The European Commission is always looking at how it can make its financial rules work more effectively. Policy analyst James Hopegood explains what it is doing to help better connect small and medium-sized businesses in need of finance with investors willing to give it.

Money for SMEs

Making sure small businesses get the money they need to grow when they need it is at the heart of the Commission's work on Capital Markets Union. As part of the long-standing drive to do this the EU has two specialist venture capital investments fund frameworks. These are designed to get more alternative funding to small businesses, which often find it hard to get money from traditional lenders.

European Venture Capital Funds (EuVECA) invest in small businesses – for example, with no more than 250 employees – which do not have access to finance from stock markets. European Social Entrepreneurship Funds (EuSEF) invest in businesses which, again, are unable to get stock market financing and also have the achievement of a positive social impact as their primary business aim. Managers that set up funds meeting all of the requirements for EuVECA and EuSEF can then sell them across borders into all EU Member States to investors able to commit at least € 100,000 to a fund.

At the moment only fund managers with less than € 500 million of assets under management can offer these two funds. This is intended to boost the number of smaller, specialist fund managers in the EU.

However, the take-up of these funds, available since mid-2013, has been disappointing – only 34 EuVECA and just six EuSEF. So the Commission is now considering how it can make them more attractive for managers to set up. More of these funds will mean more investors putting their money into small businesses – a main motor for more jobs and growth.

Gathering feedback

Using a consultation paper, the Commission asked stakeholders what was stopping more of these funds being set up. The responses, which had to be sent in by 6 January, gave a mixed bag of results.

But there was one issue on which most stakeholders, regardless of whether they were fund managers or national financial regulators, agreed on: larger fund managers with more than € 500 million of assets under management should be able to offer EuVECA and EuSEF, too. These larger fund managers have to comply with all the rules in the Alternative Investment Funds Managers Directive, so allowing them to offer the funds should not create any new risks to consumers.

The results of a single consultation are not on their own enough to justify a change to the rules, so the Commission is now assessing all of the relevant factors to decide what, if anything, should be done. A decision is expected by the summer.

Read more on European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF)