What is European Investment Fund’s strategy for investment in private equity funds?
European Investment Fund (EIF) operates as a fund-of-funds investing in private equity funds. It does not co-invest or do directs. Being a fairly young organisation in terms of investment and having only invested in venture capital for the last five years, it is hard to judge EIF’s performance levels since it is just coming out of the J-curve. EIF has money out the door of just under €2bn, roughly two-thirds of commitments made totalling around €3.3bn. EIF’s Statutes require it to act independently and commercially, seeking an appropriate return for shareholders hence being the only EU organisation with a profit motive. However, EIF is not a profit maximiser, but profit generator. It facilitates access to finance for SMEs. EIF has about 100 staff based in Luxembourg and shortly will have staff hot-desking in other European capitals including Paris, Vienna, Rome, Madrid and others. This should be in place by the end of the year. EIF also has a large guarantees business where EIF takes risk on its own accounts. EIF has written guarantees using its own resources for €3.4bn, with additional guarantees written on behalf of the EC for €6.4bn. There is a tendency to think of EIF as purely an equity and fund-of-funds business, but the guarantees business is much larger and is complementary to the venture activities. Last month, EVCJ commented on two trends in its news analysis features; the rise of the private equity debt fund, and the trend for private equity funds to seek permanent capital by listing. EIF is well ahead on both these trends. It currently has €600m in permanent capital and expects this to reach €1bn by the end of the decade. It also has a profile of CDOs as guarantees, which have reached €2.5bn, built up since 2000. Both these businesses provide steady incomes.
Have there been any legal or cultural obstacles that have held you back when doing investments?
Not really. One of the biggest difficulties is attempting to bring more support to the early stage side of the equity spectrum. There are neither a large number of teams nor co-investor LPs wanting to get into early stage in Europe. What EIF has found is that the European market is very fragmented compared to the US market where funds are set up on the basis of a given and efficient legal framework. In Europe, the legal structure and fiscal treatment vary from country to country, which has proved to have a strong effect on cost and time required to set up equity investments. The only cultural issue really is making sure the team EIF is backing understands the territory it is investing in and does not start targeting regions it doesn’t understand.
What type of investments do you look for?
EIF looks at that part of the investment spectrum from early stage seed funds to the small end of the mid-market. Most of EIF’s commitments are in funds in the €150m to €250m total fund size range so EIF has little in common with the much larger buyout funds. By working with funds of this size it supports EIF’s policy of promoting access to finance for SMEs in Europe. Sofinnova 5 was an exception, and is our largest fund, that closed on €385m after it increased its target size by 10%. Banexi IV followed that fund, raising €130m in just a few weeks which just goes to show that if you’re liked and investors are confident in the team they will come in; it is not all doom and gloom for venture. EIF normally invests around €20m to €30m, taking a stake of between 10% and 15% in a fund. EIF looks to have a fairly important holding but leave enough space for other significant investors to come in as well. I like to think that EIF’s involvement in a fund acts as a positive reference for other investors as EIF has quite a tough due diligence process.
How do you assess the risks associated with firms you have never dealt with before?
It doesn’t really matter to us whether or not it’s a new team, the due diligence process is pretty much the same and it’s fairly thorough. The difficulty with looking just at track record is that in true venture over the last few years it has been understandably pretty poor in many cases. EIF looks at the portfolio in which the fund manager has invested because, due to the markets they may not have had the possibility to sell what may have been perfectly good investments. EIF then has a look at those individual portfolio companies to see whether they’ve got their choice of investment right or wrong. Assessing the risks in an established venture fund is really about looking at the individual portfolio composition and not just by looking at a track record (often yet to be established). For a new team, it’s obviously a much bigger risk, but EIF has invested in a few first-time teams and the results have been quite favourable so far.
How do you put together your investment portfolio?
