2001/712/EC: Commission Decision of 6 June 2001 on the aid scheme Regional Venture Capital Funds (Text with EEA relevance) (notified under document number C(2001) 1547)
Date: 2001-06-06
Institutions: European Commission
Subjects: United Kingdom, aid system, control of State aid, industrial capital, investment, regional aid

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 6 June 2001

on the aid scheme Regional Venture Capital Funds

(notified under document number C(2001) 1547)

(Only the English text is authentic)

(Text with EEA relevance)

(2001/712/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(4)

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 those provisions (1), and having regard to their
comments,

Whereas:

1. PROCEDURE

(1)

(2)

(3)

By letter dated 26 May 2000, registered on 7 June 2000,
the United Kingdom notified the Commission of the
scheme ‘Regional Venture Capital Funds’. It provided the
Commission with further information by letter dated 21
August 2000, registered on 24 August 2000.

By letter dated 7 November 2000,
the Commission
informed the United Kingdom that it had decided to
initiate the procedure laid down in Article 88(2) of the
EC Treaty in respect of the scheme. The United Kingdom
authorities answered by letter dated 29 November 2000,
registered on 1 December 2000.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Communi-
ties (2). The Commission called on interested parties to
submit their comments.

(1) OJ C 27, 27.1.2001, p. 20.
(2) See footnote 1.

It

The Commission received comments from interested
parties.
forwarded them to the United Kingdom,
which was given the opportunity to react; its comments
were received by letters dated 23 March 2001, registered
on 26 March 2001, and 2 May 2001, registered the
same day.

(5)

(6)

2. DETAILED DESCRIPTION OF THE SCHEME

The purpose of the scheme is to address a lack of
provision of equity funding at regional level for invest-
ment in the ‘equity gap’ range of GBP 100 000 to GBP
for
500 000 (about EUR 160 640 to EUR 800 000)
small and medium-sized enterprises (SMEs).

According to the United Kingdom authorities, the exis-
tence of this ‘equity gap’ is due to the relatively high
fixed costs for the remuneration of investment execu-
tives. This cost and the direct costs for due diligence and
legal documentation do not fall proportionately with
smaller sizes of investment and may rise. Consequently,
there is an incentive for venture capital firms to pursue
larger investments in more mature companies, so that
costs can be reduced relative to investment value,
enhancing returns and lowering management charges to
Investors therefore seek to identify invest-
investors.
ments where growth is likely to be so exceptional that
the capital gain more than compensates for the very
high early costs. Consequently,
the United Kingdom
authorities claim, private investors demonstrate a reluc-
in businesses that need equity-based
tance to invest
financing in amounts below GBP 500 000 (about
EUR 800 000) and are not in leading-edge technology
sectors. It has also proved more difficult for SMEs far
from London to obtain risk capital, which explains the
regional approach.

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The Regional Venture Capital Funds scheme is based on
the Industrial Development Act 1982, Section 8.

(14)

(7)

(8)

(9)

(10)

The United Kingdom authorities are planning to estab-
lish at least one Regional Venture Capital Fund in each
of the English regions.

The duration of the scheme is four years initially, while
the life expectancy of the Regional Funds is 10 to 12
years.

The budget foreseen for the first three years is GBP 50
million (about EUR 80 million).
is expected that
private investors will contribute up to five times that
amount. The Government will be a minority investor in
each fund.

