Risk capital for growing world-class companies: challenges for European policy

Abstract

Executive Summary: The availability of risk capital in all its variants is a critical resource for a modern and adaptive economy. The effective exploitation of new knowledge requires a commercialisation process that is conditional on informed, skilled and risk accepting investors both as individuals (Business Angels) and professionals (Venture Capitalists). Similarly, the restructuring and reinvigoration of large established corporate businesses, often on an international or global scale, has been materially assisted by the advent of a finance industry focused on Management Buy-Out activity. In Europe, the provision and use of equity-based financing is both patchy across countries and materially lags behind the levels of development seen in the USA. Both inefficiencies in the supply of venture capital and in the demand from informed and growth-oriented entrepreneurs has resulted in parochial and nationally focused risk capital industries that are individually and collectively weaker than their US competitors. Global trends in both the provision by and demands of institutional finance seeking more and larger management buy-out opportunities, as well as the increasingly borderless identity of new technology paradigms, is threatening the relevance of Europe’s current, predominantly country-based model of private equity. There is a real need to develop a more pan-European private equity industry. In creating an Entrepreneurial Europe, policy makers need to recognise that: 1. Business Angels are a fundamental and early building block of an innovative and adaptive enterprise community. For early-stage ventures, they are collectively more important than venture capital. The national fiscal environment should incentivise and reward risk taking by entrepreneurs and their early-stage financial backers. 2. The fiscal environment should allow inter-country tax transparency. The costs associated with avoiding multiple taxation by private equity firms are a material barrier to a European market for risk capital. 3. Government should work to encourage the involvement of private and commercial investors rather than seeking to substitute for their unique skills by acting as a direct investor of public monies into new enterprises. Where government supports ‘hybrid’ venture capital funds by co-investing, it should stipulate that such funds must be of a commercially viable scale. 4. Governments themselves can be highly entrepreneurial. Yet, inter-country learning from both good and bad enterprise policy initiatives is poor and should be addressed by greater international contact between policy makers and academic experts.