Measures of financial assistance for innovative and job creating SMEs Notice of implementation of the ETF start-up facility and the SME guarantee facility under the growth and employment initiative (98/C 302/07)

Following the Council's adoption of Decision 98/347/EC (OJ L 155, 29.5.1998) on 24 July 1998 the Commission entered into cooperation agreements with the European Investment Fund (EIF) concerning the implementation of the above facilities.

1. THE ETF START-UP FACILITY

The EIF manages the facility on behalf of the Community and will make the selection of the investments into appropriate venture-capital funds. In order to ensure maximum transparency on how investments are selected, the investment policy, which EIF will follow, is hereby published in full:

THE ETF START-UP FACILITY - INVESTMENT POLICY

Purpose

ETF start-up is a facility funded by the European Community designed to stimulate job creation by assisting the establishment and growth of innovative SMEs through the increased availability of risk capital across the European Union. The amount allocated to ETF start-up is expected to be in the range ECU 150 to 190 million, to be committed by 31 December 2002.

Nature of investments

ETF start-up will invest in specialised venture capital funds established specifically to provide equity or other forms of risk capital to SMEs, in particular smaller or newly established funds, funds operating regionally, funds focused on specific industries or technologies and funds financing the exploitation of R& D results, for example funds linked to research centres and science parks.

It will not invest in funds whose primary focus is on management buy-out (MBO) and management buy-in (MBI) transactions or on replacement capital.

ETF start-up will invest only in venture capital funds operating in the European Union, taking as a rule a minority position of 25 % of the total capital of the venture capital fund (1). However, this percentage will be:

- reduced by the percentage of the venture capital fund's capital available for investment outside the European Union, always within the overall requirement that the majority of its capital must be invested in the Member States,

- reduced to a lesser amount at the request of the fund manager,

- always at least 10 % of the investee fund.

In any event, the amount committed to a single venture capital fund will be limited to a maximum of ECU 10 million.

An ETF start-up investment shall always be on the same terms as, and shall rank pari passu with, other equity investors.

ETF start-up will normally first invest at the first closing of the fund. Further ETF start-up investment will be available at subsequent closings provided that the conditions set out above are met at each closing. It will be expected that the final closing will take place within six months of the first closing.

Direct investments into SMEs will not be undertaken.

Target venture capital funds

ETF start-up will target commercially oriented venture capital funds managed by independent professional teams (2) with sufficient business experience to demonstrate the necessary capability and credibility to manage a venture capital fund, although they need not have prior direct experience of fund management.

Fund managers will be required to demonstrate a clear strategy, adequate deal flow and appropriate exit policies. They will be expected to apply best market practice in terms of legal structure, investment principles and reporting. Funds will be structured through suitable domestic or international vehicles. Where more than one legal entity is used to form a venture capital fund, the investment criteria will be applied to the aggregate of the entities.

ETF start-up will target funds with a sufficient size to achieve a critical mass in the segment of the venture capital market that they address. Funds will need to be able to support adequate professional management, make a sufficient number of SME investments and be in a position to provide follow-on investments. While it is expected that the funds supported will normally not be smaller than ECU 10 million, the facility will be available to smaller funds of ECU 5 million or more, notably taking into account such factors as their regional focus, their specialisation in smaller investments and the risks attaching to their proposed investments, provided that they can clearly demonstrate that the above criteria have been satisfactorily addressed.

Fund vehicles will have a finite life unless, exceptionally, realisation through a stock market is achievable, and must not extend beyond 30 June 2014.

Fund managers shall be required to maximise private sector investment and will normally be expected to obtain an amount of least 50 % of the total fund size from private sources. A broad range of investors is encouraged. No single investor shall account, directly or indirectly, for more than 50 % of the capital of any fund.

Up to 10 % of the committed capital of a target venture capital fund may be invested in smaller venture capital funds with similar investment policy objectives as those of ETF start-up.

