From MAP to CIP: the financial instruments EPP-ED hearing on CIP , 8 Dec 2005

Francis Carpenter, EIF Chief Executive

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EIF at a glance

WHEN? Created in 1994.

EU specialised financial institution (MDB, Triple – AAA)for SMEs, acting through:

Venture Capital (fund of funds) and Guarantees for SME portfolios

WHO ?

Subscribed capital of EUR 2 billion : - 62 %: European Investment Bank - 30 %: EC for the EU- 8 %: 25 financial institutions

WHY ?

Art 2 : « pursuit of Community objectives » such as growth, employment, knowledge-based economy, innovation, regional development, LisbonArt 24 : « generate an appropriate return on its resources »

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EIF resources / instruments

EUR 600m EUR 4 000m EUR 450m

EUR 250m – EUR 1bn

To be committed in venture capital funds and financial institutions in the EU and Candidate Countries

European Community (MAP)

ERP+ others...

Being increased

Being extented

Being increased

Evergreen

500 000 SMEs indirectly benefited from EIF

Largest EU early-stage fund of funds, leading microcredit guarantor. Total portfolio of EUR 11bn

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CIP: building on MAP credentials

• SME loan guarantees

– 27 countries covered, 66 portfolios of intermediaries – €4.5bn of EC guarantees– €15bn worth of loans guaranteed– Each euro has leveraged 44 euros of funding– Over 220 000 SMEs benefited from guarantees– More than 90% are small and micro-entreprises– Each quarter, 12 000 new SMEs benefit from the SME GF

• Venture capital (seed, early stage)

- Budget allocation EUR 130m - Some 300 high-growth SMEs have benefited - Mobilised €800m of total investment (total leverage estimated EUR 3bn)

• Evaluation

- 2 independent reports by EC: “ EIF is a must-have” for management of financial instruments, MAP has “made contribution to improving financial environment for SMEs”.

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MAP Case study

• Skype Technologies SA is a peer-to-peer phone services provider using the Voice over Internet Protocol (VoIP). The Skype software downloaded more than 155 million times !

• Skype benefits from Community resources under the ETF Start-up facility through New Tech Venture Capital Fund (“NTVCF”). NTVCF has received a EUR 10m investment (19.5% of the fund size) from the EIF in June 2000. ETF – SU Skype investment amounted to some EUR 300 000.

• NTVCF was the very first institutional investor in Skype

• On 12 September 2005, Ebay agreed to acquire Skype for EUR 2.1bn in a half cash, half stock deal. An earn-out structure is foreseen that could bring the final consideration to EUR 3.3bn if certain performance milestones are met (EUR 30m return for ETF SU investment)!

EUR 300 000 ------------------------------------------------- EUR 30m, X 100 !

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CIP instruments: addressing market failures

• Venture capital: industry recovering, but early-stage segment still an issue: low profitability, lack of critical mass, absence of tech transfer bridge between research and early stage VC investors.

• Microcredit: key for economic activity (91% of total SMEs in EU), need to increase supply of Micro Finance Providers in EU (enhance their lending capacity), in particular for social inclusion (eg French riots)

• Guarantees: enhance lending capacity of banks for all SMEs. Also focus on smaller and regional banks through securitisation of SME loan portfolios.

Adapting CIP to market gaps through new windows:

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CIP: a More Ambitious Programme More windows, more countries: budget is an issue !

MAP Period: 2000-2006

CIP (EUR 4.2bn)Including Financial instruments (EUR 1bn)Period: 2007-2013 (140m per annum!). Mid term reallocation

ETF-Start-ups - VC funds, high tech, early stages - Incubators

High Growth Innovative Companies Scheme - VC funds: • Early stages • Expansion stages for innovative companies Co-investments in side-funds with business angels Eco-innovation + Tech Transfer

SMEG (guarantees) - SME loans guarantee - Microcredit guarantee- Equity guarantees- ICT loans guarantees

SMEG (guarantees)- SME loans guarantee- Microcredit guarantee- Equity and mezzanine guarantee - SME loan securitisation risk-sharing scheme

Capacity Building - Seed Capital Action

Capacity Building- Seed Capital Action- Partnership with IFIs

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The innovation cycle covered by EIF equity

Later-stage

Buy-out

IPOs

Tech

Transfer

Incubators

Business

Angels

Expansion /

Dev.

Capital

Early StagePre-Seed

Seed

SME LIFE CYCLE

« VENTURE CAPITAL » « PRIVATE EQUITY »

New policy areas

European Investment Fund

CIP COVERAGECIP COVERAGEGAP

New policy areas

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“The European Council would urge EIF to diversify its activities, in particular towards the financing of innovative SMEs through individual-investor (business-angel) and technology-transfer networks. This action should also be supported by the new Community competitiveness and innovation programme”.Spring EU Council, March 2005

” The European Parliament committee calls for adequate funding for the support of innovative SMEs and initiatives aimed at helping the commercialisation of research and the transfer of technology, notably through EIF”. EP REPORT on Policy Challenges and Budgetary Means of the enlarged Union 2007-2013, May 2005

« The analysis unerlines the considerable weakness of early stage ventures in Europe… due to structural differences in the transfer of technology from labs to industry (compared to US) ». ECFIN paper for the EFC – March 2005

CIP: preparing the grounds in the EU ecosystem

European Investment Fund43, avenue J. F. Kennedy L-2968 Luxembourg

tel.: (00 352) 42 66 88 1Brussels: 02.235.00.71fax: (00 352) 42 66 88 200www.eif.orginfo@eif.org