State equity fund to finance SMEs and start-ups

6 mins read

Cyprus seeks to address challenges facing small and medium-sized enterprises (SMEs) in obtaining financing, by creating a state Equity Fund which will inject cash into capital-starved businesses and start-ups.

Currently, the lack of a financial ecosystem which would allow small business and start-ups to draw capital from equity and venture capital is forcing companies to rely on banks for financing.

The equity fund was suggested by the Cyprus Economy and Competitiveness Council, an advisory body to the President, as a measure to cover what it saw as a €35 mln gap in financing needs of Cypriot SMEs.

The plan involves initial capital of €5 mln will be provided by the government in 2020, while the total contribution is expected to reach €20 mln by 2022, depending on investment in the fund.

The Finance Ministry has already asked for the House to lift a freeze on the initial €5 mln, with MPs, however, appearing reluctant to do so as they raise concerns over the way the money will be distributed.

Talking to the Financial Mirror, Andreas Assiotis, member of the Economy Council, said the creation of the fund appears to be a necessity as Cyprus lacks one of the essential pillars of a healthy economy — an ecosystem financing businesses, as well as start-ups.

“This issue emerged as we have seen the weakness of SMEs to obtain funding apart from lending from Cyprus’ commercial banks.”

“Alternative sources of funding are needed in the sense that someone, the state, international investors will need to come in to fund these companies by providing equity funding.

Currently, this cannot be done as there are no equity funds or venture capital active in the market,” Assiotis said.

Juncker Plan

Asked whether the state Equity Fund could constitute state aid, Assiotis clarified that Cyprus would not be the first to put together such a fund, and it would be along the lines of the Juncker Plan or Invest Europe.

The European Commission’s Investment Plan for Europe (EC IPE) known as the “Juncker Plan” or the “EU Infrastructure Investment Plan” is an ambitious infrastructure investment programme launched by EC President Jean-Claude Juncker in November 2014.

It aims at unlocking public and private investments in the “real economy” of at least €315 bln over a three-year fiscal period.

Assiotis said the fund could be set up with government money but later it could attract resources from EU funds and other funding institutions such as the European Investment Bank, as well as private investors.

Assiotis said it could be initially funded by many institutions including the government and European funds but at a later stage by other private organisations which would secure a return either on the capital provided to a company or on the investment provided to the Fund.

It will be managed by experts with the state participating in the Fund’s board only as a supervisor and not as an administrator.

The Council also recommends a campaign aiming to strengthen the SMEs financial education which would help in promoting the equity fund.

Assisting SMEs to obtain financing, in general, is a problem, especially obtaining funding from commercial banks.

“Companies are thirsty not for bank financing but equity,” said Assiotis.

He added that Cyprus SMEs, as the whole of the Cypriot economy, are overindebted.

CIIM Professor of Economics George Theocharides told the Financial Mirror that businesses and households are heavily indebted which makes things difficult for banks to give out loans to existing SMEs and new businesses such as start-ups which are high risk.

“However, the economy needs these businesses as 90% of existing businesses are SMEs.”

Welcoming the state equity fund, Theocharides said the government is on the right track in trying to give a push to Cypriot SMEs, while also facilitating innovative start-ups on the island.

He argued that apart from giving companies a push by injecting cash into businesses in exchange for equity, the government could pave the way for the creation of such equity funds by private investors.

“The success of this fund will certainly draw the attention of investors while paving the way for the growth of innovative start-ups which in turn could draw in venture capitalists,” said Theocharides.

“One of the main pillars of any economy that Cyprus is lacking is an ecosystem within which businesses can raise capital, forcing them to turn to the banks.

If you want to tackle the problem of high private debt which exists for both households and corporations, the creation of a developed and organised ecosystem of raising equity capital is a must,” said Theocharides.