Dispute over EIF equity shares threshold

Date: 02/05/1996

By Tim Jones

A PROPOSAL to give the European Investment Fund powers to take equity shareholdings is being delayed by minor differences over how much of its capital it can expose.

The Luxembourg-based EIF has asked its shareholders - the European Investment Bank, the European Commission and a group of 76 banks - for the right to take equity stakes mostly in specialist funds created to finance small and medium-sized enterprises (SMEs).

Since its creation in June 1994, the EIF has simply carried out its mandate to provide guarantees for loans to SMEs and Trans-European Network (TENs) projects out of a total 2-billion-ecu capital base.

However, EIF President Georges Ugeux wants to take advantage of the extra flexibility offered to the fund when it was set up, allowing it to begin equity operations two years after its creation.

As a result, the supervisory board will ask the 18 June general meeting of the fund - which is 40&percent; owned by the EIB, 30&percent; by the Commission and 30&percent; by the banks - to allow it to create an equity pool of 75 million ecu over three years.

The EIB shareholders, represented by its board of directors, took a decision to allow the fund to take maximum 20&percent; equity stakes in order to limit the volume of this business, with the possibility of raising this ceiling at a later date.

A second draft changed this threshold to 30&percent;, and this has prompted differences between member states. A qualified majority in support of the proposal has not yet been found among EU finance ministers, but they will have to take a decision at their next meeting on 3 June in time for the Lisbon general meeting.

Financial counsellors preparing the coming ministerial meeting expect the differences to be ironed out in time for the June meeting, allowing the EIF to take on its new role.

Ugeux wants the fund to be given the expanded powers so it can help young SMEs obtain finance on non-onerous terms.

He has identified the kinds of schemes the EIF would be keen to finance through shareholdings, such as a fund taking share participations and lending money to SMEs in Andalucia. “We might put a certain amount of money into the equity, we might guarantee some of the subordinated loans, we might guarantee part of the debt and put together a package that leverages and allows that local fund, managed by local experts, to be an instrument of leverage,” he said in a recent interview.

The EIF will negotiate the exact nature of its participation with local financial intermediaries, but with the aim of getting involved at all levels of financing - straight equity, so-called 'quasi-equity' (including preference stock), and high-quality and slightly higher risk lending.

As it does with all its funding activities, the EIF wants to act as a 'lever' to pull in private sector finance for young start-up companies via specialist regional funds.

Ugeux and the EIF have identified financing for young firms as a particular problem, especially in countries where it is almost impossible for small entrepreneurs to get hold of finance without securing it against their assets, usually their homes.

Similarly, the fund is looking for alternatives to the kind of straight equity finance that other family firms see as a threat to their ownership.

While they may be keen to expand the business, they are far from happy about letting in other shareholders. Novel forms of funding would be appropriate for these enterprises.