Why Cyprus Needs a State-Owned Equity Fund

By Savia Orphanidou, Economist

Over the last five years, the use of financial instruments to support the private sector and, specifically, our small-medium enterprises (SMEs), has been widely promoted in Cyprus. It is well-known that, during the financial/banking crisis when access to finance was limited, the financing schemes of the European Investment Bank (EIB), the European Investment Fund and EU Structural and Investment Funds were a key factor in the survival and expansion of many Cypriot enterprises. Access to finance still remains a challenge for many Cypriot enterprises, especially SMEs and start-ups, due to the strict procedures/provisions of traditional bank lending. Although there is now sufficient liquidity in the system, banks remain nevertheless very reluctant to provide loans, in particular to highrisk enterprises. It is for this reason that, during recent years, more and more enterprises are looking for alternative funding sources. In 2017, EIB, in cooperation with PwC, conducted a study on the use of financial instruments in Cyprus, recording the financing gaps for each instrument. One of the interesting results of the study was the recording of a €35 million financing gap in the equity market in Cyprus. This clearly demonstrates that the equity finance market has been gradually maturing in Cyprus and that Cypriot enterprises are more willing now to give part of their equity share in return for financing. Equity finance can be a valuable alternative source to traditional bank lending for high-risk enterprises, innovative companies and startups with limited collateral, because it can provide resources and skills to enterprises to grow to their true potential. Today, the Cypriot equity market is among the least developed in Europe and this is, indeed, a significant drawback for the competitiveness of the country’s SMEs. Today’s economic environment favours the establishment of an Equity Fund, which will provide capital funding for SMEs, thus supporting our private sector and further boosting our economy. Due to the new financial conditions, as a result of the crisis, Cypriot enterprises appear more ready and more mature to receive such financing. It all comes down to a matter of changing our business culture and mindset, which can be achieved through gaining knowledge and experience in the field. In this context, the National Economic and Competitiveness Council recently submitted a proposal for the establishment of such a Fund in Cyprus, based on international best practices. As outlined by the Council, the benefits of such a Fund are numerous and noteworthy, such as de-leveraging private debt, strengthening the competitiveness and financial performance of local SMEs, promoting investments in a broader set of sectors aiming at enhancing sustainable growth, creating new jobs in the private sector, introducing new technologies and new international corporate best practices and stimulating innovation and modernization of Cypriot SMEs. In light of the above, it is imperative to promote the establishment of a stateowned Equity Fund in Cyprus. In order for such a Fund to be successful, the following factors need to be in place: (a) the Fund should operate on the basis of market rules and have the necessary flexibility and transparency; (b) the State should not be involved in investment decision-making but should have a role in monitoring the implementation of the State’s investment strategy; (c) the Fund should operate in a regulated environment, in order to create the right conditions for the attraction of private co-investors; (d) transparent public procurement procedures should be promoted for hiring the Fund Manager, and (e) the Fund Manager, who will implement the state’s investment strategy, should have significant experience and networking in the field. I feel confident that, with political will and prudent planning, we can lay the foundations for the establishment of an Equity Fund in Cyprus to support the private sector and our SMEs.