It

The selection of a fund manager and the establish-
ment of a fund

(11) A person who wants to set up a fund in a particular
region is called a sponsor. It can be a natural or legal
person including a regional development agency. The
sponsor will appoint a manager for the fund based on a
Community-wide public tender (3). All of those entering
the competition will be expected to have authorisation
from the Financial Services Authority and to operate
according to British Venture Capital Association guide-
lines. The main criterion for appointment will be experi-
ence of, and success in, fund management in the ‘equity
gap’ part of the market. A track record in the particular
region may be one of the criteria that prospective spon-
sors may wish to take into account but lack of experi-
ence in a particular region will not, on its own, prevent
a prospective fund manager from entering a competition
in that region. The United Kingdom authorities believe
that to insist on a proven track record in any region
prior
open
competition for the process of appointment of fund
managers. However, prospective fund managers will
have to demonstrate that they have strategies in place to
their expertise could be transferred and
ensure that
utilised in the region.

appointment would

restrict

the

to

The winning bids are selected by an Independent
Appraisal Board, which is a subcommittee of the newly
created Small Business Investment Taskforce (SBIT). It
will consist of members from venture capital academics,
experienced institutional investors, financial institutions,
the Regional Development Agencies and venture capital-
ists. The final decision to make a commitment to invest
Government money in any fund will remain with the
State. In practice, the decision to commit to invest will
generally follow the advice of the Board.

The investments

(15) All investments will be equity-based, i.e. take the form of
ordinary shares, preference shares or cumulative prefer-
ence shares, etc. In principle, the maximum amount that
may be invested in any one company is GBP 500 000
(about EUR 800 000) (see also point 5 second indent
below).

(16)

in small and
The Regional Funds may only invest
medium-sized enterprises that fulfil the Community defi-
nition (4) and are not
the
funds may not invest in SMEs that do not meet legal,
moral or ethical standards, nor in companies active in
the production, processing or marketing of products
listed in Annex I of the Treaty.

in difficulty. Furthermore,

(17) A rough estimate is that about 300 SMEs will be able to
benefit from investment each year. The funds may not
invest in certain sectors (5) considered to be low-risk and
not requesting public stimulation.

(12)

(13)

The Regional Venture Capital Funds will be commer-
cially managed by professional fund managers, regulated
under the auspices of the Financial Services Authority,
the Investment Management Regulatory Organisation
and the British Venture Capital Association.

The appointed fund manager will proceed to tender for
private investors for the fund. The sponsor, the fund
manager and prospective private investors negotiate the
terms of the private sector investment. The next step is a
public tender, in which the sponsors in England submit
to the State the bids they have agreed with their
investors. One of the selection criteria in the tender
procedure will be the extent of the subordination of
State returns that potential investors request. Sponsors
have to explain in their bids why they believe that the
degree and type of subordination they propose is the
minimum necessary to attract private investors.

(3) Those prospective sponsors for the creation of a fund who are
already authorised fund managers will not be required to undertake
a competitive process to appoint themselves.

The return on investments

(18)

The fund managers will invest on commercial terms. It is
expected that the internal rate of return will be at least
12 %, which the United Kingdom authorities claim
would be in line with data currently available on invest-
ments in this area. The State will seek a commercial
return on its investment, although this return may be

(4) Commission recommendation of 3 April 1996, concerning the defi-
nition of small and medium-sized enterprises (OJ L 107, 30.4.1996,
p. 4).

(5) Dealing in land, commodities futures, shares, securities or other
financial instruments; dealing in goods (other than in normal whole-
sale or retail trades); banking, insurance, money lending, debt facto-
ring, hire-purchase financing and other financial activities; leasing or
letting assets on hire, except in the case of certain ship-chartering
activities; providing legal or accountancy services; property develop-
ment; farming, forestry or market gardening.

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the
subordinated to that of private
minimum level required in order to stimulate the crea-
tion of any fund. The type of subordination will depend
on the individual bids brought forward in the tender,
and may include State guarantees to other investors.

investors

at

(19)

(20)

(21)

(22)

agreements

Limited-partnership

The Regional Funds will take the form of limited part-
nerships.
normally
contain a clause concerning carried interest, setting a
profitability ‘hurdle’ which the manager has to exceed in
order to get an extra bonus. This clause will be nego-
tiated from the sponsor's and investors' point of view, so
that the hurdle rate is attainable, yet stretching, thus
giving an incentive to the fund managers to reach and
exceed their hurdles.

