May 19. 2024. 2:08

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EU launches Tech Champions Initiative to keep European ownership of scale-ups


The European Union is setting up an initiative to boost equity investments and prevent its most promising high-tech companies from being bought out by foreign investors once they become successful.

The signature ceremony for the European Tech Champions Initiative (ETCI) took place on Monday (13 February) on the sidelines of a meeting of the Eurogroup, an informal body that gathers the economy ministers of eurozone countries.

The initiative started one year ago when France proposed it while hosting the rotating presidency of the EU Council, with the support of Germany, Denmark, Estonia, Greece, Spain, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Austria, Portugal, Romania, Finland, and Sweden.

At the time, the joint declaration mentioned the ambition to create a €10 billion pan-European Scale-Up Initiative to funnel equity investments into European scale-ups.

The initial money pot will be worth €3.75 billion, but its size is expected to increase over time. After a three-year-long pilot phase, the ETCI might be open to private investors.

“This initiative is a striking example of what we can achieve collectively to strengthen EU’s economic and industrial sovereignty.” Bruno Le Maire, French minister of economy, finance and industrial and digital sovereignty, said in a statement.

Funds of funds

The ETCI will not finance scale-ups directly; it is rather intended as a ‘fund of funds’. In other words, it will boost the financial capacity of existing European large-scale venture capital funds without crowding out private investments.

France, Germany, and Spain will provide €1 billion each, financing 80% of the initial sum. The European Investment Bank will provide €500 million, whilst Italy will provide €150 million and Belgium €100 million.

Whether it will be the national investment banks or the economy ministry to chip into the fund varies from country to country, depending on domestic reasons. It is still unclear what will be the source of the allocated funding, for instance, or whether it will come from the national budget or the national recovery and resilience plans.

The European Investment Bank estimates that three-quarters of European high-tech companies in their late-stage development get acquired by non-European investors, mostly American and Chinese, as they grow into more established businesses.

This late stage of development has been identified as a gap in the European scale-up ecosystems, which benefits from specialised European funds at earlier stages. Thus, the ETCI is intended to boost the financial availability for companies seeking to raise investments above €50 million.

The idea is to create an asset class for European institutional investors that can diversify their portfolio and bring steady funding to EU scale-ups in what the European Investment Bank calls a ‘positive self-sustained dynamic’.

Governance

The initiative is intended for relatively large funds, which can reach €1 billion together with ETCI’s support. That is why it has become a club mostly for large European economies compared to the relatively broader initial support.

Similarly, there was an internal push from smaller countries seeking more geographical distribution across the bloc, but the aim remains to reach the right companies that can compete with tech rivals on the world scene.

The ETCI will be managed by the European Investment Fund (EIF), a financial institution aimed at financing SMEs whose shareholders include the European Investment Bank, the European Union and private banks.

The partially-private ownership of the EIF makes it unable to invest in public funds like the European Investment Bank. The EIF’s former CEO, Alain Godard, will be the ETCI managing director, whilst the European Commission will have observer status on the initiative.

“As manager of the ETCI, we will be using our scale and expertise to nurture a sustainable late-stage growth ecosystem capable of supporting homegrown innovation,” said Marjut Falkstedt, EIF’s Chief Executive.

The EIF will provide asset management and own 5% of the ETCI for what in finance is known as ‘alignment of interest’, meaning that the European Investment Fund would also benefit from the initiative’s success.

Strings attached

The financing will come with some significant obligations for the benefitting venture capital funds, notably that they should invest at least the amount they have received in funding in the EU.

A somewhat ‘softer’ requirement is that a certain percentage of the portfolio should be invested in European businesses. The places of its operations, R&D investments, and patent registrations determine whether a company qualifies as European.

The EIF might also ask to appoint a fund’s advisory board representative.

These strings attached might provide a significant disincentive for participation in the initiative since large Venture Capital funds normally have global operations. Still, the first projects under the ETCI might be approved as early as next week.