Annex 8

Scoping Paper for

Access to Risk Finance

  1. Context

This scoping paper draws on the report[1] of the 'Access to Risk Finance Advisory Group' (RFAG)[2]; discussions ataGreek Presidency conference on 'Growth-Enhancing EU Financial Instruments for RDI'[3]; the ex-ante evaluation of Horizon 2020 financial instruments; Communications on long-term financing and on crowdfunding[4]; working papers from European Investment Fund (EIF); reports by the Organisation for Economic Co-operation and Development (OECD) and the European Central Bank (ECB); and exchanges in the Horizon 2020 Programme Committee in its configuration 'SMEs and Access to Risk Finance'.

The overall objectiveof 'Access to Risk Finance' is to support and facilitate access to sources of debt and equity financing by innovative companies and other bodies of all types and sizes.

Particular support is required for innovative small and medium-sized enterprises (SMEs) and small midcaps, especially in the start-up phase or after diversifying into new markets. The availability of early-stage and growth-stage equity finance for innovative firms also needs improvement, with better access to finance a must for the concept and proof-of-concept stage of the innovation process. For commercial-scale, first-of-a-kind demonstration plants and their market uptake and wider deployment, a more predictable and stable supply of risk capital is needed: this is a key factor in attracting the public and private stakeholders necessary for commercialisation to happen. The availability of debt finance for research and innovation (R&I) infrastructures also needs enhancing.

The Work Programme for 2014-2015 focuses onrolling out a debt instrument (coupled with a full-scale advisory service) providing loans, guarantees and other forms of debt finance to innovating entities of all forms and sizes, and an equity instrument providing finance for mainly early-stage investmentsplus some growth-stage.'InnovFin MidCap Guarantee', 'InnovFin MidCap Growth Finance' and 'InnovFin Large Projects' continue and refine theRisk-Sharing Finance Facility (RSFF). MidCap Guarantee provides guarantees and counter-guarantees on loans from EUR 7.5 million to EUR 50 millionsupplied byselected banks and other financial intermediaries; a portion of their potential losses is guaranteed by the European Investment Bank (EIB). MidCap Growth Finance delivers loans and mezzanine finance from EUR 7.5 million to EUR 25 million directly from EIB, and Large Projects channels direct loans from EUR 25 million to EUR 300 million. 'InnovFin Advisory' is an expansion in scope and size of apilot RSFF service. For SMEs and small midcaps, 'InnovFin SME Guarantee', building on the Risk-Sharing Instrument for SMEs (RSI) pilot, provides guarantees and counter-guarantees on loans from EUR 25000 to EUR7.5 million supplied by selected banks and other financial intermediaries, with a portion of their potential losses guaranteed by EIF. 'InnovFin SME Venture Capital', to be implemented by EIF via selected risk capital funds, will focus on early-stage venture capital finance.

  1. Strategic orientations for 2016-2017

SMEs continue to face more severe credit conditions than large enterprises in the form of higher interest rates, shorter loan periods, partial financing, and more requests for collateral or for greater collateral. Data compiled by the OECD and incorporating material from ECB/EC surveys persistently show that SMEs overall remain, to a very large extent, dependent on banks for their external financing and have few alternatives.

Worryingly, the volume of SME loans has declined markedly in most Member States, especially in Southern Europe, despite sporadic upsurges in some countries, while loan authorisation rates have decreased considerably in a number of countries due to tighter credit standards and more negative prospects as a result of the financial and economic crisis. The slowdown in lending recorded on the supply side is matched by SMEs' perceptions of the poor availability of credit and the reluctance of banks to lend.

The situation is even worse for SMEs undertaking R&I. Banks typically lack the ability to value knowledge assets, and are therefore often unwilling to invest in knowledge-based companies,or do so only with a risk premium. In consequence, many established and innovative SMEs find it hard to obtain loans for R&I activities.

For medium and large midcaps and large firms, although capital is available, banks are often unable to offer appropriate terms. Especially for midcaps, most of what is available is for short-term, highly collateralised financing, usually fee-heavy, that does not match the characteristics of the long-term, flexible debt required by companies seeking to fund investments primarily in intangible assets (i.e., research staff, working capital and acquisitions). The demand exceeds the available supply of suitable offerings.

Turning to equity, potentially viable, profitable SMEs and small midcaps are often unable to raise venture capital for R&I, especially at the earliest, most risky technology transfer stages. The same applies at the expansion stage. For medium and large midcaps, there is a significant short-fall between the supply and demand of equity-type financing, and a discrepancy between the optimal investment product and the characteristics of those products available.

