European Investment Fund (EIF) Chief Executive Richard Pelly signed two guarantee agreements in the combined value of €202 million with Budapest Bank (BB) in June to support SMEs in Hungary under the EU Competitiveness and Innovation Program (CIP). With the agreements, the EIF aims to address the difficulties that SMEs are currently facing on the Hungarian market and to contribute to the economic recovery by stimulating growth. Considering that every €1 of first loss guarantee support allocated today will support €17 of SME loans, Pelly was confident of achieving a broad and positive impact on the Hungarian market. There has been high demand for CIP funding so far. To date, half of the total funding available for the seven-year program period has already been used. With the BB contracts, there are now 30 intermediaries in 15 countries participating in CIP. Pelly, who was awarded a medal honoring his achievements regarding SME support in Hungary in the 1990s, has made a particular effort to lead the EIF’s expansion through CIP into new markets in Central and Eastern Europe. Pelly spoke to BBJ reporter Gabriella Lovas at his recent visit to Hungary.
Q: I was a little surprised that this was the EIF’s first agreement with a Hungarian bank.
A: With this particular instrument, the CIP, this is only the second financial institution we have signed an agreement with. If we look across the whole of Europe, we only have very small capacity and we have signed 30 institutions in 15 countries. So, we have to spread it out quite thin. The situation was much better before the crisis, since then banks had other things to be concerned about.
What I think you should take on board is that CIP is now being used to support growth again out of the crisis, as a kind of crisis response instrument. It is focused on fast-growing smaller, earlier-stage companies without the necessary collateral that might be required under more traditional lending. So this is to be thought as one of the ingredients for improvement in the economy.
Q: Which is the other Hungarian commercial bank?
A: I cannot tell you because they have not given me permission, but it is one of the international commercial banks here.
We have dialogue with several other Hungarian financial institutions. The Hungarian Development Bank is one of our shareholders with a small holding in the EIF. We have been in discussions with them ever since the structural funds’ regulation changed. We also manage Jeremie holding funds, so we share best practices and we exchange information.
Credit insurance company Garantiqa Hitelgarancia Zrt is also a partner. We have had many discussions. In fact, we have never signed a counter-guarantee contract, but that may come in due course.
Q: When do you think you could reach an agreement with Garantiqa?
A: Well, I have seen them during my current visit, so I am sure that we will progress our discussions. We have to think differently each time because the situation changes and now we can only help when there is genuine additionality, meaning that the institution will do something different it would not otherwise do. And then we take 50% of the risk with them. I can imagine potentially having some support for them early next year.
Q: Is it a coincidence that the first major contract has been signed with Budapest Bank?
A: The process of applying for the CIP is an open tender. GE Capital and Budapest Bank in particular have wanted to benefit from this not just in Hungary, but in other parts of Europe. They have applied to my CIP team. I have nothing to do with it, except when it comes to the board of the EIF and I am not a decisionmaker of the board, so honestly, this is a happy coincidence.
In more serious terms, it reflects a fact that Budapest Bank and GE Capital are very serious about their desire to grow and to continue to support the economies in Central and Eastern Europe. They are using the instruments they can get whether it be from national government-type schemes or Garantiqa schemes or this one. And they are very professional about executing contracts like this, so it is a pleasure to deal with them.
Q: The EIF has several instruments, such as equity products, debt products and microfinancing. Are you going to introduce them in Hungary?
A: We will be more active here over the next two to three years, I am sure of that. The purpose of my visit here really is trying to implement longer-term vision of how we can provide support to the commercial banking sector and to the venture capital sector in Hungary. Because there is a new European budget cycle starting in 2014, which we are already planning; there will undoubtedly be more support for financial instruments of the nature the EIF uses for investment in early-stage companies and for guarantee instruments.
We are just becoming a strong microfinance institution. Within Europe, microfinance is beginning to develop strongly and there are already many small microfinance institutions in Hungary. We have one or two discussions also going on with such institutions here, but it is not as active as in some other countries. Which is not to say that this will always be the case.
Again, you have to look at the activity of the Jeremie holding fund here. The amount of money they have is significant, so we will not come in and compete. We have to be complementary to national schemes, otherwise you have an overcrowding, which is not good.
Q: How do you see SME financing in the current business environment?
A: It is challenging everywhere in Europe, so there are many ingredients required. There are some improvements in the macroeconomic situations and therefore an increasing confidence will lead to increases in consumption and in corporate activity and investment. This is going to be slow, as it always is coming out of a recession. But I see some signs of demand picking up and some flattening out in the risk experience of the banks. The worst seems to be over and I have a certain confidence that the ingredients in the Hungarian economy for the development of the corporate sector, such as entrepreneurial spirit, and competitive skill sets, are still there. We saw in the late 1990s how this part of the economy, the independent Hungarian-owned enterprise sector can grow. I hope we can help that in the new cycle.
Q: What do you think about the challenges that the Hungarian banking sector is currently facing?
A: I think that the relationship between multinational banks in particular, because they form a big part of this sector here, and the government is constructive. These banks may have demonstrated their commitments to the country by staying, by continuing to invest and by retaining the liquidity and capital in the country. That is a good sign. This is true across Central and Eastern Europe. The country has benefited from having significant large well-managed international banks with a major presence here. You do not see a real evidence of them leaving the country.
Q: What is your opinion about the government’s recently announced FX loan rescue package?
A: It seems to me that there is proper dialogue between the government and the banking sector to try to achieve some solutions here. That dialogue should continue. As [Budapest Bank CEO] Sean Morrissey expressed, banks are intent on supporting their customers to get through the crisis, to get through the problems.
Richard Pelly was appointed as Chief Executive Officer at the European Investment Fund in 2008. His previous position was at Pall Mall Capital where he focused on Debt Advisory mandates. From 2005 to 2007 he was Managing Director of Structured Asset Finance at Lloyds TSB Bank, where he forged a 160-strong team providing project, property and asset finance on a global basis. Pelly was Chairman and CEO of Budapest Bank from 1998 to 2004. He started his career at Barclays Bank, where he held several positions and finally became Chief Operating Officer at BZW France. BZW was the investment banking arm of Barclays Bank.
Pelly studied psychology at Durham University and obtained an MBA with distinction at INSEAD Fontainebleau. In 2003, he was awarded an OBE (Officer of the Order of the British Empire) in the Queen’s Honours List for Services to the Community in Hungary and to the Budapest Festival Orchestra.
The EIF's central mission is to support European SMEs by helping them to access finance. EIF primarily designs and develops venture capital and guarantees instruments which specifically target this market segment. The EIF total net commitments to venture capital and private equity funds amounted to over €5.4 billion at end 2010 with investments to over 300 funds. The EIF commitment in guarantees totaled over €14.7 billion in close to 160 operations at end 2010.
The CIP, which spans from 2007 to 2013, has been put in place to boost European productivity, innovation capacity and sustainable growth, whilst simultaneously addressing complementary environmental concerns. Within the framework of the CIP, the EIF has been allocated €1.1 billion to be split between venture capital and guarantees.