EIF terms come under fire

In 2012, the EIF invested in around 25 venture capital funds with an average ticket of €20m, delegates at the EVCA Venture Capital Forum in Berlin heard on Friday. “That means that over the four-year investment cycle, it backs around 100 funds. Given that there are probably 110 active VCs in Europe, its penetration rate is extremely high,” said Alex Brabers, chief of business operations at Gimv, speaking at the conference.

“We have a very large market share and that’s not good news, even for us,” said Matthias Ummenhofer, head of venture capital at the EIF. “What we try to do is help the ecosystem develop in Europe and to become successful. We don’t try to be dominant – we are a public-private partnership,” he said.  

But as its dominance grows, is the EIF becoming too aggressive? This was Brabers' probing question, referring to the requirement placed upon some GPs to make a 6% management commitment to the fund.

The LP's terms came under fire at last week's EVCA Venture Forum in Berlin

“Management commitment started out at 1%," said Ummenhofer, "which came over from the US mainly from top-quartile funds that could – to some extent – dictate the terms. But it’s the most important instrument we have to align interest between the GP model and the LP model.”

The discussion then moved to hurdle rates. Brabers asked: “Several European VC funds do not have a hurdle rate; what I’m hearing is that the EIF really insists on a hurdle rate of 6%, 8%... does it provide the aligned incentive?”

“I agree,” replied Ummenhofer. "The whole idea of the hurdle rate, which to some extent has been established in Europe very early on, has to be rethought substantially. We are doing this; this year we are signing many funds where we move away from a certain percent hurdle rate per annum to a multiple. The truth is, the current system doesn’t work.”

Losing out
But what is the impact of the difference in terms proposed by the EIF and private LPs? According to one delegate, private LPs had even refused to commit to the fund if the EIF committed capital too. Another VC in the audience asked: “Coming back to the general terms situation including the GP commitment, when you are in the position where the other LPs are happy with the terms situation and you insist on a different outcome, this can sometimes lead to losing the ability to invest in some of the best managers in Europe. Why would you not be willing to compromise to meet the private LP base?” This, the GP contended, leads to the fund manager having to choose between the EIF and its private LPs. Is there a need for more convergence in terms between the EIF and private LPs?

“Some people look at us and say we’re more commercial than the commercials," said Ummenhofer. "And yes, that’s probably true in a sense. But 95% of the money we invest is taxpayers’ money; it’s money we have to take care of properly. There is a responsibility to do our job right, which, maybe, if you look at from a GP’s point of view, looks like we’re going too far.”

But as risk-averse private investors continue to avoid venture capital, leaving public bodies to account for 40% of overall commitments to venture funds, the EIF has a pivotal role to play in sustaining the industry. Venture players should perhaps be wary not to bite the hand that feeds it.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Fundraising
• Venture
• European Investment Fund
• EVCA
• Top story