Government should invest more in ‘exit’ strategies

11 Mar 2005

Enterprise Ireland (EI) should no longer invest in venture capital (VC) funds, according to a study by Trinity College Dublin’s Policy Institute. It recommends the Government should instead invest in helping companies achieve ‘exits’ in the form of company flotations.

The Policy Institute report said EI has invested more than €300m in Irish SMEs and VC funds since its creation, making it one of the largest equity investors in the country.

The report, launched yesterday by Fine Gael’s spokesman for Enterprise, Trade and Employment Phil Hogan TD (pictured), argues that there is no compelling rationale for continuing state support given the lack of evidence that an “equity gap” of early-stage risk-capital exists in Ireland, in addition to the tremendous growth in VC funds, with nearly €150m of VC funds currently available for new projects.

Venture capitalists and EI, the report stresses, should focus on closing the exit gap that is evident from the very low rate of initial public offerings (IPO) among Irish companies. The strong average returns generated by IPO exits are critical to attract investors in young companies and venture funds. Venture capitalists and EI says should help companies target and prepare for IPOs and steer them to the most appropriate exchange, such as the Nasdaq, AIM or OFEX, for listing.

The report also recommends the Irish Stock Exchange (ISE) considers demutualisation of its strategic alliances to improve its competitive position as the relatively poor capital raising performance of the ISE for small businesses contributes to the exit gap.

“Returns drive the entire equity financing cycle for young companies,” noted author Diane Mulcahy, “Strong returns are critical to attract pension funds, venture capitalists and angel investors to make private equity investments in early-stage companies that are essential to Ireland’s economic growth. The evidence is clear that IPO exits realise the highest average returns, so a focus on closing the exit gap in Ireland is a key component of any long-term enterprise policy.”

The report argues that Irish businesses would benefit from an increase in the supply of capital from business angels (successful businesspeople with money to invest in young companies).

The report argues that most of the Irish Government’s fiscal policies, such as tax reliefs, subsidies and incentives disproportionately encourage individuals to invest in property assets rather than equity. These fiscal policies are at odds with Ireland’s industrial policy goal of fostering the growth of domestic start-ups. The paper recommends that the Departments of Enterprise and Finance join up fiscal and industrial policies to more equally treat equity investments and consistently support enterprise development.

Hogan argued: “The recent decision by the European Commission to suspend grant aid in respect of the expansion of Intel at Lexilip in Co Kildare is an appropriate wake-up call for Irish industrial strategy. It shows that the European Commission will be engaged in more detailed and critical evaluations of grant aid as inward investment to developing economies such as Ireland in the context of future industrial strategy.

“It is, therefore, appropriate that this study gives us a new focus on the development of indigenous industry and the funding of new ventures from within our own jurisdiction. A new entrepreneurial drive is essential with the appropriate financial supports to implement the Enterprise Strategy Report and to sustain and promote the growth of the Irish small business sector and employment within this sector,” Hogan warned.

By John Kennedy