EC Approves UK's Enterprise Capital Fund Plans

by Ulrika Lomas, for LawAndTax-News.com, Brussels

05 May 2005

The European Commission announced on Tuesday that it has approved a scheme that promotes the establishment of venture capital funds for small to medium sized businesses throughout the UK.

Speaking regarding the decision, which states that the funds are compatible with European state aid rules, Commissioner Neelie Kroes observed that:

“Small and medium sized businesses have an important role to play in strengthening the European economy and creating jobs, and this scheme will help them to flourish in the UK. This scheme is a good example of how state aid can play a very positive role, notably in boosting competitiveness in areas where the market often fails to provide adequate finance.”

The objective of the scheme put forward by the UK government is to increase the amount of equity funding for small and medium-sized enterprises (SMEs).

Under the newly approved rules, Licensed Enterprise Capital Funds (ECFs) will combine private and public money and use these funds to supply equity finance to SMEs. Public money will be used solely to leverage private money and will have to be repaid by the ECFs with interest plus a share of the profits for the public.

The approval follows the launching, in May 2004, of a formal investigation under Article 88(2) of the EC Treaty in order to give interested third parties the opportunity to comment on the actual size of the equity gap in the United Kingdom.

The Commission received comments from 20 interested parties, showing that there was a great interest in the issue. All comments received were positive and supportive of the measure proposed by the UK, and stated that there is an equity gap of at least €3 million.

This is due to relatively high transaction costs, which mean that private venture capital firms are not interested in providing “small” amounts of equity and consequently move to larger deal sizes. The result is a finance gap in the small to medium range deal size that slows down company growth and job creation.

According to the EC, this trend was not only certified by private venture capital funds active in the same market, but also by academic studies and by other Member States.

Recommended