Commitments

The United Kingdom authorities have undertaken to
apply the Commission notice on the application of
Articles 87 and 88 on State aid in the form of guaran-
tees (6), should a regional fund choose a State guarantee
as a form of subordination of the State return.

The United Kingdom authorities have set a formal limit
of 50 % Government
in each regional
venture capital fund.

investment

The United Kingdom authorities have undertaken to
ensure that the Regional Venture Capital Funds will not
invest in companies active in sensitive sectors for which
special Community rules governing State aid have been
laid down. The Regional Funds will not invest in compa-
nies active in the production, processing or marketing of
products listed in Annex I of the EC Treaty.

3. GROUNDS FOR INITIATING THE PROCEDURE

Weak proof of market failure

(23)

The Commission expressed a general doubt concerning
the incentive effect of the notified scheme. Among other
things, the United Kingdom authorities stated in the
notification that the British Venture Capital Association
in England who invested under
had 15 members
GPB 250 000 (about EUR 400 000)
and had an
average investment size of GBP 500 000 or under
(excluding technology specialists). The Commission
therefore had doubts whether there was a market failure
or not.

(6) OJ C 71, 11.3.2000, p. 14.

Possible presence of incompatible aid to the private
investors

(24)

(25)

in a purely commercial

The State expects to have to subordinate its returns on
investment in one way or another. These are not terms
that are present
investment
situation, so the Commission considered that the State
would not be acting as a private investor in a market
economy. As the financial markets are international, the
Commission considered that the benefits granted to the
private investors could distort competition and affect
trade between Member States.

The scheme does not foresee a link between the aid
provided to private investors and any expenditure that
can be considered to constitute eligible costs. Moreover,
although the development of SMEs and regional devel-
opment are Community objectives,
the Commission
doubted whether the scheme really ensured that the aid
was the minimum necessary to attain these objectives.
The reason was that it appeared from the notification
that the call for tenders for investors would be limited to
England. Consequently, the Commission also doubted
that any aid to the investors would be compatible with
the State aid rules of the EC Treaty. A regional limit to
for tenders could also have constituted an
the call
infringement of Article 43 of the EC Treaty on the
freedom of establishment and/or Article 56 of the EC
Treaty on the free movement of capital.

Possible presence of incompatible aid to the SMEs
receiving investments

(26)

The SMEs in which the Regional Funds invest will
receive equity capital that they would not have had
access to otherwise, at least not if there is a true equity
gap. The resources have partly been invested by the State
and the private capital of each fund has been raised
thanks to the State aid provided to the private investors.
This could also imply that the capital might be provided
on terms that would not be acceptable to a private
investor, and that fund managers would not invest on
commercial
terms. Recipient SMEs will be able to
strengthen their competitive position, which threatens to
distort competition and can have an affect on intra-
Community trade, since the beneficiaries can be active in
international trade.

(27)

The scheme does not foresee an explicit commitment to
link the equity-based investments to initial investments
by the beneficiary companies. Therefore, it was neither
in line with the Community guidelines on State aid to
SMEs in force at the time, nor with the Community
guidelines on national regional aid, and the Commission
had doubts as to its compatibility with the EC Treaty.

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Possible presence of

incompatible aid to the

(32)

Regional Funds

4. COMMENTS FROM INTERESTED PARTIES

(34)

(28)

The United Kingdom authorities stated in the noti-
fication that the British Venture Capital Association has
15 members in England who invest under GBP 250 000
(about EUR 400 000) and have an average investment
size of GBP 500 000 or under (excluding technology
specialists). These venture capitalists are active in the
same segment as the Regional Funds, as are other
venture capitalists in other Member States. Therefore, if
the Regional Funds were to be seen as undertakings, the
fact that they operate with the aid of public resources
could distort competition on the venture capital market.

(29)

The compatibility problems of any aid to the Regional
Funds would be the same as for the other potential aid
recipients.

