One of the questions that is being considered by commentators and fund managers is whether the European Investment Fund (EIF) will continue to be active in Britain post Brexit.
Headquartered in Luxembourg, the EIF was established back in 1994 with the role of providing finance to small and medium-sized enterprises (SMEs) in Europe.
The EIF is majority owned by the European Investment Bank which is in turn owned by the 28 member states.
A string European financial institutions also own minority holdings in EIF. So what has the response been from the EIF so far?
Shortly after the referendum result the EIF announced that “at present… it will not change its approach to operations in the UK”.
Of course the words “at present” are an important qualifier.
There are currently different views in the market place, some confident that the EIF will continue to invest in Britain citing that it presently invests in Israel. Others are less confident that this will be the case. At this stage it is largely speculation, as so much will turn on the negotiations and what form Brexit will take.
So why does it matter for UK start-ups and growth businesses?
The EIF has operated in the UK since 1996 and by the end of 2015 it had funded 144 UK private equity (PE)/venture capital (VC) funds and 27,700 SMEs, with total commitments of €2.3 billion in the UK between 2011 and 2015.
That is not to say by any means that the EIF is the sole source of venture finance here as VC funds raise their funds from a series of international financial institutions, pension funds and private wealth.
But it should be noted that the EIF has often been the cornerstone investor in funds providing both significant financial commitment and the credibility of a state backed institution which enables fund managers to attract other LPs and launch their funds.
Continued access to the EIF would be advantageous for the industry and those in the industry would want to see it being factored into negotiations with the EU.
If this is not forthcoming then how will the gap be filled?
The UK already has a home grown institution with similar objectives to the EIF. The British Business Bank plc (BBB) is the UK government owned development bank tasked with improving access to capital and credit for SMEs.
It was established in 2014 with £3.1 billion of finance to SMEs now supported by BBB according to its 2016 annual report. The Enterprise Capital Fund (ECF) programme run by BBB (previously run by Capital for Enterprise Limited) has invested over £295 million in more than 225 companies ECFs include some very well-known funds in the industry such as Passion Capital ECF, Notion Capital 2, Episode 1 Ventures, IQ Capital Fund 1 and Longwall Ventures ECF to name but a few.
If the UK is unable to secure continued access to the EIF, then it will need to look at substantially increasing the amount of resource and financing that is available through the UK government.
At present any government backed funding needs to comply with EU State Aid rules, so there is potential for the UK government to do more to provide funding for UK venture capital funds if those restrictions no longer apply.
Of course we will be told we cannot have our cake and eat it, so it is unlikely that continued access to the EIF would be achieved without also agreeing restrictions on State Aid as part of that package.
Government funds aside, what other alternatives are there for bolstering UK investment. Born as a response to the financial crash in 2008, the Business Growth Fund (BGF) was launched in 2011 as an independent fund of up to £2.5 billion backed by Barclays, HSBC, Lloyds, RBS and Standard Chartered with a brief of supporting growing UK businesses with growth capital to SMEs.
The main fund provides £2 to 10 million of growth capital to more established SMEs. BGF Ventures (part of BGF) is a £200 million venture capital fund focussed entirely on early stage UK tech businesses, making it the largest UK fund of its type.
BGF has said that it is on course to have £1 billion of investments committed by the end of 2016. This is a huge achievement and underlines what can be done is to support entrepreneurs in response to economic events.
Whilst no decision appears to have been taken at this stage, a loss of access to the EIF would be a blow the UK venture industry unless steps are taken to compensate for this. But rather than asking how that gap can be plugged, the UK needs to look at the bigger picture.
Regardless of Brexit and EIF activity in the UK, if British companies are to compete with their US counterparts then the UK must increase access to finance at all stages in the growth cycle.
This will need a joined up approach from the Government and key financial institutions in order to harness the capital needed and to improve the infrastructure for its deployment and management.
Rory Suggett is a partner in the corporate team at Ashfords LLP.