The new generation of EU financial instruments for R&I, launched in 2014 under Horizon 2020,was designed to help address this situation.

The prime demand from stakeholders for 2016-2017 is for thecontinued roll-outof these instruments. They also want to see the continued piloting of new facilities in response to developments in the risk finance landscape and the wider economic environment.Stakeholder and Advisory Group recommendations cover proposals for activities to help bridge the financing gap for SMEs (involving the systematic collection of firms' progress data, easier availability of credit-scoring data, strengthening the securitisation market, and fostering smaller, more frequent equity funding rounds); improving liquidity in the equity market (better exit opportunities and easier fund refinancing); creating a venture capital funds-of-funds; and promoting crowdfunding as part of a wider effort to develop alternative, innovative forms of financing for R&I. This holistic approach to improving access to finance — complementing the provision of finance itself with other initiatives that have more of a regulatory flavour — will guide the development of Horizon 2020's financial instruments in the longer-term.

The key challenge for 2016-2017, as for 2014-2015, is to ensure a sustainable pipeline of financial instrument operations with a good geographical spread, and the involvement, for intermediated products, of a broad, diverse range of types of financial intermediary. To achieve this will require continuing the facilities launched in 2014 and 2015 via EIB and EIF together with further measures to inform and engage intermediaries, investors (especially long-term investors)and final beneficiaries.

A further challenge is to cater for the potential roll-out, in 2016-2017, of the technology transfer, business angel and other possible facilities (such as in the areas of first-of-a-kind demonstration plants, crowdfunding and philanthropic funding) piloted in 2014-2015 and, depending in large part on the results of a current study, the launch of a venture capital fund-of-funds.In addition, SMEs in the commercialisation stage (phase 3) of the SME Instrument will require facilitated access to risk finance.

In the light of the above, the main objective for 2016-2017, as in 2014-2015, is to keep improvingaccess to sources of debt and equity financing, and its take-up and absorption, by innovative companies of all sizes and by research centres and universities, public-private partnerships, R&I infrastructures, special-purpose companies or projects, innovation procurement projects, and joint ventures.

This main objective is fully aligned with the first priority of the new Commission's agenda[5]: to strengthen Europe's competitiveness and stimulate investment for the purpose of job creation. Financial instruments, accompanied by the preparation of projects, are allocated a key role:

"....the investment environment has to be improved and fund absorption needs to be strengthened. The preparation of projects by the EIB and the Commission should be intensified and expanded. New, sustainable and job-creating projects that will help restore Europe’s competitiveness need to be identified and promoted. To make real projects happen, we also have to develop more effective financial instruments, including in the form of loans or guarantees with greater risk capacity. "

The specific objectives for 2016-2017 are to:

Incentivise banks of all types, and non-bank lenders, to make more loans on better terms to SMEs and midcaps undertaking innovation.

Intensify cooperation with EIB (and potentially with lenders of similar stature) in risk-sharing arrangements, leading to loans on reasonable terms to large firms undertaking innovation.

Facilitate the provision of greater volumes of debt finance from alternative lenders, such as challenger banks and peer-to-peer (crowdlending) platforms.

Stimulate more equity finance from venture capital and other suppliers, such as business angels and venture philanthropists (including foundations).

Reinforce efforts to help SMEs and small midcaps improve their investment-readiness and assist large, long-term, complex projects improve their 'bankability'.

Involve a broader range of risk-finance stakeholders at national and regional levels.

On the debt side, the anticipated impacts of Horizon 2020's financial instruments in 2016-2017 are more direct loans to larger firms and other entities in terms of the number of operations and the volume of funding mobilised; and more intermediated loans to SMEs, small midcaps and other midcaps in terms of the number of agreements reached with financial intermediaries and the volume of funding mobilised.

Anticipated impacts on the equity side are a higher volume of 'formal' early-stage equity financing available to innovative SMEs and small midcaps in terms of the number of agreements reached with venture capitaland other risk-capital funds and the volume of funding mobilised; a higher volume of 'less formal' early-stage equity financing available to innovative SMEs and small midcaps in terms of the number of agreements reached with business angel groups and other less institutionalised groups and the volume of funding mobilised; and greater technology transfer financing in terms of the number of agreements reached with technology transfer funds and vehicles and the volume of funding provided.

