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At the centre of this shift is the European Commission’s Capital Markets Union Action Plan which seeks to increase funding options for Europe's businesses and to break down cross-border barriers to the free movement of capital.
These proposals, being driven by Commissioner Jonathan Hill, strike me as being different to so many of the regulatory initiatives I’ve seen during my time in Brussels, mainly because the Action Plan sets clear priorities for early action. We have already seen the publication of the revised Prospectus Directive, which aims to alleviate the administrative burdens and costs for companies seeking to raise finance on Europe’s public markets.
This practical step will unlock capital for thousands of entrepreneurs and help reinvigorate capital markets across Europe. Critically, the Prospectus Directive revision serves to show that practicality is at the heart of the Commission’s proposals. This is something I witnessed first-hand when Commissioner Hill recently toured London’s Tech City to listen to the opinions of the founders and backers of three dynamic young UK businesses: Secret Escapes, iZettle and Algomi.
What is clear is that this principle of free movement of capital and the current sense of momentum must not die. The last year has demonstrated beyond all doubt that European entrepreneurs can build and scale up companies.
So what could this coming year hold to help unlock Europe’s untapped potential?
A fully functioning venture capital market is crucial in helping small and medium sized enterprises become global champions and increase the dynamism of our economy. If European venture capital markets were as mature as those in the US, Jonathan Hill said in his speech to launch the Capital Markets Union Action Plan, companies would have raised an extra €90 billion over the last five years.
The proposals to create a pan-European venture capital ‘fund-of-funds’ – on which the Commission is set to provide further details later this year – will be critical. At around €60 million, the average European venture capital fund is only half the size of that in the US. Given large institutional investors, including pension funds and insurers, are often unable to commit less than €20 million to make their asset allocation efficient and effective, many who may otherwise want to commit to a venture fall at the first hurdle.
I’m hoping 2016 will be the year a model that encourages more institutional investor participation in the asset class is introduced. Let me be clear, this is not about putting ever more public money into the asset class: 35% of capital currently committed to European ventures already comes from national and regional governments in Europe and the European Investment Fund. This is about leveraging these funds, increasing the scale of venture capital funds and using them as a catalyst for private sector investment.
Fund-of-funds managers have experience of working and attracting mainstream investors, which could include Canadian pension funds, Asian sovereign wealth funds and European insurers. They also possess the skills required to identify and invest in managers capable of consistently delivering the best returns. Not all companies have this ability or can point to a sufficiently long track record to attract the financial support they need to evolve.