Growth capital | CDP

Growth capital

European financial instruments to support business and investment, and the role of national development banks

The crisis we are experiencing is due, in large part, to excess private debt, in turn a consequence of an abnormal growth in financial leverage (the ratio between equity and debt). The debt has put the economic system under stress, with three main effects:

  • significant reduction in public resources to support the economy, due to the cost of rescuing the banks and, above all, the negative effects of the recession on the public finances
  • reduction in the supply of medium and long-term credit to the economy, due to the process of adjusting bank balance sheets
  • reduction in the supply of capital for enterprises (already partially undercapitalised), due to a general drying up of lending channels in the economy and changed perceived risk.

This has created a "vicious cycle" among the main sectors of the economy (banks, businesses and public sector) that seems bound to have negative long-term consequences on growth.
Increasing capital in the economy

To revive the economy, the following need fresh capital:

  • banks to reduce leverage, come into line with Basel III rules and start lending to business again
  • businesses to improve their debt and capital ratios, access new financing and start investing again in growth and international expansion
  • infrastructure, especially new infrastructure, to pave the way for sustainable long-term business plans.

What can the public sector do, together with the private sector, to facilitate this process?

In general, especially in Europe, we need to create the best possible conditions to attract and activate domestic and foreign investment. The conditions for achieving this are now well-known:

  • a stable political, institutional and public finance background (at European and national level)
  • a regulatory system (accounting and tax) that does not penalise, but rather incentivises, medium- and long-term investment
  • the creation and strengthening of public instruments and public-private co-investment in risk capital, through the offer of "patient capital" (and guarantees) over a long-term horizon.

This Report deals mainly of the third type of intervention: the role that large development banks and European public and public/private agencies – either independently and/or together with the EIB and the European Commission – have had in creating financial instruments to provide capital to the economy and catalyse private investment and savings on national and international markets.

The role of these institutions is becoming increasingly important to ensure the necessary resources to meet the economy’s demand for capital, in the light of the difficulties faced by the private sector in increasing their commitments in venture capital and of the public sector in implementing economic policies to support the economy.

European development banks

The major European development banks are financially solid institutions that, while operating on a market footing, are characterised by being instruments of government policy rather than simply being profit-oriented. This enables them to:

  • invest with longer time horizons than normal market operators
  • require lower returns, albeit sufficient to provide a return on capital.

Moreover, their activities should be regarded as complementary and not in competition with the market, given the need to intervene in cases of market failure. Accordingly, there is therefore no danger of a “crowding out” of private capital.

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