(30)

The Commission received comments from 39 interested
parties within the time limits specified in Article 6(1) of
Council Regulation (EC) No 659/1999 of 22 March
1999 laying down detailed rules for the application of
Article 93 of the EC Treaty (7). Of these, 37 were from
the United Kingdom, and the other two from the Italian
and German Governments. The comments from the
United Kingdom were submitted by various regional
authorities, venture capital companies, advisory bodies, a
trade association and a university. There were also
comments from three United Kingdom MPs and from
two United Kingdom MEPs. Prospective sponsors of
funds, fund managers and private investors and investee
companies were represented.

On market failure

(31) All

interested parties who addressed the question of
market failure agreed that there was one for amounts
below GBP 500 000 (about EUR 800 000). There were
also several mentions of an equity gap below GBP 1
million (about EUR 1,6 million), at least for sectors
other than high technology. The gap was mainly due to
the high costs of due diligence, and old data showing
disproportionately high risks and low returns from this
segment, so that there was a gap between perceived and
real risk. At the same time successes in larger invest-
ments created a drive for even larger ones. Another
remark was that the business angel network did not fill
the gap.

Regarding the 15 members of the BVCA supposedly
active in the equity gap segment, several
interested
parties stated that these venture capitalists may be regis-
tered as active in the segment, but there was no actual
activity going on. One reason for this may be that the
it also
funds were already fully invested. However,
appeared from the comments that although there may
be some funds available, they were nowhere near satis-
fying market demand. It was also stated that although
major United Kingdom venture capital companies may
have regional offices, they serviced deals at the larger
end of the market.

(33)

The London Development Agency quoted a BVCA
report (8) finding that ‘London is the main European
centre for venture capital but that does not mean that
London SMEs see the benefit of this. An equity gap
exists in London up to GBP 500 000 and may extend
beyond this given the greater cost pressures that tend to
push London-based firms more rapidly towards larger
investments.’

Finally, all interested parties claimed that there was an
equity gap for small as well as for medium-sized enter-
prises, as the problem was not linked to the number of
employees. One venture capital company proposed
defining an eligible company as one that sought to raise
less than GBP 500 000 (about EUR 800 000) a year.
Several interested parties mentioned that a restriction to
small companies would increase the risk of the fund and
the private investors' requirements on return and, conse-
quently, the need for subordination of the State's return.

On aid to the investors

(35) Here the general opinion was that since there was no
offer in the equity gap, i.e. in the high risk/low return
quadrant of the market, there was no competition to
distort, and so there was no aid to investors. At the
same time several parties stressed that the possibility to
invest had to be widely advertised in order to eliminate
any discrimination between investors and to minimise
the subordination needed. One party mentioned that
even though the incentive might be granted to the
investors,
they were only a vehicle for passing the
benefit on to the SMEs.

(36) Another comment was that risk capital

investments
were usually a very small part of investors' portfolios, so
that a slightly higher return from the regional venture
capital funds would not have an impact on the overall
performance of investors.

(7) OJ L 83, 27.3.1999, p. 1.

(8) BVCA Report on Business Angel Investment Activity 1998/99.

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On aid to the SMEs

(37)

The overall impression is that interested parties did not
think that there was aid to the SMEs invested in, since
the investments were made on commercial terms. The
only element of aid acknowledged by interested parties
was the very availability of the funds. As for the compa-
tibility of any such aid, they referred to the fact that the
recipients had to undertake some ‘eligible’ investments in
order to grow.

On aid to the regional funds

(38) Many interested parties mentioned that there was no
basis for the Regional Funds being in receipt of aid, since
the standard limited partnership structure in the industry
that will be used did not create any separate legal entity.
A Regional Fund would not earn profits in its own right
and all assets and liabilities would be held by its partners
in proportion to their investment.

(39) A number of parties explained that if more funds began
to be offered in the market segment concerned, there
might be a danger of distortion of competition between
funds. In that case the policy would have accomplished
its aim and the problem of distortion would have to be
addressed.

