The European Investment Fund has helped finance more than a million SMEs over the past 26 years. The EIB and EU-funded institution is now stepping up to help Europe rebuild as it emerges from lockdown, providing €2.2bn to financial intermediaries, thereby unlocking €8bn of finance.

Here, Chief Investment Officer Alessandro Tappi, who has served at the EIF for the past 25 years, explains why a coordinated response is required to nurse European SMEs back to health.

Antoine Colson : As Europe gradually begins to emerge from lockdown, just how badly affected has the region’s SME sector been by the COVID crisis?

Alessandro Tappi : European SMEs have certainly been the most severely affected, not only because they are less economically resilient that bigger businesses, but also because they tend to be over represented in sectors that have been particularly badly hit, such as tourism, leisure and retail.

Of course, a lot of support has been offered, with significant measures taken by individual countries. But these have not always been well coordinated and have only served to reinforce the fact that Europe remains fragmented. It wasn’t until mid-April, that the European Commission started looking at emergency measures to support SMEs. However, it must be said, those programmes have since accelerated enormously with a series of important initiatives.

AC : What has the EIB – and, in particular – the EIF response been?

AT : To begin with, the EIB put together a €40bn package, comprising loans to corporates and guarantees to loans for SMEs. Essentially, the EIB has refocused all of its activities towards COVID-affected countries and sectors. The European Commission has also launched an €8bn programme to support companies with guarantees, targeting the smaller end of the spectrum.

But the most significant initiative we are seeing, involves contributions being made by member states. Potentially, we could see all 27 involved, although it is more likely to be 25 or 26. Nonetheless, we are talking about a programme that has been broadly accepted and supported. Member states will contribute to a Pan-European Guarantee Fund which will cover a whole host of financial instruments.

We certainly hope that equity will play a large and persistent role. We have consistently emphasised that while emergency debt measures are important for SMEs, the equity component is critical to a well-balanced response. You need to look at the whole package.

AC : Is there not a danger, that with so much focus on guarantee instruments, Europe’s SMEs will end up with an unsustainable debt burden?

AT : We certainly hope that equity will play a large and persistent role. We have consistently emphasised that while emergency debt measures are important for SMEs, the equity component is critical to a well-balanced response. You need to look at the whole package.

Sooner or later, after all, these loans will need to be repaid. If they are not repaid, the lender will benefit from the state guarantee, but the company will go belly up. So, it is nonsensical to only have short-term measures in place. Those measures are absolutely required, but they need to complemented by a medium-term view and, in particular, by equity.

AC : How is the current situation likely to impact fundraising over the coming months and years

AT : We have continued to invest in private equity and venture capital funds, but that has tended to involve funds that were already at an advanced stage when the pandemic arrived. We do think there will be a substantial delay in new funds coming to market over the coming months. Some funds will also need to go back to investors for more capital to support their portfolio companies.

AC : What about emerging managers, which presumably will find raising a first-time fund particularly painful? The EIF has historically played a major role in this part of the market. Will that continue?

AT : That has always been part of our developmental role. However, there is no doubt that backing new teams has become more difficult during this crisis. Online interviews simply aren’t good enough. You need to meet people in person. If this situation is drawn out for a long time, we will not be able to continue our interaction with first times funds in the same way. But from a policy perspective, nothing has changed whatsoever.

AC : One of the most recent commitments you made was directed towards a Swedish impact fund. Is impact investing an important trend for the EIF?

AT : The impact investment theme is very dear to the EIF, although it still represents only three to five percent of overall investment on an annual basis. There is certainly growing demand from investors to gain exposure to this area and the philosophy behind impact investment is also now better understood by GPs. I think there is a momentum there that is here to stay.

We have seen indications that NAVs have dropped by around six percent so far. I expect that drop to reach as much as 40 percent in the not too distant future.

AC : How good a job is private equity doing in supporting its portfolio companies?

AT : It is a little too early to say. We have seen indications that NAVs have dropped by around six percent so far. I expect that drop to reach as much as 40 percent in the not too distant future. The real bad news is still to come. Fund managers that were well prepared, in terms of having follow on capital available, will obviously be best placed to support their portfolios.

I would add that this is particularly critical for venture capital funds where debt financing does not play a role. Those companies don’t have access to bank financing or guarantees, so it is absolutely pivotal for them to be in the portfolio of a VC fund that can support them through this experience.

AC : How do you think the private equity industry is faring from a PR perspective? There has been a lot of talk of a once-in-a-generation buying opportunity. Do you think this is striking the wrong chord?

AT : I think we should be extremely cautious about that message. There is no doubt that those managers that closed their funds just before the crisis are best placed in terms of deploying, and we would agree, to some extent, that there will be opportunities – in the secondaries market, for instance.

Nonetheless, for a great many managers who have sizeable existing portfolios to manage, the emphasis should be on guiding those companies through the crisis, rather than on the buying opportunity around the corner.

AC : To what extent do you think there will be lasting, systemic change, either in terms of the European private equity industry itself, or the economic and political environment in which it is operating?

AT : In terms of the private equity industry, I think it is inevitable there will be a shift towards certain sectors. Managers are already increasing their focus on medical equipment, for example. Anything that supports the digital economy will also remain a major theme in the years to come.

Unfortunately, from a political perspective, the crisis has not helped the reunification spirit of the EU. On the contrary, countries are struggling with their own, local problems, and are paying less attention to the European dimension. I believe this to be a major mistake.

Antoine COLSON, CEO and Managing Partner - IPEM

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