2001/406/EC: Commission Decision of 13 February 2001 on the aid scheme "Viridian Growth Fund" notified by the United Kingdom (Text with EEA relevance) (notified under document number C(2001) 334)
Date: 2001-02-13
Institutions: European Commission
Subjects: Northern Ireland, State aid, United Kingdom, application of EU law, financing, small and medium-sized enterprises

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Official Journal of the European Communities

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 13 February 2001

on the aid scheme ‘Viridian Growth Fund’ notified by the United Kingdom

(notified under document number C(2001) 334)

(Only the English text is authentic)

(Text with EEA relevance)

(2001/406/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular the first subparagraph of Article
88(2) thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to the provisions cited above (1),

Whereas:

(1)

(2)

I. PROCEDURE

By letter dated 14 September 1999 the United Kingdom
authorities notified aid linked to the setting up and
operation of the Viridian Growth Fund, a venture capital
fund.

The Commission asked for additional information on 12
November 1999 and sent a reminder on 22 December
1999. The United Kingdom authorities replied by letter
dated 14 January 2000. However, they still did not
supply all the information asked for on 12 November
1999. The Commission therefore
second
reminder on 10 March 2000 to which the United
Kingdom authorities replied by letter dated 28 March
2000. The Commission requested further additional
information on 12 May 2000. The United Kingdom
authorities replied by letter dated 14 June 2000.

sent

a

(3)

(4)

(5)

(6)

(7)

By letter of 8 August 2000 (2),
the Commission
informed the United Kingdom authorities of its decision
to initiate the procedure pursuant to Article 88(2) of the
EC Treaty in relation to the Viridian Growth Fund.

The decision to open the procedure was published in the
the European Communities (3). The
Official
Commission invited interested parties
to present
comments on the aid scheme concerned.

Journal of

The Commission did not receive comments from inter-
ested parties.

The official response of the United Kingdom authorities
arrived by letter dated 8 September 2000.

On 19 September 2000, the Commission sent a request
for certain clarifications and a meeting discussing the
Commission queries was held between the services of
the Commission and the United Kingdom authorities on
8 November 2000.

(8)

The United Kingdom authorities formally replied to the
Commission queries on 15 December 2000.

II. DETAILED DESCRIPTION OF THE SCHEME

The objective of the scheme

(9)

The objective of the scheme as notified and as amended
by the United Kingdom authorities under the procedure
is to address perceived gaps in the provision of venture
capital funding for small enterprises (SEs) in Northern

(1) OJ C 266, 16.9.2000, p. 9.

(2) Reference: SG (2000) D/106067.
(3) OJ C 266, 16.9.2000, p. 9.

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Ireland, as defined in accordance with the recommenda-
tion for SMEs) (1). The Fund will invest in SEs in the
manufacturing and commercial services sector,
these
enterprises have difficulty in raising finance from
existing financial sources.

(10)

In order to attract institutional investors to this market,
which is heavily under-represented in Northern Ireland
the United
and which is perceived as very risky,
Kingdom authorities consider that they have to provide
certain incentives and thus contribute to the develop-
ment of a regional venture capital Fund called the Viri-
dian Growth Fund.

Legal basis

(11)

The legal basis for the scheme is Article 7 of the Indus-
trial Development (Northern Ireland) Order 1982, as
well as the Fund contract and the operating guidelines.

Duration

(14)

The investment phase of the Fund will be completed by
the end of December 2004, as stated by the United
Kingdom authorities by letter dated 14 January 2000.

Terms of investment and remuneration of the Fund
as notified and amended by the United Kingdom
authorities

(15)

Finance will be drawn down into the Fund over a period
of
time to match approximately the annual rate of
investment by the Fund into SEs. To cover the five-year
investment period, five tranches of investment by the
Fund shareholders were envisaged. Each tranche of funds
drawn down from the investors in the Fund will take
place in proportion to the participation in the fund. It is
also the intention that the Fund is managed both to
return all the capital invested by the private and public
sectors, and to pay an acceptable rate of return on the
invested capital.

