EU leaders met in Brussels today for a European Council that debated closer banking union, the digital economy, innovation and Europe’s economic recovery. Heads of state and governments agreed that there are signs growth is returning to Europe but rightly stressed the need for initiatives to boost innovation, research, productivity and job creation – all areas where private equity and venture capital can make a significant contribution.
The Council’s conclusions noted that “Member States that have continued to invest in research and innovation have fared better in the current crisis than those who have not…investment in research and innovation fuels productivity and growth and is key for job creation.”
These statements won’t have come as much of a surprise to those active in European private equity and venture capital as academic research shows that private equity and venture capital drives innovation, productivity and competitiveness in the businesses it backs.
Venture capital – one part of private equity – has a business model based on identifying and supporting innovative start-up business. By providing investment and expertise it helps these businesses take the next step, and as these businesses get bigger they have a beneficial effect on both local and European economies. Venture can grow an SME into a global business. A great example of this is Skype, which began life as one man’s idea in Estonia and is now a truly global giant.
An independent study by Frontier Economics, commissioned by Invest Europe, found that private-equity backed companies are better at managing and commercialising innovation than their peers.
Private equity backed companies account for up to 12 percent of all industrial innovation and for eight percent of all industrial spending on research and development – punching well above their weight when you consider that they represent less than six percent of total private sector employment in Europe.
Frontier Economics estimate that the total economic value of patents granted to private equity backed companies in Europe over five years to 2011 is worth up to 350 billion euros to the European economy.
In biotechnology, private equity backed companies are nine times more likely to create patents and their productivity is boosted by 4.5 percent to 8.5 percent during the first three years after investment. You can read more about the study here.
These are contributions that European private equity and venture capital is already making, but well-designed EU public policy could increase this significantly. Or, if badly-designed, impede private equity’s contribution.
The Council’s commitment to the Horizon 2020 strategy, which Invest Europe supports, is good news for Europe’s start-ups. But we now need EU leaders to be prepared to back new ways of encouraging venture investment, such as the Funds-of Funds proposal – a series of proposed public/private partnerships which aim to draw more private money into the European venture.
And all the European institutions – not just the European Council – have to be conscious of the risk that other regulation – particularly in financial regulation – could have unintended consequences for private equity and by extension its ability to drive innovation.
Solvency II, for example, which could force insurers to hold excessive amounts of capital and discourage them from investing in long-term assets like private equity funds (read more here). Or measures on the structure of banking which risk stifling investment into the sector and cutting off the innovation it can offer.
Invest Europe continues to speak with all European policymakers on these important issues but it’s encouraging for the future that Europe’s leaders recognise the importance of innovation for entrepreneurship, job creation and the economic recovery.