— The United Kingdom authorities undertake to ensure
that fund managers advertise widely for investors in
appropriate trade journals and in the Official Journal
of the European Communities. There will be no restric-
tions placed on the location or nationality of
investors.

— The United Kingdom authorities undertake

to
prescribe the need for
the fund
managers to maximise the performance of funds.

incentives

for

— In principle, an investor is committed for the life of
the fund, i.e. for 10 to 12 years. The only way an
investor can be released from this commitment is to
sell the investment. If an investor wishes to do this,
he must have the fund manager's and other invest-
ors' consent
for any transfer of ownership. The
Government does not intend to offer to purchase
any share of the partnership that is being sold by a
the Government's
private sector investor, even if
share of the Regional Fund is below 50 %. On the
other hand, the Government would be willing to sell
its share of the partnership to any private sector
investor who is willing to take on board the subordi-
nated terms.

(41)

In addition, the following comments have been made on
each of the issues raised in the Commission decision to
open the procedure.

5. COMMENTS FROM THE UNITED KINGDOM

On market failure

(40)

First of all, the United Kingdom authorities have clarified
the following technical details of the scheme:

(42)

— There may well be an equity gap in London, and the
scheme will not only operate outside London. There
will probably be between 10 and 15 Regional Funds
in total.

— Each tranche of investment in a company is strictly
limited to GBP 250 000 (about EUR 400 000), and
there must be at least six months between tranches.
In principle, the amount of investment per company
is limited to GBP 500 000 (about EUR 800 000).
The only exception to the GBP 500 000 limit will
be where further investment is required in order to
maintain the Regional Fund's percentage holding in a
company, and making such investment is in the
judgement of the fund manager in the best commer-
cial interests of the fund. Such further investments
will be subject to an overall limit of 10 % of any
fund being invested in one company. The United
Kingdom authorities point out that as investments
above GBP 500 000 (about EUR 800 000) can only
happen where there is a risk of dilution of share-
holding,
they will only happen alongside other
private sector investments. The further investments
will be on terms at least as good as those offered to
the private sector investments.

The United Kingdom authorities state that
there is
strong evidence of market failure caused by investors'
over-reliance on historic aggregate performance data. As
the average deal size in the venture capital market has
increased, SMEs have found it more difficult to access
the type and size of finance most suited to their needs.
In establishing these funds the United Kingdom Govern-
ment
to provide
funding in this area and demonstrate to the wider
venture capital industry that good commercial returns
can be made from this sector. The scheme is not
intended to be a long-term public support programme.

is seeking to stimulate the market

(43) Moreover, the United Kingdom authorities agree with
several interested parties that the equity gap in England
has been widened lately, so that it now covers amounts
below GBP 1 million (about EUR 1,6 million). While a
number of funds do currently exist which make invest-
ments in the equity gap, most are nearly fully invested.
The United Kingdom authorities believe that there are
currently no new private funds being raised for invest-
ment in the equity gap. The only funds proposed are
those with support
the
from either
Regional Venture Capital Funds Scheme.

the ERDF or

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On aid to the investors

the EC Treaty, with particular reference to the new
Commission Communication on State aid and risk
capital (9).

(44)

The United Kingdom authorities stress that investors in
the Regional Funds will be attracted by wide dissemina-
tion of an invitation. They are neither limited by number
nor geography nor predetermined. Those who operate
the Regional Venture Capital Funds will be commercial
fund managers, chosen following a rigorous competitive
process to ensure that any aid is the minimum required
for funds to be created.

Presence of State aid under Article 87(1) of the EC
Treaty

(50)

Point IV.3 of the Communication lists the criteria for a
risk capital measure to constitute State aid.

At the level of the investors

On aid to the SMEs

(51)

(45)

The United Kingdom authorities claim that the funds
will operate in accordance with the market economy
investor principle, since there are performance incentives
for the fund managers and the private investors would
not commit to a fund which did not offer them the
highest possible return. There are no mechanisms in the
scheme which allow for, or encourage, ‘soft’ investments
to be made. Therefore, they think that the scope for aid
to the SMEs is negligible.