Status of the Fund and the partnership structure

(16)

(12)

The Fund is to be set up as a partnership, namely a
limited partnership, registered under the Limited Partner-
ships Act 1907, as amended from time to time, under
the name of Viridian Growth Fund LP. The partnership
has a General Partner who is responsible for the conduct
and management of the Partnership's business, and has
the ability to appoint a manager. The fund manager was
selected through a competitive bidding procedure. The
totalling GBP 10 million. To
Fund will have capital
finance (2) of
establish the Fund the public sector
GBP 3,34 million is provided alongside finance from
the private sector and finance provided by the European
Investment Bank (EIB), GBP 3,3 million. The non-public
sector finance is provided by the Viridian Group plc (the
private sector supplier of electricity in Northern Ireland),
GBP 2 million, the Northern Ireland Local Government
Officers Superannuation Scheme, GBP 1 million, and
Abbey National, GBP 0,33 million.

(13) However, the United Kingdom authorities are prepared
to seek further private sector investors in relevant publi-
cations across Europe. They are presently considering
advertisements in the international edition of the Finan-
cial Times and the monthly publication produced by the
European Venture Capital Association.

The income achieved by the Fund will be redistributed
to the investors in four phases.
In a first phase, all
private sector investors and the EIB will be reimbursed
until that sector and the EIB have realised a total return
of their investment. In a second phase they will receive
an internal rate of return of 10 % a year. In a third
phase, further realisations from the portfolio will be
made preferentially to the public sector investment until
its
initial GBP 3,34 million investment has been
returned and in a fourth phase the public sector will
receive an internal rate of return of 2,2 % a year.

(17)

If the Fund should produce losses, the allocation of net
income losses and net capital Losses (if any) will first be
borne by the Department of Enterprise, Trade and
Investment (DETI). This will be done until such time as
the full amount of its investment in the Fund has been
reduced to zero by reason of such allocation. Any
further net income losses and net capital losses will be
allocated amongst the remaining Investors pro rata to
their participation.

(18)

It is the intention of the United Kingdom authorities that
the General Partner will receive an administrative fee
partly based on the performance of the Fund.

(1) OJ L 107, 30.4.1996, p. 4.
(2) The public sector finance made available by DETI and partially re-

financed by the ERDF.

It can be concluded that the DETI takes both a higher
risk and a lower rate of return than the other investors
do.

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Investment in SEs by the Fund

(19)

The Fund will operate under certain limitations as noti-
fied by the United Kingdom authorities. The Fund will
have the ability to invest up to GBP 600 000 in an
individual SE by means of loans and shareholdings:

— Loans: a loan (subordinated, unsecured loan) will be
given at an interest rate which is 1 % to 3 % higher
than the interest rate charged by the commercial
banking sector for a secured loan

— ordinary share capital: the SEs will give up a portion of

their equity in return for capital

investment.

(20)

(21)

The Fund will not invest in companies in difficulties as
defined by the Community Guidelines on State aid for
rescuing and restructuring aid (1).

(25)

The Fund will not invest in companies active in the
production, processing or marketing of products listed
It will be excluded from
in Annex I to the Treaty.
investing in companies active in the sensitive sectors for
which special Community rules governing State aid have
been laid down.

tion of the private investors' risk, and giving them
the benefit of the differing drawdown provisions
were linked to any expenditure which can be consid-
ered to constitute eligible costs under any of the
communications and frameworks of the Commis-
sion under which State aid can be authorised;

(b) second, the Commission also questioned whether
the aid to the companies invested in was linked to
initial investment in the sense of either the former
Community Guidelines on State aid for small and
medium-sized enterprise (4) or the Guidelines on
national regional aid (5) or to any other expenditure
constituting eligible costs under any other of the
Commission's communications and frameworks.

In its decision to initiate the procedure pursuant to
Article 88(2) of the EC Treaty, the Commission also
indicated that it would consider whether the limited
partnership, which is the vehicle for the Fund's opera-
tion, should also be considered to be an undertaking
that is a beneficiary of the aid.

(22) According to the United Kingdom authorities, the Fund
will only invest
in companies that will undertake a
programme of expansion that will include investment in
fixed assets or intangible assets similar to that described
in point 4.4 of
the Guidelines on national regional
aid (2).

