EN
L 161/108
Official Journal of the European Union
16.6.2022
viable according to the financial intermediary’s internal rating criteria, would be in a risk class where the intermediary would not invest in the absence of the risk finance measure.
The pass-on mechanism must include adequate monitoring arrangements, as well as a claw-back mechanism (53) or an equivalent contractual mechanism.
107.
Finally, to ensure that financial intermediaries involved in the risk finance measure deliver the relevant objectives, the investment strategy of the financial intermediary must be aligned with the objectives of the measure.
As part of the selection process, financial intermediaries must demonstrate how their proposed investment strategy may contribute to the achievement of the objectives and targets.
Furthermore, the Member State must ensure that the investment strategy of the intermediaries remains at all times aligned with the agreed targets, for instance via appropriate monitoring and reporting mechanisms and the participation of representatives of the public investors in the representation bodies of the financial intermediary, such as the supervisory board or the advisory board.
An appropriate governance structure must ensure that material changes to the investment strategy require the prior consent of the Member State.
For the avoidance of doubt, the Member State may not participate directly in individual investment and divestment decisions.
108.
Member States can deploy a range of financial instruments as part of the risk finance measure, such as equity and quasi-equity investment instruments, loan instruments or guarantees on a non-pari passu basis.
Paragraphs 109 to 121 set out the elements that the Commission will take into account in its assessment of such specific financial instruments.
(a)
Equity investments
109.
Equity investment instruments may take the form of equity or quasi-equity investments into an undertaking, by which the investor buys (part of) the ownership of that undertaking (54).
110.
Equity instruments can have various asymmetric features, providing a differentiated treatment of investors as some may participate to a larger extent in the risks and rewards than others.
To mitigate private investors’ risks, the measure may offer upside protection (the public investor giving up a part of the return) or protection against a part of the losses (limiting the losses for the private investor), or a combination of the two.
111.
The Commission considers that upside incentives create a better alignment of interests between public and private investors.
Conversely, downside protection whereby the public investor may be exposed to the risk of poor performance may lead to misalignment of interests and adverse selection by financial intermediaries or investors.
112.
The Commission considers that equity instruments with capped return (55), call option (56) and asymmetric income cash split (57) offer good incentives, especially in situations characterised by a less severe market failure.
113.
Equity instruments with non-pari passu loss-sharing features going beyond the limits set out in the General Block Exemption Regulation may only be justified for measures addressing severe market failures, for instance in hightech sectors, or other relevant obstacles identified in the ex ante assessment, such as measures targeting predominantly start-ups and SMEs before their first commercial sale or at the proof-of-concept stage.
To prevent extensive downside risk protection, the first loss piece borne by the public investor must be capped.
(53) A claw-back mechanism or equivalent contractual mechanism means an arrangement under which an intermediary must return an advantage obtained from the State that it failed to pass on to the final beneficiary as required.
(54) For the avoidance of doubt and in line with Article 21 of the General Block Exemption Regulation, for equity and quasi-equity investments, no more than 30 % of the financial intermediary’s aggregate capital contributions and uncalled committed capital may be used for liquidity management purposes.
(55) Capped return for the public investor at a certain pre-defined hurdle rate: if the pre-defined rate of return is exceeded, all returns above are distributed to the private investors only.
(56) Call options on public shares: private investors are given the right to exercise a call option to buy out the public investment share at a pre-agreed strike price.
(57) Asymmetric income cash split: cash is drawn from both public and private investors on a pari passu basis, but returns are shared, whenever they arise, in an asymmetric way.
Private investors receive a larger share of the distribution proceeds than they should receive pro rata their respective holdings, up to the pre-defined hurdle rate.