0. Alternative Finance for SMEs
EU Sources of
Alternative Finance for SMEs
COSME, InnovFin, EFSI
Vladimír Bílek
Financing of competitiveness, innovation and employment policies
European Commission
DG Economic and Financial Affairs
Ljubljana, 23 September 2015

1. EU SMEs rely on bank loans
EU SMEs need bank loans:
'Access to finance' the second most pressing problem, right after getting customers
76% of EU SMEs dependent on external financing, 90% of which comes as bank loans or leasing, very little in equity!
Alternative finance is scarce: venture capital investment at one quarter of 2006 levels
Difficulties in access to lending differ according to
Geographic location (country),
Company size and company age,
Business model, capital structure, risk perceptions, etc.
Bank loans are the right tool for many SMEs, but are there better alternatives for some?

2. Alternative sources of finance
Anything that is not bank loans or leasing (and money from family and friends)
Venture Capital and Private Equity
Business Angels
Crowdfunding
Microfinance
B2B lending

3. Why do we want venture capital?
Boutique instrument with fewer than 1% SMEs VC- fundable
BUT
Significant positive externalities:
Supports innovation and growth
Enhances productivity
Creates jobs much faster than traditional sectors
Has a potential to kick-start industrial giants (Microsoft, Apple, Skype, Google and Facebook all financed by VC Funds in their early years)

4. What do we do for venture capital?
Sound financial markets (trust): Assistance to countries in difficulty, creation of new legislation and institutional infrastructure
Legislation supporting financial market efficiency (2013 Regulation on Venture Capital Funds)
Money
Investments in venture capital funds, via EIF 4

5. Venture Capital – How?
EU entrusts resources to European Investment Fund (EIF).
EIF selects the venture capital funds on the basis of open call and invests in these funds.
Other investors also invest in these funds, pari passu with the EIF.
The fund invests in SMEs and takes active role in the management, with a view to nurture and grow the company.
VC Fund sells stake and distributes resources back to EIF/EU.
investment
Other Investors
Venture Capital Fund
Investment, VC added value
SME

6. EU Venture Capital funding – since 1998
ETF Start-Up ( , /7)
High Growth and Innovative SME Facility ( )
: EUR 309m of EU resources generated EUR 1.9bn of total investment into 433 highly innovative SMEs.
: EUR 560m of EU resources invested in 43 VC Funds generated EUR 3.1bn of total investment volume available. 473 SMEs covered so far, the number will increase further.
For example supported Skype or the commercialisation of "graphene", for which the 2010 Nobel prize for Physics was awarded to professors Geim and Novoselov.

7. Provision of financing - today
COSME Equity Facility for Growth (EFG) – July
targets growth and expansion stage SMEs
approx. EUR 650m of EU budget
to achieve total financing between EUR 2.6 and 3.9bn
funds co-operating with business angels are also eligible
Horizon 2020 InnovFin IFE Facility– July
targets early stage SMEs and small mid-caps
approx. EUR 430m of EU budget
to achieve total financing between EUR 1.4 and 2bn
Other mandates managed by the EIF (RCR, EIF own resources, regional and national mandates, Jeremie, etc.)
National programmes

8. Rationale for the SME Window of EFSI
The intervention volume of all of the support combined is not sufficient to fill the market gap and effectively assist all SMEs.
The "Juncker" Investment Plan for Europe, and especially one of its pillars – the European Fund for Strategic Investments, is therefore a key opportunity to enhance SME access to finance and thereby boost growth and job creation.

9. EU Investment Plan: 3 pillars
1. MOBILISING FINANCE FOR INVESTMENT
2. MAKING FINANCE REACH THE REAL ECONOMY
Boost to strategic investment and access to finance for SMEs and mid-cap companies via the European Fund for Strategic Investment (EFSI)
Investment Project Portal
European Investment Advisory Hub: technical assistance
Cooperation between National Promotional Banks and the EIB
3. IMPROVED INVESTMENT ENVIRONMENT
Predictability and quality of regulation
Removing non-financial, regulatory barriers in key sectors within EU Single Market
Structural reforms at national level

10. European Fund for Strategic Investments
EU guarantee
€ 16bn
€ 5bn
EFSI
€ 21 bn
Infrastructure & Innovation window
SME window
EIB financing
EIF financing
Long-term investments
 € 240bn
SMEs and mid-cap firms
 € 75bn
Total over 3 years:
 € 315bn

11. What is the SME Window of EFSI?
European Fund for Strategic Investments has a specific window to support financing of SMEs and mid-caps.
Support is delivered via the European Investment Fund (EIF), through agreements between the EIF and financial intermediaries.
The budget foreseen for the SME Window is EUR 5 billion. One half is guaranteed by the EU under EFSI, the other funded by EIB.
The window will offer a mix of facilities covering:
both debt and equity financing;
finance to SMEs and small mid-caps in the EU in early, as well as expansion stages of their life-cycle;
financing of investment as well as working capital;
specifically the needs of higher-risk, innovative or research- intensive companies.

12. EFSI: Where do we stand, what is coming?
3 products already launched since July 2015:
guarantees supporting loans to SMEs with a higher-risk profile;
guarantees supporting loans to innovative and research-intensive companies of up to 499 staff;
EUR 2.5bn boost to "Risk Capital Resources", a facility investing in venture capital and equity funds.
Further products to be launched in 2015 and 2016, often in partnership with national promotional banks, to support
equity financing, including technology transfer and social investment
securitisation of SME loan portfolios and
lending to innovative companies that lack collateral

13. Planned new equity product in detail
Equity Investment Platform, developed in coordination with National Promotional Institutions
This facility will focus on providing equity financing to SMEs and mid-caps in all stages of their corporate life cycle.
It could have up to 1.8 billion EUR* to be invested in equity funds, and matching funds will be sought from national promotional banks for most of this amount.
Possible Investment Channels:
Direct investments in funds
Investment in Funds of Funds
Co-investment vehicles, investing directly in portfolio companies alongside existing equity funds
Timeline:
Investments for growth and expansion stages should be ready before end 2015
Investments in early stage companies to be added in 2016
* Best estimates based on current assumptions. Potentially subject to change.

14. EFSI Equity for SMEs: Expected Results
Apart from support for lending (guarantees), the SME Window in total (including the EIB's contribution to RCR) should mobilise approx. EUR 4.3bn* of EFSI investment into venture and equity funds in Europe.
These funds should invest approx. EUR 16-20bn* in European SMEs and mid-caps.
SMEs will also be supported under the Infrastructure and Innovation Window of EFSI managed by teh EIB.
The products are complementary to existing EU financial instruments and also to the ECB monetary policy.
* Best estimates based on current assumptions. Potentially subject to change.

15. Combining support for equity financing
COSME + InnovFin:
Investment in multi-stage funds
Structural Funds (ESIF) + COSME/InnovFin:
Joint instruments
EFSI + COSME/InnovFin + Structural Funds (ESIF):
Invest in the same funds
EFSI and ESIF invest in a co-investment facility
ESIF co-investment facility alongside a fund that raised COSME/InnovFin or EFSI resources
Guiding principle: complementarity, additionality

16. Access to EU Finance Website Use your search engine or type in
SMEs: Where to look?
Access to EU Finance Website
Use your search engine or type in 16 16

17. Conclusion
Alternative finance is a needed and useful complement to bank loans and leasing.
Support for equity funding via venture capital funds is available from the EU, and the Investment Plan brings more.
Fund managers are encouraged to contact EIF and apply for this funding.
SMEs should look at the Access to EU Finance website.