The RiverRock European Opportunities Fund, a vehicle seeking to make money by lending to small and mid-size European companies, has held its first external closing as such funds look to fill the gaps left by credit-shy banks.

On the day that the supposed dearth of bank lending again surfaced as a contentious UK political issue, London-basedRiverRock European Capital Partners announced the first close of the fund had netted €76 million ($106.7 million), and expects to reach a target of €250 million when the final close is expected to be held in around 12 months’ time, the firm said. The cornerstone investor in the fund is the European Investment Fund, alongside other institutional investors and private family offices in Europe and the Middle East, as well as RiverRock’s own internal capital.

The EOF is a five-year fund targeting direct lending to strong, small to mid-sized European companies that are looking for growth or working capital. The fund typically invests between €5 to €15 million in each company.

The need for such lending has been highlighted by banks’ limited lending to firms. Yesterday, for example, Bank of England data showed that banks fell short of targets agreed with the UK government for lending to small firms in the first three months of this year, although they remained on track to hit their overall goals.

In this difficult lending environment, firms such as RiverRock and other financial institutions, such as FF&P Private Equity – part of Fleming Family & Partners, the multi-family office, are looking to fill the gap. (To view a recent article on this topic, click here).

“The availability of capital for European SME’s remains terribly depressed and with the withdrawal of so many traditional financing sources from the market this situation has become structural rather than merely cyclical,” said Jason Carley, chief investment officer at RiverRock.

His chief executive, Florian Lahnstein, agreed: “Looking across Europe, the challenges which still face the financial sector will take some time to unravel. Small and medium sized companies which are the backbone of Europe are frequently the victims of this capital shortage. With our first close I am glad that we can work with the best of these companies to encourage investment, growth and employment.”

The issue of bank lending - or the lack of it - has been a sensitive issue, because banks are arguably being pulled in opposite directions - greater capital requirements on the one hand, and pressure by policymakers to lend more to businesses, on the other. Under a deal with the UK government known as “Project Merlin”, the UK’s biggest banks - Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Santander - have agreed to increase their gross lending to businesses this year to £190 billion (around $306 billion), and to commit to lend £76 billion to small- and medium-sized businesses.