Fund proposes to buy into shares bolstering SMEs

Date: 07/03/1996

THE European Investment Fund (EIF) is seeking new powers to buy shares in funds created to support small and medium-sized enterprises (SMEs).

EIF President Georges Ugeux has decided to ask its shareholders to set up an equity participation fund worth 75 million ecu over three years when they meet in Lisbon on 18 June.

The fund does not normally invest directly in SMEs, but provides loan guarantees to groups of firms in a form determined by the financial intermediaries with which it is dealing.

The new 75-million-ecu instrument would be highly flexible, taking an out-and-out shareholding or guaranteeing 'subordinated' or slightly higher-risk debt.

Overall, the aim would be to 'leverage' the effect of the fund's investment, which means that the mere presence of the EIF would encourage other shareholders or lenders to take part at terms preferential to the SMEs.

“The EIF would never take individual stakes in individual companies. We would be a very remote and bad shareholder, so we need to do it through local structures,” said Ugeux. “This is a gold mine, but it requires a lot of preparation and discussion with the local financial intermediaries.”

Ugeux wants to ensure that SMEs win better access to investment capital. Traditionally, small start-up firms have to rely on straightforward bank debt secured on their assets, often the owner's house. Even when these firms start to grow, family businesses are often reluctant to expand aggressively because this means having to bring in outside shareholders.

The fund aims to provide a much wider range of financing options to SMEs to avoid this kind of dilemma.

The EIF intends to provide a taste of things to come when it announces its participation in a 40-million-ecu fund to be set up by two UK banks with the aim of providing unsecured finance to SMEs.