(23)

The financial aid from the Fund will be separate from
other regional or national programmes, but if they are
used together the United Kingdom authorities have
undertaken to limit the total aid to the aid ceiling laid
down in accordance with the current aid status of
Northern Ireland (40 %).

IV. COMMENTS FROM THE UNITED KINGDOM

(26)

By letter of 8 September 2000, the United Kingdom
submitted comments on the Commission's decision to
initiate the procedure pursuant to Article 88(2) of the EC
Treaty, regarding the Fund. These comments can be
summarised as follows:

(a) it is because potential investors do not wish to invest
at the proposed level of the Fund that the Govern-
forward. The
ment brought
the Fund proposal
failure,
proposal seeks to address a real market
which places targeted companies in Northern Ireland
at a disadvantage;

III. OPENING OF THE PROCEDURE PURSUANT TO

ARTICLE 88(2) OF THE EC TREATY

(24)

In its decision to initiate the procedure laid down in
Article 88(2) of the EC Treaty concerning the Viridian
Growth Fund (3),
the Commission expressed several
doubts regarding the compatibility of the notified aid
measure with the Community's State aid rules:

(a) first, the United Kingdom authorities justified the
preferential treatment of the private investors of the
Fund as being necessary in order to attract their
participation in the Fund. In its decision to open the
procedure, the Commission expressed doubts as to
whether the underwriting of a considerable propor-

capital

(b) the companies in question cannot find or attract
equity
the
to Northern
GBP 50 000 to GBP 300 000 level. The issue of
whether they can afford it does not apply - at the
present time it is not an available option, and there-
fore they do not get funded;

Ireland

at

(c) the United Kingdom authorities pointed out that an
interest rate of between 1 % and 3 % higher than
that charged by banks is significant in the Northern
Ireland context where banks compete to make
secured loans at low margins;

(d) the scheme has to be selective, given that there are
limited funds and the demand is potentially large, so
the Fund Manager has to take discretionary decisions

(1) OJ C 288, 9. 10. 1999.
(2) OJ C 74, 10.3.1998, p. 9.
(3) OJ C 266, 16.9.2000, p. 9.

(4) OJ C 213, 23.7.1996, p. 4.
(5) OJ C 74, 10.3.1998, p. 9.

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(e) the assistance provided to the private investors of
the Fund is limited to the minimum necessary to
secure private sector involvement. The Fund will
make sources of risk capital available to companies
in Northern Ireland, addressing the market failure
rather than excessively distorting competition;

(f) the United Kingdom authorities do not accept that
the existence of the Fund would reduce the number
or attractiveness of investment opportunities avail-
able to other potential investors who might be inter-
ested in serving the same market. All potential insti-
tutional investors were approached about supporting
the Fund and all had the opportunity of partici-
pating. Further, no fund currently addressed the
investment needs of the target range of companies
and therefore it would seem that these enterprises
have no attractiveness
Potential
investors will continue to find attractive opportuni-
ties for investment not targeted by the Fund;

to investors.

(g) the purpose of the investment assistance is to enable
targeted companies to rapidly expand their opera-
tions, not
to reduce their current expenses. The
proposed investments from the Fund cannot there-
fore be construed as operating aid;

(h) a limited partnership is an arrangement whereby
people and organisations agree to carry on business
in common with a view to profit. The Limited Part-
nership Agreement regulates the operation of the
partnership. A limited partnership is not a legal
person distinct from its partners. Also, in a partner-
ship the tax authorities treat the individual partners
(investors in the partnership or fund in this case) as
if the partners themselves had made investments
directly into the underlying portfolio of companies.
In other words, limited partners are assessed individ-
ually on their tax liabilities arising from income and
capital gains in the partnership or fund. The limited
partners are not taxed twice, first as a partnership
then as individual partners. The United Kingdom
contends that if aid is judged to have been derived
by individual partners it would be double counting
and incorrect to attribute aid to the limited partner-
ship.

(27) A meeting was held on 8 November 2000 between the
services of the Commission and the United Kingdom
authorities and a formal letter dated 15 December 2000
was sent to the Commission in which certain amend-

(28)

(29)

(30)

ments were provided. These amendments are integrated
in the description of the scheme in Section II.