(46) As returns to the investors can only be generated by
growth in the investee companies and as growth
without
it
would seem inconceivable to the United Kingdom
authorities that investments by the funds would not lead
directly to investments by the SMEs.

is virtually impossible,

investment

initial

(47)

Private investors are likely to consider that a restriction
the
on investments to small companies would limit
Regional Funds' ability to secure the highest possible
rates of return. Consequently, investors would require an
even higher level of public support.

Since the State participates directly in the Regional
Funds, State resources are involved. The State expects to
have to subordinate its returns on investment in one
way or another. These are not terms that are present in a
purely commercial
investment situation, so the State
cannot be said to be acting as a private investor in a
market economy. Consequently, there is an advantage to
the private investors. Although the private investors are
found through an EU-wide call for tenders, the measure
is selective in that not all applicants can finally partici-
pate. There is discretion at two points, i.e. firstly, when
the fund manager selects offers from prospective private
investors and, secondly, when the State decides in which
proposed Regional Funds it will invest. These selections
will be based on qualitative as well as quantitative
criteria. Investment of capital is an activity which is the
subject of very large trade between Member States.
distort
Consequently,
competition and affect trade between Member States.
The private investors are only covered by Article 87(1)
of the EC Treaty to the extent that they constitute under-
takings.

threatens

scheme

the

to

(52)

It is clearly stated in point IV.5(I) of the Communication
that the fact that due to a market failure no investors
would otherwise make such investments, is not in itself
sufficient to rebut the presumption of an advantage.

On aid to the regional funds

At the level of the SMEs

(48)

The United Kingdom authorities explain that it is not
possible to distinguish between a fund and its investors.
The fund does not have a separate taxation status and
does not have the ability to make profits or losses in its
own right. Any profits or losses are attributable to the
investors in line with the legal agreement.

6. ASSESSMENT OF THE SCHEME

(49) At the time of opening the procedure, the Commission
did not yet have any State aid rules dealing specifically
with the particular form of State aid that may be
contained in measures providing risk capital to enter-
prises. The present assessment is based on Article 87 of

(53) As much as 50 % of the resources made available to the
SMEs may constitute State resources. On the issue of
whether there is an advantage, the aim of the measure is
to give the SMEs access to capital to which they would
not otherwise have had access. The existence of advan-
tage depends on whether the terms on which this capital
is made available would be acceptable to a private
investor in a market economy. This is discussed in the
following paragraph. At this level the measure is clearly
selective as the Regional Funds may only invest in SMEs
in certain regions of the United Kingdom. Recipient
SMEs will be able to strengthen their position in relation
to their
to distort
competitors, which threatens
competition and have an effect on trade between
Member States, since the beneficiaries can be active in
international trade.

(9) Adopted by the Commission on 23 May 2001 (not yet published

in the Official Journal).

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(54)

It is stated in point IV.5(III) of the Communication that
the fact that the investment decisions are being taken by
commercial managers of risk capital funds, or by repre-
sentatives of
to ensure a
investors, with an interest
maximum return for the fund is an important indicator
that the company has received the investment on terms
acceptable to a private investor in a market economy,
but it is not in itself conclusive. If a risk capital measure
has reduced the risks and/or increased the rewards
which investors will obtain from making a particular
then they may be said no longer to be
investment
operating as a normal economic operator. The Commis-
sion has already found, and the Court of Justice has
agreed, that advantages granted to investors to persuade
in a certain class of enterprise may
them to invest
constitute advantages to those enterprises (10). In accord-
ance with point
the Communication the
Commission must take into account the possibility that
any advantages accorded to investors in the funds are
passed on to the enterprises invested in, when the
investments are not made by the fund pari passu, with a
private investor in a market economy. It may be that the
typical investments of the funds are not made pari passu
in this way, and the Commission cannot
therefore
conclude that the enterprises will receive the investment
on terms which would be acceptable to a private
investor in a market economy. The Commission there-
fore considers that the existence of an advantage and
therefore of State aid at this level cannot be excluded.

