A new agreement signed by Commissioner for Research Carlos Moedas on Wednesday will see the EU provide more loan guarantees to small and medium-sized (SMEs) and mid-cap companies through its financing arms, the European Investment Bank (EIB) and the European Investment Fund (EIF).
The Commission announced it would bring forward €750 million to boost the InnovFin programme, the part of the EU’s Horizon 2020 research programme designed to make more money available for high-risk projects that cannot raise cash from traditional sources.
InnovFin vehicles, now numbering seven with the recent addition of three new ones, are designed to furnish risky projects with attractive conditions, all in the hope that otherwise risk-averse investors might take a punt.
The extra firepower is made possible because of backing from the European Fund for Strategic Investments (EFSI), better known as the Juncker plan, a €315 billion scheme to boost private investment in European infrastructure projects. InnovFin will use EFSI money as collateral or backing for its own guarantee schemes, which in turn will be drawn upon if any of the loans it guarantees should default.
Explaining the new arrangement, Moedas said, "The InnovFin instruments that we put in place to help innovative SMEs access finance have had phenomenal success and have been oversubscribed for 2015. The backing of the European Fund for Strategic Investments will help satisfy the extraordinary demand by ensuring more and faster access to finance for innovative SMEs.”
“This is one tangible example of the Investment Plan for Europe already delivering for research and innovation and increasing the firepower of Horizon 2020,” Moedas claimed.The Juncker plan is a move away from the traditional system of subsidies and grants to a financial market-driven, loans-based approach aimed at providing guarantees to private investors who are expected to queue up to fund energy, IT, broadband, transport and research projects chosen by Europe’s national governments.
New financial vehicles
InnovFin will grow from four financial vehicles to seven. The three recently-added vehicles include:
- InnovFin SME Venture Capital facility, which will see the EIF co-finance investments by business angels in innovative SMEs and small midcaps that predominantly aim to commercialise new ICT-related products and services. With an initial EU financial contribution of €30 million to around 30 funds, the Commission expects this pilot to generate an amount of up to €120 million of investments.
- InnovFin Energy Demo Projects will support demonstration projects in the fields of renewable energy and hydrogen and fuel cells. It has been given €100 million to get off the ground.
- Similarly, InnovFin Infectious Diseases will ensure projects with a higher risk factor, such as new drugs, vaccines and medical and diagnostic devices, will receive loans. It has also been given €100 million.
- The Large Projects pot, which has been developed to improve access to risk finance for R&D projects developed by big entities. The range of loans is from €25 million to €300 million.
- MidCap Growth Finance, which offers senior and subordinated loans or guarantees for innovative larger midcaps, with up to 3,000 employees, and also to SMEs and small midcaps. Loans will range from €7.5 million to €25 million.
- MidCap Guarantee, which offers guarantees or contingent loans of between €7.5 million and €25 million, to improve access to finance for innovative larger midcaps in particular. The EIB will backstop loans, in partnership with Europe’s banks.
- SME Guarantee, which is designed to open the door to loans of between €25,000 and €7.5 million for innovative SMEs. The European Investment Fund (EIF) is steering this in partnership with banks across Europe. Under this vehicle, banks will be guaranteed by the EIF against a proportion of any losses incurred on loans.
The programme was created to benefit mostly medium and large technology companies, and large-scale research projects such as European or national research infrastructure. However, it is open to private and public entities of any size and ownership, including SMEs, research organisations and public-private partnerships.
The predecessor of InnovFin, the Risk Sharing Finance Facility, operated from 2007 to 2013 as part of the EU's Seventh Framework Programme for research. Over this period it was involved with 114 projects, providing funding of €11 billion and loan guarantees worth over €1.4 billion.
One criticism of the risk-sharing instrument was that it did not cater well enough to SMEs, which tend to have trouble with complex loan arrangements.
There has been more effort this time on designing a vehicle that brings SMEs into the fold.
The new announcement is seen as an effort to allay any fears that the fruits of the Juncker plan will not reach SMEs.
With reactions to the investment package so far mostly cautious or sceptical – feelings heightened after policymakers went looking for research money to help bankroll it – the inclusion of more commitments to small businesses is designed to play well with members of the European Parliament and national electorates.One difficulty in selling the plan has been the relatively little cash put upfront by the Commission.
Seed money to launch the investment programme will total €21 billion - that is, just €8 billion of new EU cash, plus €8 billion of existing EU budget funds and €5 billion from the EIB. The EU then hopes to achieve a leverage ratio of 15 to turn this €21 billion into an investment of €315 billion.
However nine countries – the UK, Germany, Spain, France, Italy, Luxembourg, Poland, Slovakia and Bulgaria – have since come out as willing to cough up additional national funding to help stir the pot.