Micro bank to invest €175m in 'bright ideas'
Enterprise Ireland will provide finance for hi-tech firms, says Jerome Reilly
THE creation of a micro bank operating through Enterprise Ireland is perhaps the clearest signal yet that the Government has given up on the existing banks' ability or willingness to help small and medium-sized enterprises (SMEs), especially in the hi-tech sector.
Last week there was further evidence that the entrepreneurial class – the so-called 'driver' of economic recovery and growth – is being strangled by the freeze on meaningful bank credit.
Isme has even coined a phrase to describe the cynical delaying tactics adopted by the financial institutions in processing applications for credit while at the same time hoodwinking the Government into believing their doors are open for business. Isme calls it "constructive refusal".
Analysis of the organisation's latest Quarterly Bank Watch survey shows a decline in lending to SMEs. The survey found 53 per cent of businesses were being refused loans, four percentage points worse than the figure in September.
Against the backdrop of a Budget which, for all its manifest faults and controversies, did provide a range of new measures designed to improve cash flow in the SME sector as well as tinkering with their tax burden, Jobs Minister Richard Bruton announced an initiative that would help at least one section of the business economy over the next few years.
Enterprise Ireland is to provide venture capital firms with €175m to invest in science, computing and other hi-tech businesses. Think of it as a micro-bank, providing seed finance which venture capital firms can then leverage to attract other investors.
This is the high-risk, high-reward side of small- and medium-sized business. Many of these hi-tech firms have been unable to access money from the banks. Other possible beneficiaries of this type of finance are at such an embryonic stage of development that they wouldn't be candidates for traditional bank loans.
The Irish Venture Capital Association (IVCA) said such investors would be able to leverage the Enterprise Ireland money to obtain other funding, so the overall investment into new hi-tech business could be more than €1bn – based on an assessment that the State cash could be ramped up by a factor of seven or eight.
Regina Breheny, director general of IVCA, said although the new measure was lost in the turmoil of a difficult Budget, it would have a major impact.
"We think it is a very enlightened decision and it is the start of a fundraising process for us. The Irish venture capital firms are in effect the conduit for venture capital for Irish companies. The money makes its way into Irish SMEs mainly in the hi-tech sector. The first investor is the State through Enterprise Ireland which is considered to be a cornerstone investor, in fact. The Irish VCs need to then go out to the private sector who have money to invest in bright ideas and say: 'look, the State has committed €175m'," she said.
The last time this happened was in the period between 2006 and 2012 and was successful.
Breheny said the State did not have to stump up all €175m now. It is only as VC firms identify potential investments that the money will be needed.
The reward comes roughly after 10 years, by which time the company will, hopefully, have thrived and created real worth. When that period comes towards the end, the VC funds harvest that investment by selling them and the money goes back immediately to the investor.
"We maintain that we could create up to 21,000 direct jobs at the high end if we can leverage up that State investment over the €1bn mark. For every job you create directly, there could be five to eight other jobs around it in the real economy," she said.
She said that venture capital of this sort was not a substitute for bank debt.
"Some of the companies we would be looking at have nothing to offer the banks. They have no security. They might just have an idea that is not yet even commercialised," she added.