IV.5(III) of

At the level of the regional funds

(55) As the Regional Venture Capital Funds will be limited
partnerships, the Commission does not consider them to
be separate aid beneficiaries. This principle was estab-
lished in the Commission decision on another United
Kingdom venture capital scheme, namely the Viridian
Growth Fund (11).

EUR 500 000

a maximum of

wholly or partially financed through State aid will
contain
(about
GBP 312 700). This criterion is fulfilled in the case
under examination.
In addition, the United Kingdom
authorities and interested parties have stated that the
majority of funds present in the equity gap segment are
fully invested and that there is no evidence that new
private funds are being established. There is also agree-
ment on the fact that the available funds are far from
sufficient to cover demand. Finally, there are indications
that the equity gap is actually increasing to amounts
below GBP 1 million (about EUR 1,6 million), rather
than GBP 500 000 (about EUR 800 000).

(57)

In point VII.1 on the form of the aid measure, it is stated
that one form of aid which the Commission will be
prepared to view favourably under the compatibility
criteria is that of schemes in which the State is an
investor in Venture Capital Funds, even if on less advan-
tageous terms than other investors.

(58)

In section VIII.3 of the Communication seven compati-
bility criteria are listed in order of importance.

1. Target enterprises and size of transactions

(59)

The scheme is not limited to small enterprises and to
medium-sized enterprises in their start-up or other early
stages, or in assisted areas. However, as there is a restric-
tion on the total funding available through the measure,
the inclusion of later stage medium-sized enterprises can
be accepted. The Commission notes that any invest-
in excess of GBP 500 000 (about
ments made
EUR 800 000) in one enterprise will be made on terms
at least as good as those of the other private investors
investing at the same time.

Exemption under Article 87(3)(c) of the EC Treaty

(60)

(56) According to point VI.5 of the Communication, the
Commission will
require provision of evidence of
market failure before proceeding to authorise risk capital
measures. It may be prepared to accept that there is a
market failure where each tranche (12) of finance for an
enterprise from risk capital measures which are in turn

of

EUR 500 000

It is a positive element that the ceiling for each tranche
of financing provided is far below the stipulated thresh-
olds
regions,
EUR 750 000 for regions qualifying for assistance under
Article 87(3)(c) of the EC Treaty or EUR 1 million in
regions qualifying for assistance under Article 87(3)(a) of
the EC Treaty.

non-assisted

for

(10) Case C 16/97, OJ L 212, 30.7.1998, p. 50. This case was the
in Case C-156/98, 19

the Judgment of

the Court

subject of
September 2000.

2. Focus on risk capital market failure

(11) Decision adopted by the Commission on 13 February 2001 (not

yet published in the Official Journal).

(12) Separate injections of capital within six months of each other
the same tranche, as would
would be considered to be part of
different
to which a
commitment is made simultaneously as part of a single transaction.

instalments, even over a longer period,

(61)

It is a positive element that the measure is limited to the
provision of equity-based investments.

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Official Journal of the European Communities

L 263/35

3. Profit-driven investment decisions

(62)

It is a positive element that the United Kingdom authori-
ties have undertaken to ensure that there will be a link
between investment performance and the remuneration
of those responsible for investment decisions. In any
case, this is common practice for funds established as
limited partnerships.

(69)

(63) Given the undertaking by the United Kingdom authori-
ties, the Commission is confident that the investments in
the equity of SMEs will be made on a commercial basis.
Market economy investors will provide at least 50 % of
each Regional Fund's capital, which can be considered a
significant involvement. For funds operating in assisted
areas the Commission would consider a private capital
share of 30 % to be significant.