Target SMEs

The principal target of the venture capital funds in which ETF start-up investments are made shall be SMEs with growth potential, especially SMEs at their establishment and early stages (including seed capital) and innovative SMEs. Investments must provide long-term equity or quasi-equity capital (including subordinated or participative loans, convertible bonds.) The investment funding may be applied to assist that growth by financing capital investment, modernisation and expansion (including working capital and investment in human resources) and to a limited extent acquisition of businesses or changes in ownership where this is expected to safeguard employment or to lead in due course to expansion and capital investment. The funding must not principally be used to refinance existing obligations.

All investments made by a venture capital fund shall be in SMEs, which are defined as companies that at the time of the initial investment have less than 250 employees, turnover not exceeding ECU 40 million or net assets not exceeding ECU 27 million and conform with the criterion of independence and the definition of SMEs as outlined in Commission Recommendation 96/280/EC (OJ L 107, 30.4.1996). Priority will be given to SMEs with up to 100 employees.

Co-investment

Co-investment finance from other Community facilities will be permitted provided that the aggregate amount does not exceed 50 % of the capital of the target venture capital fund. However, there will be no co-investment with the European Investment Fund or with facilities managed by it, as ETF start-up is designed to complement these facilities by addressing a different segment of the venture capital market.

ETF start-up reporting requirements

Annual statistical information for each investment made by a target venture capital fund will be required, including data on the number of employees. Funds must make provisions to allow the European Commission's Financial Controller and the European Court of Auditors to have access to adequate information to enable them to discharge their duties with respect to control of the application of European Community funds.

Realisation of investments

As venture capital funds in which ETF start-up investments are made will typically be unquoted and illiquid, the realisation of ETF start-up investments will be achieved principally through the distribution of the proceeds from the sale of investments made by the venture capital funds. Fund managers will be expected to manage their portfolios with the clear objective of realising all investments within the life of their funds.

In the case of ETF start-up investments in funds listed on a stock market, shares will be realised at an appropriate time with a view to achieving a suitable investment return and maintaining an orderly market in those shares.

Financial performance

Fund managers will be required to demonstrate their objective of managing the venture capital fund so as to achieve financial viability.

Selection

Investment proposals will be examined as and when received on a continuing basis, taking into account in particular the following factors:

- Management team

Relevant experience

Size of team and balance of skills

Ability to provide relevant added-value

Ability to provide adequate commitment for the life of the fund

- Market

Identification of the target market

Size of market and potential development of it

Growth potential of SMEs in the target market

- Deal flow

Track record of access to deals

Quality of deals

Credibility of plans to develop deal flow

- Investment strategy

Appropriateness of the investment strategy to the market

Coherence with the purposes of the facility

Identification of suitable and achievable exit routes for investments

- Size of the fund

Balance between fund size and expected deal flow

Adequacy of provision for follow on investments

- Proposed terms

In line with market norms, with explanations for deviations

Any performance related remuneration such as carried interest to be designed to reward overall fund performance

- Expected returns

Evidence that the fund is to be run on a commercial basis and that it can be expected to be financially viable

- Other investors

Evidence of support from other investors especially from the private sector

The extent to which the ETF start-up investment can be expected to have a catalytic effect

Investments will be considered for approval in chronological order following satisfactory conclusion of this examination within the available budget allocations made from year to year by the European Commission and the need to achieve reasonable geographical balance across the European Union.

Venture capitals funds interested in benefiting from the facility should contact:

The Programme Manager - ETF start-up

European Investment Fund

43, avenue J. F. Kennedy

L-2968 Luxembourg

Tel. (35-2) 426 68 81

Fax (35-2) 426 68 83 00

E-mail info@eif.org

2. THE SME GUARANTEE FACILITY

Purpose

The objective of the SME guarantee facility (the facility) is to stimulate job-creation by supporting the investment activity of innovative small and medium-sized enterprises (SMEs) through increased availability of loan finance. The facility is targeted at SMEs established or to be established in a Member State of the European Union, with growth and therefore job-creating potential.

Characteristics of the facility

The EIF will manage the facility on behalf of the European Commission.

Under the facility the Community provides budget allocations for the purpose of covering the cost of guarantees issued by the EIF. The guarantees are issued and managed by EIF on a trust basis. Losses covered by the guarantees will be fully covered by budget allocations, up to a pre-determined cap.

