Access to finance by SMEs and EU financial instruments Joint Venture Association Conference Budapest, 12 October 2004 Jean-François AGUINAGA Enterprise Directorate-General SME financing policy Unit

Challenges for New Member States and Candidate Countries Conclusions of the 4th Round Table of Bankers and SMEs Difficult for SMEs to get (sufficient) credits Banks lack experience and skills for SME lending Lack of guarantee mechanisms in some NMS and CC or insufficiently developed Banks also suffer from economic situation Leasing often underdeveloped, but growing fast Banks ask for high collateral Early stage finance still rather limited

Bank intermediation in New Member States and Candidate Countries Domestic Credit 2000 as % of GDP Source: ECB (2002): Financial Sectors in the EU Accession Countries

Financing stages Equity Formal venture capital Bank loans HIGHER RISK Financing needs Equity Formal venture capital Bank loans Business angels Entrepreneur, friends, family LOWER RISK Seed Capital Start-up phase Early growth Expansion Financing stage

SME’s access to finance Bank lending Most important source in Europe But under pressure: Basle II Different banking cultures in the MS Equity finance Becoming more important Business angel market needed VC funds not enough active at early-stage

Valley of Death 1 Enterprise’s revenue Enterprise’s development stage Seed phase Start-up phase Emerging growth Expansion Enterprise’s development stage Valley of Death

The Valley of Death 2

MAP Financial Instruments Budget 2001-2005 of EUR 317m (+ 74m) for three financial instruments : SME Guarantee Facility ETF Start-up Facility Seed Capital Action European Investment Fund (EIF) operating on behalf of the European Commission Open to EU Member States, Candidate Countries + Norway, Iceland and Liechtenstein See www.eif.org for detailed MAP guidelines

European Investment Fund Created in 1994 EU and EIB Group’s specialised financial institution for SMEs, acting through : Venture Capital (fund of funds) Guarantees for SME portfolios  of banks Statutes: To contribute to Community Objectives To generate an appropriate return on resources

Implementation SMEs SMEs Provides funds Co-Guarantees Invests Invests European Commission budget Provides funds Co-Guarantees Invests Guarantee Society Venture capital Fund Bank Invests SMEs Lends SMEs

ETF Start-up: early-stage financing for high tech start-ups European Commission Returns, Losses Fundraising EIF other investors Fundraising Returns, Losses Dedicated VC Funds Cash Equity Early stage technology SMEs with high growth potential

Seed Capital Action What? Complements ETF Start-up Aims at the long-term recruitment of qualified investment managers Reinforces the capacity of the VC industry to invest in seed capital How? For each eligible staff member, the maximum grant available is €100,000 For funds into which EIF already invests

SME Guarantee Facility Four windows: SME Loan guarantee Growth potential, up to 100 employees For investments, including intangibles Microcredit guarantee Particularly for start-ups, up to 10 employees Loans up to € 25,000 Information technology (ICT) guarantee For investments, up to 100 employees Equity guarantee Expanding existing programmes

Microcredit Guarantee Example: KfW (Germany) StartGeld: loans for start-ups, € 50,000 max. Model of resulting default risk for a start-up loan 50% of Kfw‘s risk 100% of the risk 80% of bank‘s EIF 40% KfW Bank 20% Start-up

Impact of Guarantees High leverage effect of guarantee schemes for €1 of EC budgetary resources utilised by the financial intermediaries a loan volume of approx. € 45+ is guaranteed under the Facility

Experience 1998-2000: lessons Loan guarantees Venture capital EC budget contribution: €199m €10bn worth of loans guaranteed 112 000 SMEs benefited from guarantees Venture capital EC budget contribution: €168m 200 SMEs benefited

2004 and beyond... Looking for a successor to Phare SME Finance Facility… …Preparatory action in 2004 for Eur-10 financial institutions: technical assistance; focus on local/regional financial institutions; microcredit to small businesses To be included in the MAP successor programme, if test appears positive.

Innovation and Competitiveness Programme (ICP) ICP period: 2007-2013 End of current MAP: Dec 2006 ICP public consultation 2004 Q4 Proposal of the Commission in 2005 Co-decision procedure: 18 months Financial instruments: outsourced management, mainly to EIF Positive evaluation: BUDG, ENTR

Forthcoming SME financial instruments Open ETF Start-up to companies with more than 5 years (expansion) and focus on high growth potential rather than on high tech Based on EIF’s own experience, provide support to the securitization of SMEs loans portfolio: incremental credit to SMEs requested with extra cash received by credit institutions.

See more on… http://europa.eu.int/comm/enterprise/entrepreneurship/financing/index.htm jean-francois.aguinaga@cec.eu.int Thank you.