4. Minimised distortion of competition between investors and

between investment funds

(64)

It is a positive element that the extent of subordination
of the return on the public resources is determined
through a series of calls for tender. First of all the
invitation to invest in the funds will be published in the
Official Journal of the European Communities and in appro-
priate trade journals. Secondly, each sponsor of a fund
will present the Government with a bid containing an
explanation of why the subordination proposed is the
least necessary to attract private investors.

(65)

This should ensure that there is no overcompensation to
the private investors.

(66)

(67)

5. Sectoral focus

It is a positive element that there is no sectoral focus,
and that particularly low-risk sectors which should
manage without State intervention have even been
excluded.

The United Kingdom authorities have undertaken to
ensure that the Regional Venture Capital Funds will not
invest in companies active in sensitive sectors for which
special Community rules governing State aid have been
laid down. In particular, they will not invest in compa-
nies active in the production, processing or marketing of
products listed in Annex I to the EC Treaty.

(71)

6. Investment on the basis of standard commercial practice in

fund management

(68)

It is a positive element that the Regional Funds will be
commercially managed by a professional fund manager,
regulated under the auspices of the Financial Services
Authority,
Investment Management Regulatory
Organisation and the British Venture Capital Associa-

the

tion. This ensures that the fund managers will make
professional
judgements as to whether an expected
return from a proposed equity injection into any SME
will be a good commercial proposition.

The communication mentions the lack of an ‘exit mech-
anism’ for the State's involvement in individual enter-
prises as a negative element, since an exit mechanism
would be a safeguard against schemes providing long-
term financing to companies which will never be viable
on their own. However, it is in the nature of a scheme
taking the form of a Venture Capital Fund like this one
that the individual investors, including the State, cannot
withdraw from individual investments made by the fund.
The exit mechanism is built
into a Venture Capital
Fund's design in that the State exits at the same time as
the other investors when the fund is wound up. More-
over, the Regional Funds are operating on commercial
terms. They will therefore withdraw from companies
that will never be viable on their own and will seek to
realise the value of successful
investments when it is
most advantageous to do so, leading ultimately to the
withdrawal of the fund (and therefore of the State partic-
ipation) from all of the companies invested in.

7. Avoidance of
enterprises

cumulation of aid measures

to single

(70) According to the Communication, the Commission may
request commitments by a Member State to assess and
set limits to other forms of State aid to enterprises
funded by the risk capital measure,
including under
if a measure provides aid to the
authorised schemes,
enterprises
In this particular case the
Commission has decided not to exercise this right owing
to the small size of the total investments and the indi-
vidual tranches.

invested in.

7. CONCLUSION

The Commission takes note of the comments received
from interested parties and of the explanations given
and further commitments made by the United Kingdom
authorities since the opening of the procedure. It also
notes that the scheme contains positive elements under
each of the seven criteria stipulated in the Communi-
cation. Therefore, the Commission is able to take an
overall favourable view of the scheme and to conclude
that the aid granted to the private investors and to the
small and medium-sized enterprises is compatible with
the State aid rules. The doubts regarding a possible
infringement of Articles 43 and 56 of the EC Treaty
have also been allayed.

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Official Journal of the European Communities

3.10.2001

(72)

The Commission concludes that there is no aid at the
level of each Regional Fund, as the funds will not be
legal entities and the resources of the funds belong to
the investors. However, the United Kingdom authorities
are invited to monitor the development of the equity
is no
gap situation and to ensure
crowding-out of prospective fully private venture capital
funds,

there

that

trial Development Act 1982, Section 8, is compatible with the
common market within the meaning of Article 87(3)(c) of the
EC Treaty.

Implementation of the aid is accordingly authorised.

Article 2

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

HAS ADOPTED THIS DECISION:

Article 1

Done at Brussels, 6 June 2001.

The notified State aid scheme Regional Venture Capital Funds,
as completed by the comments made by the United Kingdom
authorities since the opening of
the procedure, which the
United Kingdom is planning to implement based on the Indus-

For the Commission

Mario MONTI

Member of the Commission