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European SMEs and Social Businesses

Driving acccess to financial capital for European SMEs and social businesses

December, 2011

As innovator and enabler of innovation for our clients, Excellis Business Consulting welcomes the two announcements made on 7th December by the European Commission on:
The proposals are aimed at facilitating the sources of venture capital to raise funds across the European Union (EU) and lend more money to innovators and start-up businesses. Plans are also in place to help social enterprises that are making a social impact along with generating commercial profits.

In 2008, Excellis Business Consulting was one of the forerunners in voicing our support for the need for cohesive, comprehensive and ‘out of the box’ approaches to financial mechanisms, structures and policies to enable SMEs across the EU to realise their aspirations and achieve their optimal potential, without over-reliance on debt-leveraged, traditional “run of the mill” financing solutions.

In 2011, Excellis also launched OSMEO (Opportunity SME Observatory) to drive much needed reforms and improvements in publicly funded projects or business support measures aimed at SMEs. Excellis also lent cautious support to the Start-Up Britain initaitive launched by the UK Prime Minister, whilst recommending further action - a viewpoint subsequently endorsed by a number of leading industry figures, including Sir Richard Branson, who pressed for an SME manifesto.

Excellis maintains that whilst the Commission plans are a step in the right direction, the real test of their implementation will be through their practical and timely effectiveness in driving economic recovery within the European Union.

Improving access to financial capital for SMEs

According to these plans, the European Commission will reinforce its loan guarantee and venture capital facilities under the Programme for the Competitiveness of Enterprises and SMEs (COSME). These loan guarantees are used in cases where the entrepreneur or the small enterprises do not have sufficient collateral to offer and the bank will not provide a loan. Ninety percent of the beneficiaries have 10 or less employees, and this is the category that has most difficulties in securing financial loans. The average guaranteed loan is about €65,000.

In addition, the loan guarantee scheme would be extended to the cultural and creative sectors†. The Commission also highlighted that the European Investment Bank would allocate 10 Billion Euros for SMEs for next year. The Commission will improve the monitoring of SME lending in order to better assess the impact of measures in support of SMEs' finance and the new capital requirements applicable to banks.

Detailed plans have also been revealed to promote venture capital for SMEs in Europe. These proposals include creating a uniform "single rule book" governing the marketing of funds under the designation "European Venture Capital Funds".

A "European Venture Capital Fund" is defined by three essential requirements:
  • It invests 70% of the capital committed by its sponsors in SMEs;
  • It provides equity or quasi-equity finance to these SMEs (i.e. 'fresh capital'); and
  • It does not use leverage (i.e. the fund does not invest more capital than that committed by investors so is not indebted).

All funds that operate under this designation must abide by uniform rules and quality standards (including disclosure standards to investors and operational requirements) when they raise funds across the EU. The "single rule book" will ensure investors know exactly what they get when they invest in European Venture Capital Funds.

The Regulation will provide all managers of qualifying venture capital funds with a European marketing passport allowing access to eligible investors across the EU. This is a marked improvement over the existing rules in the area of asset management, in particular the 2011 Alternative Investment Fund Managers Directive (AIFMD - see MEMO/10/572) as the existing passport provided under AIFMD is only applicable to managers whose assets under management are above a threshold of €500 million. In addition, the rules of the AIFMD create a legal framework typically aimed at hedge funds and private equity firms, and are less suitable for the typical venture capital fund which would get a tailor-made regime.

Improving investment funding for social businesses**

The European Commission has also laid the foundations for a strong European market for social investment funds. It has introduced a new "European Social Entrepreneurship Funds" label so investors can easily identify funds that focus on investing in European social businesses**.

The approach is simple: once the requirements defined in the proposal are met, managers of social investment funds will be able to market their funds across the whole of Europe. To get the label, a fund will have to prove that a high percentage of investments (at least 70% of the capital received from investors) is spent in supporting social business. Uniform rules on disclosure will ensure that investors get clear and effective information on these investments.

According to the internal Market Commissioner Michel Barnier: "Social businesses embody just the kind of smart, inclusive and sustainable growth and innovation that is so important for today's European economy. Our new measures will help build these businesses across Europe, ensuring they get the financial support they need so that they can grow – especially in these times of crisis."

Audacious Innovation

† Excellis' ongoing initiative Innovate with Web2i market-tested initial requirements of the cultural/creative sectors, and provided feedback on our findings via the EU 2010 Consultation Green Paper. Innovate with Web2i is currently in its next phase of market deployment.

** The term social business in this context means a social enterprise that is making a societal impact along with generating commercial profits. It should not be confused with the marketing fad of a "social business", which is intended to imply a business utilising social networking practices, applications and systems.

Excellis Business Consulting operates in industry sectors where change is a constant, and management, innovation and technology trends and practices evolve more rapidly than elsewhere. Therefore, for articles published over 18 months ago, we recommend that you should contact us to ensure that you receive the most up-to-date information pertaining to the subject matter of the article.