Businesses of all sizes, and at all stages, require access to finance and funding solutions. It’s the oxygen in their ecosystem. The current programme for government contains a number of commitments to take steps to help, including through an increased allocation of €250 million to Enterprise Ireland’s Seed and Venture Capital Scheme.
The Government is also working with the Irish Stock Exchange to facilitate future growth, focusing particularly on small to medium-sized, fast-growing companies.
The Irish Venture Capital Association (IVCA) reckons Ireland has the potential to unlock up to €2 billion of institutional capital to boost the growth prospects of Irish SMEs and start-ups.
Its pre-budget submission noted that increasingly isolationist US economic policy emphasises the need to recalibrate our own economic model, of which securing foreign direct investment has long been a solid plank.
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Its submission coincided with results showing the worst venture capital investment into Irish SMEs and start-ups for 10 years, as funding fell from €494 million to €112.6 million in Q2 of this year.
The IVCA is pushing for a number of government policies to stimulate private capital from Irish institutional investors, including pensions, insurers and banks, to co-invest in Irish venture capital (VC) and growth funds.
“This would reduce our over-dependence on international VC funding which accounted for three quarters of total venture capital investment last year,” said IVCA chairwoman Caroline Gaynor on the launch of its submission.
Right now the big barrier to growing more global winners in Ireland, recognised by government and industry alike, is lack of scaling finance.
The advent of pensions auto-enrolment, finally, may be an auspicious time to push this, not least because other EU countries already have policies in place to encourage pension funds to invest in venture capital, including the Netherlands.
France has a requirement for employees to be able to invest part of their pensions in SMEs. Since 2019 its Tibi initiative has been encouraging institutional investors, including pension funds and insurers, to back innovative technology start-ups and scale-ups.
In the UK, 17 big pension providers have committed to investing at least 10 per cent of their defined contribution default funds in private markets by 2030, doubling a previous 5 per cent target set in 2023.
While Germany’s coalition government hopes to mobilise at least €100 billion in private capital, targeting small and medium-sized enterprises (SMEs) and scale-ups through its Germany Fund.
Even before the disappointing Q2 figures were released, the Department of Enterprise, Tourism and Employment’s Market Demand for and Supply of Scaling Finance in Ireland report, published in July, highlighted the gap in equity financing for Irish enterprises at the point where they are looking to scale up and realise their potential. It estimates that gap at about €1.1 billion over the next two to five years.
The report, which was prepared by SQW Economic Research Consultants, finds the issue is particularly acute for deals in the €5 million to €10 million range in capital and R&D intensive sectors where product development can be lengthy and require “patient, long term, capital investment”.
For SMEs in established sectors, with good growth stories to tell, the rise of private equity has at least delivered a boon.
“There is quite a lot of activity at the moment, which is surprising given the level of economic turbulence and uncertainty going around,” says Katharine Byrne, head of deal advisory at BDO Ireland.
Companies are currently either looking for funding for growth or looking to ensure they have sufficient funding for working capital to ensure they can outride any potential tough times ahead.
“With so many different events going on, uncertainty is actually the new norm and management teams have become a lot more adaptable as a result,” says Byrne.
“We are seeing a lot of forecasting and re-forecasting taking place and constantly making sure they have sufficient funding in place to support the existing business, while also achieving their growth plans.”
While banks still back companies, of course, they look at repayment capacity based on trading profile, making them unsuitable for start-ups. It’s why there is good support at this level from state backed entities such as the Local Enterprise Offices, MicroFinance Ireland and Enterprise Ireland.
For existing businesses alternative providers will lend based on cashflow or on the strength of an asset base.
“Private equity is investing in businesses with a compelling growth story, but which are in need of an injection of capital to go and achieve that story,” says Colm Sheehan, director with Crowe’s corporate finance department.
“Private equity is now active on both sides of the transaction too. Where previously they were all in growth phase and building out their portfolios, now they are all building and divesting at the same time.”
For business owners it’s a way of cashing in at least some of their chips and, finally, securing some personal wealth before doubling down on expansion. For others it offers a route to exit, including through management buyouts.
For those looking for an early exit, it’s hard to blame them. It has been “a surreal time” for many SMEs, says Sheehan.
“In the last 10 years, we’ve had Brexit, Trump version 1, Covid, Ukraine, inflation, interest rates, then Trump version 2. The only certain thing has been the uncertainty of it all. But businesses have continued to thrive, so it is the resilience of Irish businesses that is the key takeaway.”
