Information from the Commission - 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
Date: 1998-10-01
Institutions: European Commission
Subjects: European Investment Fund, aid to undertakings, innovation, job creation, small and medium-sized enterprises

C  302/8

EN

Official  Journal  of  the  European  Communities

1.10.98

COMMISSION

Measures  of  financial  assistance  for  innovative  and  job  creating  SMEs

Notice  of  implementation  of  the  ETF  start(cid:220)up  facility  and  the  SME  guarantee  facility  under  the
growth  and  employment  initiative

(98/C  302/07)

adoption 

the  Council’s 

Following 
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(cid:220)UP  FACILITY

the 

facility  on  behalf  of 
selection  of 

the
The  EIF  manages 
the
the 
Community  and  will  make 
into  appropriate  venture(cid:220)capital  funds.  In
investments 
order 
transparency  on  how
investments  are  selected,  the  investment  policy,  which
EIF  will  follow,  is  hereby  published  in  full:

to  ensure  maximum 

It  will  not  invest  in  funds  whose  primary  focus  is  on
management  buy(cid:220)out  (MBO)  and  management  buy(cid:220)in
(MBI)  transactions  or  on  replacement  capital.

ETF  start(cid:220)up  will  invest  only  in  venture  capital  funds
operating  in  the  European  Union,  taking  as  a  rule  a
minority  position  of  25(cid:216)%  of  the  total  capital  of  the
venture  capital  fund(cid:216)(˛).  However,  this  percentage  will
be:

-(cid:217)reduced  by  the  percentage  of  the  venture  capital
fund’s  capital  available  for  investment  outside  the
overall
European  Union, 
requirement  that  the  majority  of  its  capital  must  be
invested  in  the  Member  States,

always  within 

the 

THE  ETF  START(cid:220)UP  FACILITY  - 
POLICY

INVESTMENT

-(cid:217)always  at  least  10(cid:216)%  of  the  investee  fund.

-(cid:217)reduced  to  a  lesser  amount  at  the  request  of  the  fund

manager,

Purpose

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

to 

stimulate 

is  a  facility  funded  by  the  European
ETF  start(cid:220)up 
job  creation  by
Community  designed 
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(cid:220)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(cid:220)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  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.

funds, 

An  ETF  start(cid:220)up  investment  shall  always  be  on  the  same
terms  as,  and  shall  rank  pari  passu  with,  other  equity
investors.

ETF  start(cid:220)up  will  normally  first  invest  at  the  first  closing
of  the  fund.  Further  ETF  start(cid:220)up  investment  will  be
the
available  at 
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.

subsequent  closings  provided 

that 

(˛)(cid:217)Subject  to  the  approval  of  the  European  Commission,  the
percentage  of  a  fund  held  by  ETF  start(cid:220)up  may  occasionally,
in  exceptional  cases  such  as  for  new  funds  which  are  likely
to  have  a  particularly  strong  catalytic  role  in  the  devel(cid:220)
opment  of  venture  capital  markets  for  a  specific  technology
or  in  a  specific  region,  be  increased  to  an  amount  not
exceeding  50(cid:216)%.

1.10.98

EN

Official  Journal  of  the  European  Communities

C  302/9

Direct  investments  into  SMEs  will  not  be  undertaken.

Up  to  10(cid:216)%  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(cid:220)up.

Target  venture  capital  funds

funds  managed  by 

ETF  start(cid:220)up  will  target  commercially  oriented  venture
independent  professional
capital 
teams(cid:216)(˛)  with  sufficient  business  experience  to  demon(cid:220)
strate  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(cid:220)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(cid:220)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
investment  and  will  normally  be  expected  to
sector 
obtain  an  amount  of  least  50(cid:216)%  of  the  total  fund  size
from  private  sources.  A  broad  range  of 
is
encouraged.  No  single  investor  shall  account,  directly  or
indirectly,  for  more  than  50(cid:216)%  of  the  capital  of  any
fund.

investors 

Target  SMEs

The  principal  target  of  the  venture  capital  funds  in  which
ETF  start(cid:220)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(cid:220)term  equity  or
quasi(cid:220)equity  capital  (including  subordinated  or  partici(cid:220)
pative  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
safeguard
is 
ownership  where 
employment  or  to  lead  in  due  course  to  expansion  and
capital  investment.  The  funding  must  not  principally  be
used  to  refinance  existing  obligations.

expected 

this 

to 

the 

initial 

investment  have 

All  investments  made  by  a  venture  capital  fund  shall  be
in  SMEs,  which  are  defined  as  companies  that  at  the
time  of 
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.

less 

Co(cid:220)investment

Co(cid:220)investment  finance  from  other  Community  facilities
will  be  permitted  provided  that  the  aggregate  amount
does  not  exceed  50(cid:216)%  of  the  capital  of  the  target  venture
capital  fund.  However,  there  will  be  no  co(cid:220)investment
with  the  European  Investment  Fund  or  with  facilities
managed  by 
to
complement  these  facilities  by  addressing  a  different
segment  of  the  venture  capital  market.

it,  as  ETF 

is  designed 

start(cid:220)up 

ETF  start(cid:220)up  reporting  requirements

(˛)(cid:217)"Independent’  management  teams  include  teams  operating
within  a  corporate  structure  provided  that  the  operation  of
the  fund  management  business  has  a  high  degree  of  inde(cid:220)
pendence  from  the  parent  company.