EIF puts together its investment portfolio in a different way from other investors, as most investors are trying to get into later stage large buyouts in Europe. EIF’s investment portfolio is a direct result of its mandate to support SMEs in Europe. The portfolio is approximately two-thirds early stage and one third slightly later stage. This is calculated from the first investment of the fund, the statistics are taken from the point of entry rather than as the fund “seasons”. EIF does also get involved in buyouts, but only at the small end. In the small European mid-market you find family-run businesses looking for funds to put in place a buy-and-build strategy where the company can grow from profit rather than from any financial engineering techniques. If you look at Central & Eastern Europe buyout businesses, there have been some funds that have been very successful in such buyout buy-and-builds.
In your view, what are the most important characteristics for a good fund manager?
EIF wants to see a balanced team. Part of the due diligence procedure is that EIF talks to each part of the team individually. EIF needs to see the team is really united and can work well together.
How do you source your funds? And how do find the best performers?
EIF operates in a small part of a huge pond. I would be surprised if there’s anyone in our end of the market who doesn’t know to get in touch with EIF if they are raising a fund, because we are so specialised. EIF has invested in 220 funds altogether. The sourcing for those funds is a two-way street. EIF spends an awful lot of our resources on monitoring the existing portfolio. But once invested in a fund, investment and divestment decisions lie with the management team. EIF is on the advisory board of its funds and voices its opinions in that forum if it needs to and that’s also one of the ways in which EIF hears about future fund raisings.
How would you describe the investment environment for institutional investors in private equity today?
I think there’s still a lot of fear amongst investors in the EU venture space. The fallout from the Internet boom is still prevalent and now the pressure is building up at the other end of the spectrum in large buyouts. With the institutional investors, even if they have a 3% allocation to private equity, it will still tend to go to later stage large buyouts.
What are EIF’s plans for investing in private equity in the next year?
EIF’s VC commitments reached €475m in 2002; €139m in 2003; €375m in 2004; and €468m in 2005. What you see from those figures is that the EIF has no particular strategy to increase its commitments every year if the opportunities aren’t there. However, it has tried to maintain quite regular disbursements during the period 2002 through to today. Now the future for venture is looking a bit brighter, I would expect this year’s commitments figure to be in excess of €500m. That at least shows the market is stronger than in 2003. The radar for 2007 is also good; the deal pipeline has never looked stronger for the venture funds in which EIF looks likely to continue investing.
Francis carpenter : CV
Francis Carpenter was nominated in mid 2002 as chief executive of the European Investment Fund (EIF), which is owned by the European Investment Bank (62%), the European Community (30%) and 25 public and private banks and financial institutions (8%). EIF is the European Union’s specialist for small- and medium-sized businesses, investing in venture capital and in portfolio guarantees. Carpenter leads a team of specialists to perform commercially driven operations in line with strategic EU policy objectives. While primarily a European fund-of-funds, the EIF, he argues, addresses a range of market opportunities, also leveraging grants from the Commission and loans from the EIB, to support innovation-driven businesses in the EU and in neighboring countries. Thanks to prudent financial policies, sophisticated risk management and monitoring systems and to the strength of its management team and shareholders (some 95% are triple-A rated), the fund has been consistently rated triple-A since 2003 and has multilateral development bank status since 2004 with zero Basel II weighting. Prior to his appointment to EIF, Carpenter was secretary general of the EIB for six years where he oversaw corporate strategy, governance issues, management control, HR, IT, as well as key organisation changes, notably the formation of the EIB Group in 2000. He continues to serve as adviser to the EIB’s management on group strategy and negotiations. Carpenter first joined the EIB in 1975 as head of lending in energy and industry in Italy and later moved to Luxembourg where he held several positions including head of UK and North Sea, developing project finance, and lending in Ireland and Portugal. He was director of the credit risk department and started his career with Citibank in Paris, New York and Geneva. He holds degrees from Oxford (UK), the New School for Social Sciences (NYC) and from the Institut d’Études Politiques in Paris. He is fluent in English, French and Italian, with working knowledge of German, Spanish, and Portuguese. He is married with four children and his hobbies include early music, books, and history.