Small business demand helps EU growth fund exceed targets

By Jan Strupczewski BRUSSELS (Reuters) - Unexpectedly strong demand from small business and co-financing from the private sector has seen the European Union's new growth fund exceed targets in its first year and it may now set aside more money for smaller firms. "The demand is there," European Commission Vice President Jyrki Katainen told Reuters in an interview. Overall, he said, the European Fund for Strategic Investments (EFSI) has achieved a leverage ratio - how much the EU cash encourages others to invest - of over 50 percent more private cash for every euro from Brussels than was expected. The EFSI was set up with fanfare under new Commission president, Jean-Claude Juncker, to kick-start growth by putting up EU risk capital to stimulate some 315 billion euros (239 billion pounds) of new investment over three years. Despite the scepticism that greeted the Commission's plan to put up just 21 billion euros of its own cash to achieve that result, investment experts say it has started well. "The plan seems to be more successful at generating private finance than initially anticipated," Global Infrastructure Investor Association (GIIA) chief executive, Andrew Rose, said. "The initial indications are encouraging," he said. Demand is there from both companies and investors. The very low-yield environment for investors, created by the European Central Bank's quantitative easing programme, has made the fund a more attractive alternative to government bonds for some and it also defrays risk. "Investors see the opportunity for a low-risk investment that provides better yields than government bonds," Rose said. Katainen noted demand for funding from small and medium-sized enterprises (SMEs) had been "much bigger than expected." "It is quite obvious that by the end of the year we have to find additional resources within the EFSI for SME financing, because the demand is there," Katainen, a former Finnish prime minister, said on Friday. Increasing loans to SMEs would probably mean reshuffling the EFSI's structure to set aside more than the initially allotted 24 percent for those businesses, he said. The total EU funding for the scheme is 63 billion euros once the EU-owned European Investment Bank (EIB) has put in its contribution. Of that, 12.8 billion euros have been disbursed in the first year. Katainen said the first year's leverage ratio had been 23.4 times against initial expectations of 15 times. And though there could be variations as the process goes on, Katainen saw scope for the leverage to rise further still: "We started from scratch when nobody knew about it," he said. GIIA's Rose agreed. "There is a strong interest," he said. Katainen said, however, that some investment plans could now be stalled by uncertainty over the June 23 British referendum on whether to leave the European Union: "Investors are asking what is going to happen. It is a source of uncertainty," he said. "No investor likes uncertainty." (Editing by Alastair Macdonald and Louise Ireland)