The EU Competitiveness Compass

Today’s publication of the “Competitiveness Compass” for the European Union is a first and important step towards the creation of EU policies that will incentivise EU innovation.

As noted in the report, the EU current financing structure hampers start-up creation and scale-up development. These innovative companies require equity capital rather than debt finance – and EU financial institutions are typically unable to provide them with the capital required. As such, today’s exercise is a crucial one, and Invest Europe fully agrees with its assessment that we need to do more to finance our competitiveness.

As the association representing venture capital, growth and private equity managers, Invest Europe has long considered options that could increase both the availability of capital that can be invested into start-ups and scale-ups and the ability of these businesses to receive it. And our – somewhat blunt assessment of the Compass is that although aimed in the right direction, it isn’t always addressing the true needs of the industry we know well.

Let us take two examples where we feel the level of ambition of the European Commission does not yet match the unique challenge our continent is facing.

Lack of equity financing

The only solutions currently announced are changes to securitisation rules and the creation of a “low-cost” long-term savings products. Both initiatives are valid in themselves – but it is unclear how they would channel capital into start-ups, which typically do not receive bank financing and are only partly funded by direct retail capital.

The real solution here remains opening up the ability of large institutional investors, including foreign ones, to commit capital into long-term equity funds, helping in turn drive that capital to start-ups and scale-ups. This typically requires changes to Solvency II, CRR and IORP. Such objectives were in fact part of the Draghi report: it is disappointing they have already evaporated as priorities in the Compass - irrespective of how difficult these changes would be.

Defining start-ups to better help them

The idea of creating a small mid-cap category is an important one – and so is the promotion of a start-up definition. Yet, nothing is yet said about the problems faced by many start-ups funded by equity capital, which are losing their SME status when financed by venture – for the sole reason that equity ownership is not distinguished from trade group ownership. There cannot be any progress on the treatment of start-ups without a redefinition of the concept of control that would make it easier for them to benefit from venture and growth support.

The two examples above are a few of many where general announcements will have to be tested and structured based on the true needs of innovative businesses (and those that finance them).

We at Invest Europe will be happy to continue providing EU lawmakers with the support they need to understand the specificities of our ecosystem – and how we can transform EU law into a framework that truly, and fully, supports innovators.