Europe’s private equity and venture capital sector benefits significantly from state-sponsored investment, at both a national and pan-EU level. In 2016 alone, the European Investment Fund (EIF) – Europe’s largest public-sector investor – invested €3.2 billion in 117 funds. More than half of that went to lower mid-market buyout and private debt funds.

In addition, because it seeks to cornerstone funds that might not otherwise be viable, the EIF also unlocks a fair amount of private sector investment. According to EIF data, it provided 10% of the total investment into Europe’s start-ups in 2014, but the funds into which EIF invested contributed over 40%. That suggests a strong multiplier effect. There may be a secondary catalyst too: EIF figures also show that, on average, a 1% increase in EIF-provided venture capital in a region leads to a 1.41% increase in other investors’ activity in the same region a year later.

Europe’s small and medium-sized businesses (SMEs) will get most of that capital. They also benefit from the EIF’s guarantee and loan finance schemes – amounting to €6.2 billion in 2016 – and partnerships with national bodies, including recently announced agreements with the British Business Bank and the Scottish Investment Bank.

There is, therefore, no doubt that growth companies in the European Union rely on the EIF as a crucial source of growth capital, even though most countries also have their national equivalents.

All of which means that the UK’s mid-market private equity, growth and venture capital funds are thinking hard about whether they can continue to rely on EIF funding once the UK leaves the EU. The early indications are not good: many UK-based managers have found that investment flows have “paused” since the UK formally began the process of leaving at the end of March (although there are hopes that the blockage may clear soon). Funds would certainly miss the investment, which averaged around €500 million a year between 2011 and 2015, representing around one-third of the total investment in British venture funds. UK-based funds that invest significant amounts elsewhere in the EU might consider relocating to retain access.

Certainly, the British Business Bank (BBB) – the UK government’s main delivery mechanism for SME support – will be gearing up for an enhanced role in a post-Brexit world. Already an expert investor, with strong support from successive governments for its equity investment programmes, the BBB team is well-placed to step in.

But it is too early to assume that a continuing relationship with the EIF is not on the cards, and the UK’s Finance Minister, Philip Hammond, has certainly left the door open to that. In a recent speech he said that an ongoing relationship could be “mutually beneficial”.

Quite what that relationship might look like is hard to tell, but it is important that concrete proposals are developed soon. One possibility is that the current structure remains unchanged – at least during a transitional period – and that the EIF changes its rules to allow the UK to participate in its funding programmes. That would be the most radical option, and whether it is realistic depends mainly on what is agreed in relation to the EIF’s majority shareholder, the European Investment Bank (EIB). Since negotiating the UK’s departure from the EIB – and the financial settlement that goes with it – will be no easy task, a continuing relationship with the EIF does seem like a plausible interim compromise while longer-term solutions are explored.

The UK is, of course, unlikely to benefit from the mandates funded from the EU budget unless it makes its own contribution to those mandates, but the status quo could well be a mutually beneficial outcome. Many EU27 SMEs benefit from EIF-financed funds based in the UK; those UK funds are, in effect, an important part of the EIF’s delivery mechanism, and it would feel their loss. In the longer-term, joint ventures and EIF management of specific mandates part-funded from the UK budget could be considered.

Whatever the shape of the future relationship, a clean-break separation would clearly be traumatic, and would risk continuity of funding for Europe’s SMEs – and not only those based in Britain. Negotiators must think creatively to design a pragmatic and politically acceptable solution because it is in the interests of all sides to avoid such trauma.