The amount allocated to the facility will be decided on an annual basis and is expected to reach a total of ECU 150 to 190 million. Amounts allocated to the facility will have to be committed in full by the EIF by 19 May 2002.

Characteristics of guarantees

Intermediaries will be required to undertake to lend or allow lending exclusively to final beneficiaries which, at the date of the respective loan agreement evidencing the loans, constitute small SMEs (i.e. have no more than 100 employees and otherwise comply with the definition of SMEs as outlined in Commission Recommendation 96/280/EC established in a Member State of the European Union, unless otherwise approved by the Commission.

Intermediaries will be required to undertake specific action to ensure that the risk covered by the facility will be additional to the risk that the intermediary would have underwritten in the normal course of its business during the utilisation period of the EIF guarantee. The additionality of the EIF guarantee shall be measurable or otherwise quantifiable having regard to one or more of the following criteria:

- the volume of guarantees or, where appropriate, loans extended by the intermediary or the co-guarantor in respect of the same type of risk-taking as is covered by the EIF guarantee, and/or

- enhanced access to debt finance for small SMEs through less stringent eligibility criteria, for example with regard to start-up companies, investment in intangible assets, loan maturities, or reduced cost of finance to small SMEs, and/or

- acceptance of higher risk through, for example increased proportionate share of loan losses covered or reduced proportionate collateral requirements.

Intermediaries will be required to provide information on the financial standing and on the number of employees of the final beneficiaries (SMEs) of the guarantees. In addition, intermediaries will be required to provide quarterly information on the utilisation of the facility.

For each intermediary, the cover of loan losses will be capped to a predetermined amount, above which the guarantee will be void.

Subject to the cap above, the facility will normally cover the same payment obligations as the intermediaries and will always provide for a risk sharing with the intermediary.

Guarantees will normally be provided free of charge; commitment fees may, however, be charged on the non utilised guarantee commitments made by the EIF under the facility.

Target intermediaries

The facility will primarily target existing guarantee schemes operating in Member States within the public and/or private sector including mutual guarantee schemes and where available guarantee schemes set up primarily to help finance loans that the banking system would not readily provide without guarantee cover.

Secondarily, where adequate guarantee schemes are not established in any one country, the EIF may also enter into agreements with financial intermediaries, including exceptionally the European Investment Bank (EIB), to guarantee directly portfolios of eligible loans. With the exception of the EIB such intermediaries shall be selected following calls for expression of interest.

Selection of intermediaries

The EIF will select the intermediaries in conformity with best business and market practice in a fair and transparent manner having regard to the following criteria:

- the financial standing and operational capability of the intermediary, its ability to manage risk and its willingness to accept the contractual terms proposed under the facility,

- the geographical coverage provided by the intermediary either at national level or, as the case may be, at regional level,

- the extent to which the intermediary's guarantees are accessible by SMEs in the Member State or region of operation,

- the extent to which guarantees will cover loans with lesser collateral than is customary for commercial SME lending,

- the overall risk-sharing arrangements between the intermediary and the lenders.

The EIF will consult with the relevant national authorities in each Member State before finalising its selection of intermediaries.

Proposals by intermediaries will be examined on a continuing basis. The final selection will take into account the budget allocations made from year to year by the European Commission and the need to achieve a reasonable geographical balance of the facility across the European Union.

Further information concerning this facility can be obtained from:

The Programme Manager - The SME guarantee facility

European Investment Fund

43, avenue J. F. Kennedy

L-2968 Luxembourg

Tel. (35-2) 426 68 81

Fax (35-2) 426 68 83 00

E-mail info@eif.org

(1) Subject to the approval of the European Commission, the percentage of a fund held by ETF start-up may occasionally, in exceptional cases such as for new funds which are likely to have a particularly strong catalytic role in the development of venture capital markets for a specific technology or in a specific region, be increased to an amount not exceeding 50 %.

(2) 'Independent` management teams include teams operating within a corporate structure provided that the operation of the fund management business has a high degree of independence from the parent company.