Growth & Competitiveness
Restaurant chains, fitness centres, bakeries, builders, car alarm manufacturers – we use them every day, and, in 2018, SMEs in Europe employed 97.7 million people. Just like innovative businesses, these small businesses can only be competitive and succeed with the right access to financing.
Competitiveness and growth are at the very heart of what we do. The growth of value-creating, larger companies that employ people and boost the European economy. The growth of a local business to a niche, regional, or even global leader. The growth of start-ups that benefitted from Europe’s burgeoning venture capital market and now seek financing to scale up to the next stage. Venture capital managers find it easier to secure co-investments at the seed and early-stage rather than later-stage, while average fund size in Europe is only about USD 100m (EUR 90m) compared to USD 140m (EUR 128m) in the US.
Financing for the competitiveness and growth of SMEs is an essential next step in Europe. In 2019, we continued to work with our partners to diversify sources of financing to support the growth and competitiveness of Europe’s SMEs. Guarantees to support more loans. Securitisation to release fresh capital. Alternatives to bank debt, such as private debt and hybrid debt/equity. Co-investment opportunities. Growth-stage equity, and, of course, a range of new products.
Individual transactions have been allocated to thematic areas based on a combination of investment stage and/or mandate objective. This overview is for illustrative purposes only and provides an indication of our main areas of investment focus in 2019.
Increasing loans to Europe's small businesses through guarantees
Boosting the volume of bank debt available to small businesses is one of the most important steps in helping them to grow. In fact, the EIF guarantee on loan portfolios for small businesses (COSME LGF) is the EIF’s best-leveraged product, with one euro guaranteed by the EIF generating 31 euros of SME financing on average. However ensuring the penetration of the guarantee into different geographies in Europe is essential. As is anticipating new challenges for businesses and ensuring the guarantee targets these areas.
Covering everything from water supply to transportation
From sewage management to production of consumer electronics, small businesses are active in hundreds of sectors. That is why we cover so many areas; health work, administrative and support services, professional services, scientific and technical sectors, agriculture, forestry, fishing, storage, accommodation, food, construction, manufacturing, wholesale and retail trade. We have also supported close to 2.5 million jobs (as of the end of September 2019) since 2014.
Smashing targets to help more SMEs in Europe
Originally, the COSME guarantee hoped to support between 220,000-330,000 SMEs. However, thanks to EFSI resources, we have been able to support almost double this number - more than 510,000 SMEs. In addition, we have gone beyond our volume targets – originally EUR 14.3-21.5bn, but now leveraging EUR 50bn to SMEs.
Increasing our presence
By the end of 2019, the COSME guarantee was present in 33 countries, ensuring that SMEs across Europe can access debt financing on attractive terms.
“We don’t make soaps, we make gifts. All our products represent elements of our culture and that’s something we’re very proud of.”
Marta Araújo – Castelbel
Porto, Portugal. Traditional cosmetics & lifestyle products.
Financing purpose: growth capital.
EIF financing: PVCi
First-time transactions in Kosovo and Finland
In 2019, the EIF guaranteed up to EUR 22.5m of a maximum EUR 45m loan portfolio to Kosovan SMEs. The guarantee, with Kosovan guarantee institution KCGF, intends to provide financing for up to 2,250 higher-risk SMEs. The EIF also guaranteed up to EUR 75m of a maximum EUR 150m loan portfolio to Finnish SMEs. Finnish national financial institution Finnvera expects to make 3,900 transactions off the back of the guarantee.
Greater volumes at our disposal
We made EUR 385m of guarantees under COSME LGF in 2019 and a cumulative 132 guarantees since inception. This is set to increase with an extra EUR 230m planned under EFSI 2.0 for guarantees. With guarantees under COSME, a little really does go a long way.
Including new volumes for digitalisation…
Together with financing from InnovFin, COSME will contribute to a guarantee for loans to digitalisation projects (please see ‘What is the Digitalisation Initiative for SMEs and small mid-caps?’).
“It’s the dream of every kindergarten teacher actually – to do things their way and run their own shop. What held us back at first was the high financial risk that such a project entails. Nevertheless, we took a deep breath and took on the challenge.”
Le Tatte Matte - kindergarten
Increasing financing through securitisation
Another way to release bank capital to Europe’s SMEs is through securitisation. Synthetic securitisation, responsibly applied, can help diversify an institution’s funding sources as well as release regulatory capital, playing an essential role in improving the quantity and cost of bank loans to small businesses in Europe. The EIF is active in securitisation for the purposes of improving financing for SMEs and has spearheaded an increase in significant risk transfer (SRT) trades in Europe. In 2019, we also connected our securitisation to environmental, social and governance-compliant (ESG) loans.
Securitisation with extra impact
• Gender equality
We have participated in the securitisation of a portfolio of around PLN 2.1bn of leases with Poland’s EFL Leasing. The transaction is expected to release around 39,000 leases on fixed assets, movables and real estate for clients in the SME sector. What makes this transaction unique is that one third of the additional leases in the portfolio will be dedicated to leases for female entrepreneurs.
• Substantial transactions
We take pride in creating a powerful signalling effect with our presence in the securitisation market. In 2019, we participated with a group of private investors in the biggest market placement of an SRT on a portfolio of senior secured and unsecured loans of around EUR 3bn to SMEs in Spain via Santander Magdalena.
• On-boarding new financial institutions
We are willing to go the extra mile to make sure financial institutions that have never pursued an SRT trade can participate with us. Since September 2018, financial institutions such as Ceska Sporitelna, Banco BPM, Alior, Cajamar and Banca Nazionale del Lavoro have all participated in SRT transactions thanks to the EIF.