V. ASSESSMENT OF THE SCHEME

As to the existence of aid

The legal person, which constitutes the Fund, is a limited
partnership, which under United Kingdom tax legislation
is not deemed to be a legal person distinct from its
partners. Therefore, for the purpose of the present case,
the Commission considers the Fund and the investors
therein to be one and the same level.

The Commission notes that the terms for the investors
in the Fund have been modified under the procedure.
Furthermore,
the United Kingdom authorities have
committed themselves to seek further private investors
to the Fund on a European-wide level. However, differ-
ences in remuneration remain between the DETI and the
other investors in the fund at the cost of the DETI. The
stake from the DETI
in the Fund stems from State
resources. Notwithstanding its stated policy to promote
access to risk capital, the Commission can therefore not
exclude that, given its particularities, the scheme may
involve aid to the investors/Fund and to the enterprises
invest.
in which the Fund will

Such aid to the investors/Fund and to the enterprises in
which the Fund will invest could distort or threaten to
distort competition and affect trade between Member
States within the meaning of Article 87(1) of the EC
Treaty in view of the fact that there is a high level of
competition in the financial market, which is at least
European-wide and because the small enterprises in
Northern Ireland,
invest, will
have a considerably enhanced capability of competing
with undertakings in other Member States.

in which the Fund will

(31)

The scheme was notified in advance in accordance with
Article 88(3) of the EC Treaty.

As to the compatibility of the aid:

(32) Having established that the Fund may involve State aid
for the purposes of Article 87(1) of the EC Treaty, the
Commission has examined the compatibility thereof
with one of
the derogations provided under Article
87(2) and 87(3).

(33)

that

exemptions
The Commission considers
provided for in Article 87(2) of the EC Treaty do not
apply, since the aid measure does not pursue any of the
objectives listed in that article of the Treaty, nor has the
United Kingdom argued that this would be the case.

the

(34) Article 87(3)(a) of the EC Treaty does not apply, since
no part of Northern Ireland qualifies for regional aid
under Article 87(3)(a) (1).

(1) The United Kingdom regional aid map for the period 2000 to
2006, approved by the Commission under State aid number
letter No SG (2000) D/1006293 of 17
N 265/2000 (Approval
August 2000),
an Article
87(3)(c)region and that it is an exceptional region based on foot-
note 44 of
the Guidelines on national regtional aid (OJ C 74,
10.3.1998, p. 9).

that Northern Ireland is

indicates

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(35) Aid under the scheme is not intended to promote the
execution of an important project of common European
interest or to remedy a serious disturbance in the
economy of a Member State, nor is it
intended to
promote culture or heritage conservation. The Commis-
sion therefore considers that neither Article 87(3)(b) nor
Article 87(3)(d) of the EC Treaty is applicable to the
Fund.

(36)

In view of the above, the Commission determined that
the only possible basis on which the measure could be
found compatible with the common market is Article
87(3)(c) of the EC Treaty.

(37)

The Commission notes that Northern Ireland is an
assisted area according to footnote 44 of the Guidelines
on national regional aid (1). The Commission recalls its
well-established view that SMEs suffer from a number of
handicaps that can slow down their development. One
of the main such handicaps is the difficulty in obtaining
capital and credit, the chief causes of which are imper-
fect information, the risk-shy nature of financial markets
and the limited guarantees that SMEs are in a position to
offer. The Commission also recalls that the Community
has a stated policy as set out, for example, in the conclu-
sion of
‘…to redirect
funding towards support for business start-ups, high-
tech firms and micro-enterprises, as well as other risk-
capital initiatives proposed by the EIB’ (2). The Commis-
sion furthermore notes that:

the Lisbon European Council,

(a) the most comprehensive research study into the
financing of SMEs in Northern Ireland, undertaken
by the Ulster Society of Chartered Accountants,
shows that a market failure exists at the lower end of
the public
the risk capital market. Furthermore,
intervention is decisive for the creation of the Fund;
no private investor would invest in the Fund on the
same terms as the public sector. Thus, without the
intervention of the State there would be no Fund;

