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Alain Godard: "There is a clear funding gap for the companies in the scale-up phase"
The Chief Executive of the European Investment Fund explains how the mechanisms of the EIF support the funding of innovation and shares his views on the aftermath of the pandemic.
EIF handed x Leaders League
Leaders League: What are the EIF’s available mechanisms for supporting innovation, especially for SMEs?
Alain Godard: The EIF is an institution which specializes in SME risk financing; this includes the financing of innovative businesses, which are by nature the riskiest. The EIF acts via two main business lines: 1) the EIF acts as a large pan-European fund of funds for venture capital (VC), growth and lower mid-market funds. By doing so, the EIF is a catalyst for the early-stage private equity funds ecosystem, fostering the growth of the players that in turn typically invest in highly innovative technological companies. 2) the EIF also provides guarantees and credit enhancement to financial institutions, in order to improve their lending capacity. Thanks to this support, innovative SMEs can get access to finance more easily and benefit from reduced interest rates and/or lower collateral requirements.
The EIF supports companies in an intermediary way. We believe that, as an institution based in Luxembourg, the most efficient and impactful way to do this is to rely on a network of players present locally across Europe, in order to support and encourage them to reach out to the riskier SME.
InvestEU will promote a number of EU policies, among them both the digital and green transformation feature prominently
Concerning innovation, in which aspects is the EU lacking in competitiveness?
This depends on the country, but overall, there is a clear funding gap for the companies in the second valley of death, i.e. those in the scale-up phase. They have a proven technology and a proven product but need to take the next step into commercialization, which requires a significant amount of investment. These companies are still too young to access traditional bank financing but may have already a number of VC funds in their capital.
Last February, the EIF announced a 64% increase in its share capital from €4.5bn to €7.4bn in order to better support SMEs. What proportion will be allocated to venture capital activity?
There is no direct link to the capital increase amount and the level of activity in VC. However, the capital increase will allow us to deploy our ambitious business plan over the next seven years (2021-2027) that foresees on average €2bn p.a. for VC in Europe.
What is the EIF’s approach to VC?
We also aim to build up VC ecosystems, to kick-start VC markets, like we did in Bulgaria, Greece, Romania and the Baltics: making cornerstone investments into funds, attracting private resources and catalyzing more investment, attracting expertise and mobilizing the investment community. We select VC managers based on various criteria; first-time teams get a chance, but we also ensure that the risk/ return of our investments is acceptable.
InvestEU, the EU’s investment program for 2021-2027, is promoting the digital transformation of the EU economy. What are the main areas of innovation in the bloc, and how will you support them?
There are many high-tech areas that benefitted from the crisis, like digital or healthcare and these are typical areas for VC investment, this also being the reason why VC weathered the storm pretty well. Many innovative activities happen in these markets and the crisis provided a push. We need to turn the need to re-launch the economy into an opportunity, by focusing on the key sectors that will ensure a green and digital future.
InvestEU promotes a number of EU policies, among them both the digital and green transformation feature prominently. To achieve this, the EIF will provide products on both the equity and the debt sides. On the equity side, it will invest in funds that invest in innovative technologies that address those challenges, as well as in funds that will roll out the digital and green infrastructures of tomorrow. On the debt side, it will provide guarantees to reduce the risk involved in lending to SMEs and midcaps that invest in those areas.
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