09 Jul 2020
Last week, I participated in a panel session that took place during POLITICO’s Competitive Europe Summit. I did so alongside distinguished panelists: Olivier Guersent from the European Commission, Alain Godard from EIF and Veronique Willems from SMEUnited, representing the full value chain from policy-maker via public and private funding to the companies hopefully benefitting from the efforts of all the others on top of their own endeavours.
I was invited to speak about the investment model that would best guarantee the survival and growth of the European economy in a post-COVID world.
To that fundamental question, I had a “simple and straightforward” answer… or rather a complex and challenging one: There isn’t a silver bullet to deliver the perfect solution, but a mix of various sources of finance for a variety of situations and understanding how to get the balance right at each juncture will be the “investment model” that Europe needs to pursue.
My overriding concern is that in the long run, the appropriate balance between equity and debt isn’t present in the way Europes’ growth is financed.
A political preoccupation with how public money can be leveraged via debt instruments, rather than how they can be manifestly best invested, needs to change. If policymakers invested as much energy and speed in ensuring equity instruments were perfectly complementary to market developed instruments as they do in calculating how many times public debt can be multiplied by private debt, much would be achieved.
I recognize and commend the emergency debt support provided over recent months by Member States and EU institutions, including the European Investment Fund. They have been, and will remain, extremely important in the coming months; a majority of businesses, including our own portfolio companies, have faced exceptionally difficult conditions due to COVID-19 and it follows that this liquidity crisis be resolved .
During our panel discussion, I pointed out that while authorities have delivered wide support programmes, the very framework of EU competition rules – more specifically, definitions of an “undertakings in difficulty” – put and is putting equity-backed companies at a disadvantage compared to their debt-supported counterparts. This represents blatant discrimination on the basis of the financial structure, not viability, of the companies concerned. This lack of logic was echoed and emphasised by Veronique Willems from SMEUnited.
Solvency and recovery measures
This discrimination is all the more illogical as equity support, in all its forms, has been deemed by many as the right way forward to help businesses remain solvent, in the short- to medium-term, and to ultimately, in the medium- to long-term, return to growth. Many academics, experts and investors, including the EIF itself, have emphasised recently that support programmes must have equity components.
As support programmes slowly start to focus on solvency issues faced by businesses, policymakers should therefore at all costs avoid discriminating between debt and equity, and rely on the strengths of the equity model to provide capital to businesses in need.
The use of equity will also be in the interest of EU taxpayers, whose countries may suffer from the amount of debt sustained without enjoying the benefits that equity investments are able to offer in terms of returns.
Looking to the future
Shaping upcoming programmes to favour equity support may be the first step towards reducing European businesses’ overreliance on debt-financing. Actions launched as part of the Capital Markets Union revision, such as the revision of the prudential treatment of insurers’ and bank’s investment in long-term equity, may also help in that regard.
I probably have greater hopes for small steps moving forward, that the rightly balanced state aid rules, the right co-investments with EIF and the right initiatives to finalise the capital markets union could deliver, than I have in ‘great leaps’, like believing in short-cuts to build “European champions” – a highly debatable idea which took up a good part of the panel discussion.
I am not strongly opposed to the concept – though other panelists clearly were – coming from and representing an industry that would be able to adapt to policy initiatives like this. But we would hardly be the first or second investors in such big projects - that’s not the VC or PE way. We would rather invest in the infrastructure, or SMEs, that support these “champions” or indeed in the SMEs that will become the giants of tomorrow… without resorting to political short-cuts.
After all, the private equity industry, one that predominantly favours equity over debt, is a great example of how performant equity can be and how committed it is to European growth. With 2019 marking a total equity amount invested in European companies of €94 billion, we are the best example to demonstrate that equity financing is, if not the future of Europe, then a great part of it.
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