Brexit leaves question mark over start-up money

As Britain grapples with its decision to leave the EU, one issue has received little attention: the reliance of entrepreneurs on a group of EU officials in Luxembourg.

The European Investment Fund is a relatively small institution, with only 400 staff, but its financial firepower has packed a big punch for UK start-ups and the venture capital industry that supports them.

Between 2011 and 2015 the EIF invested €2.3bn in 144 UK-based venture capital funds and similar entities — accounting for over a third of all such investment — according to industry data.

Michael Collins, deputy chief executive of Invest Europe, says the EIF’s importance cannot be overestimated. It is “an enormous investor in venture capital and growth-capital funds across Europe,” he said. “They are one of, if not the, biggest investor.”

Its role was particularly pronounced in the years after the 2008 financial crisis, when it leapt into the breach as private funding dried up.

Some are now beginning to question what Brexit will mean for that support. Charlotte Holloway, policy director of techUK, told the FT that “uncertainty on the status of the EIF is being felt across the tech community”.

The EIF was created by the EU in the 1990s as a subsidiary of the older, and larger European Investment Bank. Unlike the EIB, which is wholly owned by the EU’s member states, the EIF is a public-private partnership, with commercial banks and other financial institutions among its shareholders.

While initially modest, its role ballooned after the dotcom boom and bust of the early 2000s as it stepped into the breach left by chastened investors, such as pension funds, which retreated from financing innovative start-ups. One of its main approaches is to invest in venture capital funds which then back entrepreneurs, allowing them to pursue their ideas.

For Tim Hames, director-general of the British Private Equity and Venture Capital Association, what makes the EIF special is not just the scale of its support, but the fact it is prepared to keep on investing in the same funds again and again.

“It does not regard its role in life as just seed capital. It is a persistent long-term investor,” he said. It “is a partner rather than just a pump primer. You can perhaps replace the money, but how do you retain that culture?”

Paul Shea, chief executive of London-based Beechbrook Capital, which provides medium to long-term loans for small and medium-sized business in the UK and Europe, has received funds from the EIF on three occasions. Most recently, the EIF invested €30m on August 1 in a Beechbrook private debt fund, which Mr Shea noted was a positive sign.

They have invested since the referendum, and we are very appreciative of that, but I guess it is unknown whether that will continue

“They have invested since the referendum, and we are very appreciative of that, but I guess it is unknown whether that will continue,” he said. “But I am cautiously optimistic that a way will be found for them to continue.”

Venture capital funds have also leaned heavily on the badge of approval that comes with EIF participation in a fund, using it to reassure and attract other investors. The Luxembourg institution will only hand money over after carrying out a heavy due diligence process, so its participation can cut down the amount of administrative work that other investors feel they have to undertake.

The EIF’s nearest UK equivalent is the newly established British Business Bank, which was created by the coalition government in 2014. One of the questions is the extent to which it would step in replace the potential EIF void that could be created by Brexit.

Ms Holloway said that the government should explore the potential of “new opportunities” such the British Business Bank, while also making continued access to the EIF a priority in the UK exit talks.

Under the EIF’s current rules, its lending is limited to EU nations, members of the European Free Trade Association, as well as “potential” candidates to join the EU. The EIF has been active in Turkey, as it is a candidate country for EU membership, and also has a targeted programme in Israel.

The fund sought to strike a reassuring tone in the immediate aftermath of the Brexit vote, saying it “will not change its approach to operations in the UK” while negotiations on the British exit are under way.

Some in the venture capital industry, however, fear that the EIF will, in practice, be unable to ignore the outcome of the vote for long.

“It will be very hard for it to look at a UK-only venture capital fund,” one industry professional said. “If you and I formed a venture capital fund this afternoon and then knocked on the door in Luxembourg, I do not think we would get more than a polite smile.”