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

C  302/10

EN

Official  Journal  of  the  European  Communities

1.10.98

the  European  Court  of
Financial  Controller  and 
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.

- Deal  flow

Track  record  of  access  to  deals
Quality  of  deals
Credibility  of  plans  to  develop  deal  flow

Realisation  of  investments

funds 

in  which  ETF 

As  venture  capital 
start(cid:220)up
investments  are  made  will  typically  be  unquoted  and
illiquid,  the  realisation  of  ETF  start(cid:220)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(cid:220)up  investments  in  funds  listed  on
a  stock  market,  shares  will  be  realised  at  an  appropriate
investment
time  with  a  view  to  achieving  a  suitable 
return  and  maintaining  an  orderly  market 
in  those
shares.

- 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 
such  as
carried  interest  to  be  designed  to  reward  overall  fund
performance

remuneration 

related 

Financial  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

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

- Other  investors

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(cid:220)value
Ability  to  provide  adequate  commitment  for  the  life
of  the  fund

- M a r k e t

Evidence  of  support  from  other  investors  especially
from  the  private  sector
The  extent  to  which  the  ETF  start(cid:220)up  investment  can
be  expected  to  have  a  catalytic  effect

Investments  will  be  considered  for  approval  in  chro(cid:220)
nological  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(cid:220)up
European  Investment  Fund
43,  avenue  J.(cid:216)F.  Kennedy
L(cid:220)2968  Luxembourg

Identification  of  the  target  market
Size  of  market  and  potential  development  of  it
Growth  potential  of  SMEs  in  the  target  market

Tel.  (35(cid:220)2)  426(cid:216)68(cid:216)81
Fax  (35(cid:220)2)  426(cid:216)68(cid:216)83(cid:216)00
E(cid:220)mail  info-eif.org

1.10.98

EN

Official  Journal  of  the  European  Communities

C  302/11

2. THE  SME  GUARANTEE  FACILITY

co(cid:220)guarantor  in  respect  of  the  same  type  of  risk(cid:220)
taking  as  is  covered  by  the  EIF  guarantee,  and/or

Purpose

The  objective  of  the  SME  guarantee  facility  (the  facility)
is  to  stimulate  job(cid:220)creation  by  supporting  the  investment
activity  of  innovative  small  and  medium(cid:220)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(cid:220)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  allo(cid:220)
cations  for  the  purpose  of  covering  the  cost  of  guar(cid:220)
antees  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(cid:220)determined  cap.

-(cid:217)enhanced  access  to  debt  finance  for  small  SMEs
through  less  stringent  eligibility  criteria,  for  example
with  regard  to  start(cid:220)up  companies, 
in
intangible  assets,  loan  maturities,  or  reduced  cost  of
finance  to  small  SMEs,  and/or

investment 

-(cid:217)acceptance  of  higher  risk 

for  example
increased  proportionate  share  of  loan  losses  covered
or  reduced  proportionate  collateral  requirements.

through, 

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.

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.

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  inter(cid:220)
mediary.

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
in  Commission  Recommendation
SMEs  as  outlined 
96/280/EC  established 
the
in  a  Member  State  of 
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:

-(cid:217)the  volume  of  guarantees  or,  where  appropriate,
the

intermediary  or 

extended  by 

loans 

the 

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
including  mutual  guarantee
and/or  private 
schemes  and  where  available  guarantee  schemes  set  up
primarily  to  help  finance  loans  that  the  banking  system
would  not  readily  provide  without  guarantee  cover.

sector 

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.

C  302/12

EN

Official  Journal  of  the  European  Communities

1.10.98

Selection  of  intermediaries

The  EIF  will  select  the  intermediaries  in  conformity  with
best  business  and  market  practice  in  a  fair  and  trans(cid:220)
parent  manner  having  regard  to  the  following  criteria:

-(cid:217)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,

-(cid:217)the  geographical  coverage  provided  by  the 

inter(cid:220)
mediary  either  at  national  level  or,  as  the  case  may
be,  at  regional  level,

-(cid:217)the  extent  to  which  the  intermediary’s  guarantees  are
accessible  by  SMEs  in  the  Member  State  or  region  of
operation,

-(cid:217)the  extent  to  which  guarantees  will  cover  loans  with
lesser  collateral  than  is  customary  for  commercial
SME  lending,

-(cid:217)the  overall  risk(cid:220)sharing  arrangements  between  the

intermediary  and  the  lenders.

The  EIF  will  consult  with  the  relevant  national  auth(cid:220)
orities 
its
selection  of  intermediaries.

in  each  Member  State  before 

finalising 

intermediaries  will  be  examined  on  a
Proposals  by 
continuing  basis.  The  final  selection  will 
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.

take 

Further 
obtained  from:

information  concerning 

this 

facility  can  be

The  Programme  Manager  -  The  SME  guarantee
facility
European  Investment  Fund
43,  avenue  J.(cid:216)F.  Kennedy
L(cid:220)2968  Luxembourg

Tel.  (35(cid:220)2)  426(cid:216)68(cid:216)81
Fax  (35(cid:220)2)  426(cid:216)68(cid:216)83(cid:216)00
E(cid:220)mail  info-eif.org