PRINT THIS PAGE Institutional Investor Profile: John Holloway, Director, Investments, European Investment Fund02/01/2008. Source: AltAssets. 
John Holloway on European venture capital, on the benefits of operating in a niche segment, on investment opportunities in future EU member states and on the importance of good capital reflow.  EIF is a specialised investment vehicle with the mandate to provide the European SME sector with financing for growth. It is majority-owned by the European Investment Bank, with the European Commission also holding a significant stake in the fund.
John Holloway started his career in the international division of National Westminster Bank (now RBS) in the mid-1970s. After four years, he moved to Luxembourg to work for EIB. He spent 20 years at EIB, working in various senior positions. In summer 2000 he took up the position of director, investments at EIF.
How does EIF operate?
'EIF really only has two business products. On the one hand, we have the equity product, starting from tech-transfers at universities, going through incubators, venture capital, all the way up to the smaller end of the mid market. We also have another complementary product, where we come into deals as a guarantor, particularly in securitisations of portfolios of assets, portfolios which usually comprise SMEs. We provide guarantees to the investors for part of the tranches. The capital released by the securitisation deal can then be taken by the originator and used for further lending for SMEs.'
What were the difficulties faced by EIF when starting out?
'EIF is focused on early stage venture capital in Europe, starting up in the late 1990s. Particularly in 2001-2002, times were pretty tough, but we were able to find some good investment opportunities.
Part of the problem was that EIF usually signs a 20 to 25 per cent ticket and the remaining 80 per cent would need to come from other LPs investing alongside us. At the time it was difficult, and European VC is still not to everybody's taste. Finding the LPs to invest alongside us at the start was certainly not easy. It has definitely got easier in recent years.'
How were you able to see through this difficult period?
'We decided we would expand our investment spectrum to include funds focused on the smaller end of the mid market. One of the reasons for the move was that we had noticed that when several of the European fund managers who were classified as venture capital in 1999-2001 came back into the market, around 2004/2005, they no longer stayed 100 per cent pure early stage. They would also look at companies which were a little bit more advanced in their development. EIF decided to go along with this.'
What is your shareholder structure?
'About 61 per cent of EIF's capital currently comes from EIB, 30 per cent from the European Commission and nine per cent from a group of 32 financial institutions from all over the EU. Mostly, they are banks or financial institutions. EIF is the only EU organisation that enables non-public organisations or member states to have a shareholding. This makes us a little bit different from most EU organisations. What also makes us different is that we are obliged to generate returns on the investments we make.'
How much capital does EIF currently have committed to private equity?
'As of 30 September 2007, our equity commitments were €4.26bn. Of that about 60 per cent is actually disbursed, and that covers about 260 venture capital or private equity vehicles.
We are a medium-sized European fund of funds. There are many that are bigger, but I think we are the biggest early stage fund of funds in Europe. I cannot think of anyone who has a European early stage portfolio as big as ours.'
How much do you invest in an average deal?
'We have an average investment of about €16m per fund.'
How many investments would you typically make in a year?
'We would expect to make between 30 and 40 investments in a year. There is no fixed target. Deal quality is what drives us. We try to get into the deals that fit our remit and promise good returns.'
How do you get to hear of good investment opportunities?
'We are in a niche market and most fund managers within the EU know of us. It is a two-way process; there are funds that will come to us because they know us. From an internal perspective, we have developed a tool we call the EIF Radar Screen, which attempts to plot funds up to 12 to 18 months going forward, so we know when we expect them to be coming back for fundraising. The Radar Screen allows us to plan our resources.'
Do you receive many unsolicited approaches?
'There is a lot of speculative interest from fund managers and we have an open-door policy. Occasionally, we come across a fund that we have not been aware of, which is where the deal identification process comes into play. We frequently get approaches on a cold basis from funds in America and funds in the Far East who have heard about us and seen that we have a fairly large portfolio. Unfortunately, we cannot help them as it is outside our geographical remit.'
Could you tell me more about your due diligence process?
'When we receive a PPM it goes through a first screening process, just to discern whether it is something we would consider. If we do not feel we want to go forward then we simply tell the fund manager accordingly.
If we feel this opportunity might be something for us, we start our in-house due diligence process. Once completed, it is up to the chief executive and myself to decide whether we want to hand the investment proposal to the board of directors for final approval.'
Do you make direct investments at all?
'We operate purely as a fund of funds and do not make any direct investments into SMEs. It is our mandate to invest alongside and share risks with like-minded LPs.'
What are your main geographies?
'Our remit covers the EU member states - 27 countries at the moment. We have deals in most but not all of them. However, our exposure covers the entire EU. We are also observing closely what is happening in those countries that have applied for EU membership, Turkey for example.
Actually, in Turkey we are pretty active already. We have just signed a specific fund of funds mandate in Turkey. We hope to hold a second closing on €200m during 2008. This will be a mini fund of funds dedicated to the Turkish market. This is not the first time we have done something like this. EIF launched a Spain-focused fund of funds vehicle last year. There are also plans to do something similar in Portugal using almost exactly the same structure as in Turkey. The Portugal-focused vehicle is expected to raise between €100m and €110m.
The idea behind the country-focused funds of funds is that we want to group together a number of like-minded investors, who are able to make available a larger amount of money for EIF to manage than we would otherwise have out of our own resources. In each case, we are looking to bring in at least four times the commitment that EIF is allocating.'
What are the most interesting industry sectors going forward?
'The name on everyone's lips at the moment is cleantech. We recently signed our first pure cleantech fund, ETF. Previously, we have invested in funds that may have invested in companies that had a cleantech element to them, but ETF was the first fully-focused cleantech fund that we chose to invest in, and we decided to put €15m into that fund in December of last year.
It needs to be noted that we try and keep a reasonable balance between sector-focused funds and the more generalist funds. It is all about portfolio balance.'
Do you invest in distressed debt funds?
'They are not part of our remit.'
How do you feel about the current state of European venture capital?
'LPs still have a huge headache left over from the crash eight years ago and European VC is still not back in people's thoughts. You cannot blame anyone for that because if you look at the returns achieved over the past ten years, they have not been stellar. However, we are finding it a bit easier year on year to find investors that are happy to invest alongside us in some of the best managers and some promising emerging managers.'
How would you describe EIF's role going forward?
'We are trying to help the European venture capital market develop and remain commercially minded whilst doing this. We need to ensure that our money returns are right. The biggest envelope of capital for our equity operations comes from our major shareholder, the EIB, and they have provided us with €4bn to invest in this niche sector. They have made this money available on the basis that it is an evergreen facility, and any reflows are there for us to reinvest.
We are reaching a stage in our own development where we are getting quite close to needing the reflows to keep us going, and the only way to get reflows is by making good investments. This is the business ethic that drives us forward. We have to invest well to ensure that we have capital available in the future.
Currently the reflows are very strong and we are very pleased with them indeed. Looking at the quality of funds in our portfolio, and where they are in their divestment process, I would say that the reflows look sustainable.'
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