funds,

insurance

companies

and banks fell from 35

of funds

raised to just 15 in 2012. O ver the same

period

of

time,

contributions

by government

agencies

grew

considerably. Wh ile

in 2007

government

agencies

accounted

for

less than

15 of

investment

in

European

venture

capital,

by

2012

their

share

had increased

to

represent

40

of venture

funding.

The changing investor

base

for venture

capital is

illustrated in Graph 1.

3

See Fitch 2011

and E FAMA (2012).

4


7/32

Graph 1:The

changing

source of investors in European venture capital

2007-2012 -

Incremental amount raised

during the

year

-

of

total

amount

2007 2008

2009

2010 2011 2012

Academic inot.

/ Endowments /

Foundations

Banks

Capital

markets

Corporate

nvestors

Family

offices

ft Private individuals

Fund

of

funds

Other

asset managers

Government

agencies

--Insurance

companies

Pension funds

Sovereign

wealth funds

Hew funds raised

(excluding capital

gainst

2007 2008

2009

2010

2011 2012

Source: EVCA/PEREP_Analytics

The

relatively low

returns to investors

from

theventure capital ndustry

in

recent

years

in

comparison

to other

illiquid asset classes, coupled with tightening EU investor regulation

(like

CRD

and Solvency II) and the impact of other financial services legislation like the European Alternative

Investment

Fund Managers

Directive

(AIFMD) and US

FATCA, have

compounded the

challenge.

This trend

towards increased

reliance on public sector investment will be

exacerbated

in the

coming

years as new

prudential

regulation comes into

effect

4

. Institutional

nvestors

will

be under

pressure

to

reduce

their

investments

in long-term, illiquid nvestments and commitments to

private equity

are

also

likely to

be

affected. As

a consequence

venture capital, as

the

smallest

part of the private equity

industry

and the

one

that

is most

willing

to back

more

innovative (and

thus

riskier)

European companies, is in danger

of

being

cut out

entirely

from the

asset allocation

strategies

of

banks,

insurance

companies

and occupational

pension schemes.

Difficulties in reaching international

investors

The

withdrawal

of

major European institutional

nvestors

from the

venture

capital asset class

creates

a

pressing

need

for venture

capital

to

reach

international

investors who

have

access

to

addit ional

pools

of capital and a potentially higher risk appetite. However, this is not easy for

(small)

venture

capital

managers, for several reasons.

Fragmentation

The European venture capitalindustry

is fragmented

and,

lthough

strategically important,

venture capital accounts for

only

approximately 3.7

billion

on

an

annual

basis

in

terms

of

investments. This

is

tiny

in

comparison to other asset classes.

5


8/32

Small fund size

European

venture

capital

funds are

also

relatively small. Between 2007 and

2012, the average

size

of European venture capital

funds

(at final closing) was

61

million

(see

Table

1

). The median fund

size only amounted to

27 million;

in

other words,

50%

of

all European

venture capital

funds were

smaller

than

27

million.

Table 1: Average

size

of

a

European

Venture Capital Fund

(2007-2012)

2007-2012

Amounts in

millions

Number of

funds

Average

(in

millions)

fund

size

Median

(in

millions) fund

size

Early-stage 7,488

126 59

25

Later

stage

venture

3,091

41 75 36

Balanced

7,018

120

58 28

Total Venture

17,597 287

61

27

Source:

EVCA\PEREP_Analytics

By comparison, the size of buyout funds would typically be

in

these ranges:

Large

Buyout:

> 2 billion

Mid-Market:

500 million

- 2

billion

Small

Buyout:

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