(c) as a further amendment to the terms originally noti-
fied to the Commission the United Kingdom author-
ities will revise the present limited partnership in
order to ensure that, on each tranche of investment
made by the Fund, funds from each investor in the
Fund will be drawn down in proportion to their
commitment to the Fund. Thus the only advantages
to the private partners concern the distribution of
returns and not the drawdown of funds. This means
that the private investors (and the EIB, which invests
on the same terms) are required to put funds at risk
well before the first returns are made;

(d) the total funds invested by the private investors are
33 %, which can be regarded as substantial, and the
total funds invested on the same terms are 66 %
(both private investors and the EIB). This provides
assurance that commercial considerations will play a
key role in the Fund's investment decisions, which
should
of
limit
competition created by the aid to the investee
companies;

additionally

distortion

the

(e) it is the stated intention of the United Kingdom
authorities that the Fund be managed both to return
all the capital
invested by the private and public
sectors, and to pay an acceptable rate of return on
the invested capital;

(f) the Fund Manager was selected from an open call for
tender published in the Official Journal of the European
Communities (3) and his/her remuneration is partially
based on its performance. This fact
too should
enhance the commerciality of the Fund;

if

(g) the Commission finally notes the United Kingdom
authorities' commitment to keep interventions by
the Fund separate from other regional or national
the
programmes, but
United Kingdom authorities have undertaken to limit
the total aid to the aid ceiling laid down in accord-
ance with the current aid status of Northern Ireland
(40 %). However, due to the problems concerning
calculation of aid intensities in equity participation
this can only be done in regard to the loans.

they are used together

(b) as an amendment to the terms originally notified to
the Commission, the Fund will invest only when the
investee company (the SE) undertakes a programme
of expansion as set out in a supporting business
plan. The investment decisions will focus on the
nature of the product, the market, the development
plan, the quality and the know-how of the manage-
ment team and the availability of key personnel;

(1) OJ C 74, 10.3.1998, p. 9.
(2) Lisbon European Council, Presidency Conclusions on 35 March

2000.

(38) Under these conditions the Commission concludes that,
in so far as aid could be involved in the establishment
is limited to the
the Fund,
and the operation of
minimum necessary and will not adversely affect trading
conditions
to an extent contrary to the common
interest.

it

(3) OJ C 136, 17.7.1998, p. 215.

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(39)

(40)

The above conclusions are supported by the fact that no
observations were made by interested parties under the
formal

investigation.

The Commission notes the commitment of the United
Kingdom authorities to notify any application of the
Fund not authorised by the present Decision or by
Commission Regulation (EC) No 68/2001 of 12 January
2001 on the application of Articles 87 and 88 of the EC
Treaty to training aid (1), Commission Regulation (EC)
No 69/2001 of 12 January 2001 on the application of
Articles 87 and 88 of the EC Treaty to de minimis aid (2)
or Commission Regulation (EC) No 70/2001 of 12
January 2001 on the application of Articles 87 and 88
of the EC Treaty to State aid to small and medium-sized
enterprises (3).

(41) On the basis of the foregoing, the Commission takes the
view that the amended Viridian Growth Fund, in so far
as it involves aid, would qualify for derogation under
Article 87(3)(c) EC. The Commission therefore concludes
that the scheme is compatible with the common market,

HAS ADOPTED THIS DECISION:

Article 1

The Viridian Growth Fund, as amended, is compatible with the
common market. That scheme may, therefore, be implemented.

Article 2

The United Kingdom authorities shall submit to the Commis-
sion, in addition to the information on any plan to continue
funding or to extend or amend the scheme referred to in
Article 1 which they are required to provide pursuant to Article
88(3) of the EC Treaty, an annual report providing detailed
information that allows the Commission to evaluate the sche-
me's performance and whether the positive effects of
the
scheme continue to outweigh any distortion of competition.

Article 3

This Decision is addressed to the United Kingdom of Great
Britain and Northern Ireland.

Done at Brussels, 13 February 2001.

For the Commission

Mario MONTI

Member of the Commission

(1) OJ L 10, 13.1.2001, p. 20.
(2) OJ L 10, 13.1.2001, p. 30.
(3) OJ L 10, 13.1.2001, p. 33.