17 Mar 2021
Why would an industry that has private in its own name be interested in public money? Counterintuitive? Not so much. Yes, venture capital and private equity are in fact mostly accustomed to solving our own problems on market conditions. And it is also true that we are not an industry that cares much for whining and whimpering and demanding public sector money. And yet…
State aid and private equity
In the smaller end of our market for investments, state aid is sought by start-ups and scale-ups that benefit from the active involvement of venture and growth funds. Policymakers understand – almost as well as investors - the impact of these businesses on a nation’s economic tissue and their role as drivers of innovation. Lending a hand to these companies has rightly and for many years been deemed critical to the vitality of the national ecosystems.
But the COVID-19 crisis has shown that state aid is not all about anticipating the future – it is also about facing the present. As lockdowns were introduced to mitigate the health impact of the pandemic, measures to guarantee loans were the necessary other end of the policy pendulum for private firms to simply survive the long COVID-19 winter. That was as true for private equity-backed businesses as it was for others.
Technical, not trivial
Conditions to access state aid may seem a technical issue but it is not a trivial one for companies whose survival depend on it. This is why acronyms you have never heard of, such as GBER (General Block Exemption Regulation) or RFG (Risk Finance Guidelines), although being about as sexy as a tax code, probably are as relevant as…a tax code.
Whatever the reason behind the public support, state aid has long been an EU affair. Because of the risk of unfair competition between Member States, EU Treaties made it soon clear that national governments can only support companies while aid is meeting a series of strict conditions. In practice, businesses that are either small, recently set up and/or are not in jeopardy are much more likely to be eligible under EU rules than others.
This starting point makes perfect sense. Taxpayers' money should not be used to help those well-established and/or are big enough to handle their own fights in the schoolyard, nor should they be thrown around as good money after bad investments. But it is not easy as one might think to determine what is a well-established businesses and what is a crumbling one. And that is all the more true when it comes to companies backed by private equity, a form of financing that has its own specificities.
Pretty simple questions can after all have pretty complex answers - and the upcoming review of the GBE Regulation and of the RF Guidelines – scheduled later this year - offers an important opportunity to simply fine-tune the regime. Here are three examples that deserve further consideration to get the state aid framework right:
Defining difficulty is… difficult
Current rules consider a business to always be in difficulty – and as such not eligible for aid - irrespective of the company’s actual viability, if the accumulated losses are equal to or greater than 50% of their subscribed share capital.
This very bank-centric metric is not at all relevant to the private equity world, where the (long-term) success of businesses is rather determined by the viability of a company. While this can be difficult to set into ratios, the relationship between net debt of the company and its EBITDA however comes much closer to relevance than the dogmatic bookkeeping of the rules today.
At any rate, it seems thoroughly illogical, that state aid can not be granted to companies with a proven market test – namely that VC or PE investors believe in its viability and have put their own and investor money behind this analysis -because of bookkeeping based rules.
Don’t think – and count - twice
Many small and medium-sized businesses cannot get state aid because they are backed by venture and private equity managers. When being financed by our members, PE or VC equity-backed businesses companies are not deemed to be small enough to get support because they are “linked” to the fund manager and to the other companies in her portfolio. This is simply wrong, given the fundamental differences between private equity ownership in a portfolio and the companies being part of a conglomerate or trade group. For one (but there are many others): cash is simply not pooled between companies within of a portfolio and there is, therefore, no financial support that can be granted from one company to the other.
Age is just a number
When a company is older than 7 years, it no longer qualifies for start-up public support measures. This probably fits some types of companies in some “traditional” sectors. Unfortunately, it does not for truly innovative ones which, with vast research and development challenges beyond their early size, will take a very long time to grow. The current 7 years (from the first commercial sale) limit to be considered a newly established business would deserve to be expanded to cover start-ups in certain sectors where growth simply takes more time.
Ironically, 7 years is the exact time since the Global Block Exemption Regulation and the Risk Finance Guidelines entered into force. While it may not be enough for some businesses in some sectors to be fully grown to stand alone, it should be enough for a regulatory framework to move forward and walk the right walk …even if it’s on a tightrope with difficult balancing.
So if answering questions is always harder than raising them, it is definitely time for policymakers to reach again for the buzzer.
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