Letter from Brussels: Pensions in their sights
EU big shots working on how to release capital flows from funds into SMEs under the new Capital Market Union (CMU) programme should look at an existing scheme with similar aims.
The mission of the European Investment Fund’s (EIF) is to “develop complementary financing solutions” for SMEs. It does this by providing them with risk capital from its own resources, and by catalysing leverage from other financial intermediaries. The EIF notes that it is one of a few in its field.
Its record dates back to 1994 and its capital base has recently been increased from €3bn to €4.5bn. The European Investment Bank is the majority owner. Investors can be pension funds, banks and other institutions, for which EIF makes available guarantee functions.
The fund’s support to SMEs might appear less ambitious than the CMU. No doubt the CMU’s prime movers – EU president Jean-Claude Juncker and Commissioner for financial services Jonathan Hill – hope to attract large investments from major investment funds.
Noting the vast assets of occupational pension and insurance funds, the Commission clearly sees pension funds as backers of CMU.
This could help solve the EU’s SME current financing gap – the European Small Business Alliance (ESBA) lists access to finance as a key challenge.
Estimates of the total absorption capacity of the SME sector vary. One Commission source puts the SME financing gap as low as €105bn. But it qualifies this noting that it is “difficult to measure”. Another Commission source cites a wider investment gap of €1.3trn, including areas outside the SME sector, and identifies 2,000 possible European projects. An EU task force on investment has found that many of these could be realised within three years.
The European Banking Federation (EBF) calculates that total combined loans by EU-based banks for 2013 came to €23.2trn. Of this, 22%, or €5.1trn, was to non-financial corporations.
One commentator says: “What can be absorbed by SMEs might still be below €1trn. Nonetheless, the amount of liquidity that could be re-allocated in all types of securities across borders could climb to €2-3trn.”
To achieve any of these targets, the CMU faces serious hurdles. The legislative upgrades would have to embrace takeover codes, corporate governance, corporate taxation, employment rules, and consumer protection.
Set against whatever the true SME financing gap figure might be, EIF’s record is small, but not insignificant. One example of its activity is the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) programme.
Under COSME, which started in 2014, the Commission provided EIF with €1.3bn, in equity and guarantees, to support SMEs. Thanks to leverage, the sum should mount up to €25bn when COSME ends in 2020.
The EIF also manages the EU’s InnovFin programme. This aims to improve the ‘bankability’ and investment-readiness of complex projects, which are judged to benefit from substantial, long-term investments.
The intention is to offer projects financial support, such as collateral, and future cash flow. The objective is to make them acceptable to institutional lenders.
The programme is part of a series of financial instruments and advisory services designed to help innovative firms to access finance. It comes within Horizon 2020, the EU research programme for 2014-20.
Also in a range of other EU programmes, which the EIF manages, is Progress Microfinance, which will soon be succeeded by a replacement, to apply until 2020.
At present, pension funds do not provide large-scale funding for the EIF. But as the EIF’s Roland Kampe, senior structured finance manager, puts it: “Closer cooperation with pension funds would be very welcome.”