These outcomes will contribute to the availability of a wider range of debt and equity financing products and facilities available to support R&I; a stronger venture capital and wider equity industry in terms of its ability to attract institutional and other investors and to operate on a pan-European basis; the increased involvement of business angels, crowdfunding platforms and philanthropic foundations in funding R&I; and more investment in technology transfer.

This will lead, in turn, to a boost for jobs and growth and increased private investment in R&I, so helping achieve the Europe 2020 target that, by 2020, 3% of EU GDP should be invested in R&D.

Achieving these impacts needs a buoyant economy, sufficient awareness by firms of all sizes of the facilities available, deeper involvement of long-term investors, better project or company preparation in terms of 'bankability' or investment-readiness, and the participation of a broader, more diverse range of financial intermediaries.

There are clear links to several other parts of the Horizon 2020 work programme:

  • Enabling SMEs emerging from phases 1 or 2 of the SME Instrument to access risk finance (phase 3) [Leadership in Enabling and Industrial Technologies and all Societal Challenges].
  • Improving the potential of SMEs to undertake innovation [Innovation in SMEs].
  • Financing the development and market deployment of commercial-scale, first-of-a-kind demonstration plants, notably in the energy domain [Secure, clean and efficient energy].
  1. Translation into financial instruments and calls 2016-2017

'Continuity' will be the main principle in the next work programme, with the financial instruments and accompanying measures launched in 2014-2015continued in 2016-2017.

The financial instruments to be continued are InnovFin MidCap Guarantee, InnovFin MidCap Growth Finance, InnovFin Large Projects(Loans Service for R&Iin the Work Programme 2014-2015),InnovFin SME Guarantee (SMEs & Small Midcap R&I Loans Service), SME Initiative Uncapped Guarantee Instrument (Joint Guarantee Instruments for R&I-intensive SMEs and Small Midcaps),andInnovFin SME Venture Capital(Equity Facility for R&I). These instruments will operate, as now, in conjunction with COSME's Loan Guarantee Facility and Equity Facility for Growth.

The possibility of topping-up existing InnovFin products with ring-fenced budgetary contributions will be systematically explored[6].

Pilot instruments that may be scaled up are Piloting Co-Investments by Business Angels in Innovative ICT Firmsand Technology Transfer Financing Facility Pilot. Final decisions about the scaling-up of pilots will be taken once the pilots produce results and in the light of the budget available[7].

The main accompanying measures to be continued are InnovFin Advisory(Technical and Financial Advisory Service for Risk Finance in R&I), and the Coordination and Support Actions Capacity-Building in Technology Transfer and Boosting the Investment-Readiness of SMEs and Small Midcaps.

Potential pilot financial instrument facilities, subject to further work on their design and development and the outcome of discussions with stakeholders and the EIB and EIF, comprise support forfirst-of-a-kind demonstrator plants, crowdfunded R&I activities, venture philanthropy[8], innovation procurement, young entrepreneurs undertaking R&I, and venture capital funds-of-funds.

There may be calls for proposals covering capacity-building for business angels and for philanthropic funding, and to support the activities of National Contact Points for risk finance. There will be a call for tenders for the interim evaluation of financial instrument facilities under Horizon 2020, and there may be further calls covering studies on risk finance matchmaking platforms, credit-scoring registries, and on patent markets and technology transfer. Expert groups will address the development of a charter for socially responsible investment, and the philanthropic funding of R&I.

Two calls for expressions of interest launched in 2014-2015 will continue to be open, addressing banks and other financial intermediaries for the products InnovFin SME Guarantee (via EIF) and InnovFin MidCap Guarantee (via EIB).

Subject to discussion with the incoming Presidencies concerned, the 'Innovative Enterprise Week' conference in Riga under the incoming Latvian Presidency in June 2015 will be repeated in each of 2016 and 2017.

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[1]Strategic Programme Consultation, Access to Risk Finance Advisory Group (RFAG) (RFAG, 16 July 2014)

[2]See

[3]12-13 June 2014.See

[4]COM(2014) 168, 27.3.2014 and COM(2014) 172, 27.3.2014 respectively.

[5]See p.4

[6]The possibilities are outlined in Part II, section 2, Access to Risk Finance, of the Horizon 2020 Specific Programme. See pp. 995-996 in

[7]Common criteria for assessing to what extent EU financial instrument pilots have been successful are under development.

[8]In complementarity with the Employment and Social Innovation(EaSI) programme.