• Active market role
The EIF’s structured finance experience has led to its securitisation team winning the ‘Investor of the Year’ award at the 2019 SCI Capital Relief Trades Awards and contributing to the ongoing debate on regulatory change that is shaping new securitisation regulation in Europe.
Increasing financing through debt alternatives
What do you do if traditional bank debt financing does not fit your business model? The most innovative and fastest-growing businesses often need a tailor-made finance package. Alternative, bespoke debt, such as loans, bonds and leases provided by private credit funds and hybrid debt/equity financing may be more suitable.
Alternative lenders offer a deep understanding of the business itself and can execute transactions rapidly — in some cases as quickly as two weeks. They also give guidance, support and even introductions to advisers off which the business may leverage in the future.
The EIF is playing a critical role in attracting institutional investors into this asset class. Our participation helps the alternative debt fund reach first close and start lending to SMEs, but it also acts as a ‘stamp of approval’ that encourages other institutional investors to crowd in. We are also supporting first-time teams, new geographies, as well as the origination of financing through crowdlending platforms.
Growing activity under new instruments
The EIF is one of the most active investors in Europe in the universe of private debt, with 19 debt funds invested in 2019 alone, for a total of 9 EUR 799m. We have invested in direct lending funds, predominantly under our flagship EFSI Private Credit Tailored for SME Programme, as well as in mezzanine funds. One third of these funds were launched by first-time managers.
Support to crowdlending
Crowdlending is an innovative and agile way for small businesses to access financing. The EIF makes cornerstone investments in debt funds originated through crowdlending as a signalling effect to institutional investors to enter this area. In 2019, we committed to supporting four funds under the EFSI Private Credit Programme, which invest alongside more than ten crowdfunding platforms across Europe. These include:
• Credimi: launched in 2017, Credimi is an Italian web-based SME invoice-financing platform funded by institutional investors;
• Creditshelf: launched in 2015, Creditshelf is a pioneer in the development of marketplace lending practices in Germany and the largest loan platform in the country by volume;
• October: launched in 2014, October was a key part of developing crowdlending in France and the largest loan platform in the country by funding volume. Following its success in France, platform operations were extended to Spanish, Italian and the Dutch markets.
Boosting resources for alternative debt
The overwhelming demand for cornerstone investments in alternative debt in Europe has allowed us to secure an extra EUR 50m under the new EFSI Private Credit Programme – all of which can be deployed in new cornerstone investments. This will bring EFSI’s contribution to the product to EUR 350m, with expected leverage of EUR 3bn to small businesses.
Catalysing growth through equity financing
Europe’s small businesses need growth capital in order to take their businesses to the next stage. However, later stage funding available in Europe was USD 7bn in 2017 (EUR 6.4bn), compared with USD 39bn (EUR 35.7bn) in the US. The EIF is responding to this funding gap by investing in equity financing at the growth stage, such as the growth end of private equity, scale-up funding, capital increases, buyout funding to execute buy-and-build strategies and hybrid growth equity. In 2019, we continued to diversify our funding sources, harnessing private sector investment from inside and outside Europe, as well as building private equity financing in different geographies.
Greater volumes from EFSI
We have deployed EUR 1.05bn of EFSI resources into European private equity this year, totalling EUR 2.95bn since EFSI inception.
We are channelling more financing for growth
Businesses scaling up their operations in Europe face a real financing gap. We hope to improve this by using a new pilot (the ESCALAR pilot) to make between four and six investments in late-stage equity fund managers, benefitting around 70 scale-up businesses. Because scaling up a business requires larger sums of capital, we will be making up to EUR 100m available per single fund commitment (please see ‘What is ESCALAR?’).
“We don’t want to be the pioneering innovative start-up that never took off. We now have 9000 clients across France… The future is digital.”
Comwatt – smart energy
Harnessing the private sector
As well as EC resources, EFSI, other public resources and our own financing, the EIF attracts private sector financing directly into its portfolio through the AMUF vehicle. By 2019, AMUF’s investor pipeline was composed of private investors from a widening number of geographies, including Europe, the Middle East and the Far East. The diversified investor base reflects the growing appetite and recognition of European private equity as an asset class, as well as AMUF’s capacity to select unique investment opportunities (please see ‘what is AMUF?’).
…and putting it to work
By the end of 2019, the AMUF Growth Capital compartment completed EUR 232m of investments in 15 funds managed by some of the best European private equity managers.
…in new markets
The new AMUF European Secondaries Compartment will allow private investors to get exposure to the European Private Equity secondary market. Secondary investments allow investors to get another ‘bite of the apple’ by investing in existing private equity portfolios, rather than in new “blind pool” funds. The advantages include knowledge of underlying companies, earlier cash distributions and more predictable cash flows, as well as mitigation of the J-curve, which is usually inherent in PE investments. The EIF’s strong relationships in private equity and venture capital mean that it often has first-mover advantage when it comes to secondary market positions. From a policy perspective, a greater number and volume of secondary market investments means greater inflows of capital to SMEs. In 2019, the compartment already boasted a pipeline of up to nine interested investors and the compartment’s first close is forecast for 2020.
“We have developed software to monitor treatments on more than 80 disease groups and then process and analyse the information in order to allow healthcare providers to offer better medical solutions.”
Petteri Viljanen – BCB Medical
Turku, Finland. Big data driving medical solutions.
Financing purpose: growth capital.
EIF financing: PVCi
Investing funds from China
In 2019, the EUR 500m China-EU Co-Investment Fund (CECIF) was fully invested, committing in aggregate EUR 110m to two funds and with a pipeline of three funds with an expected commitment date and three without as of 30 September 2019. CECIF, signed in 2018, has invested EIF (both own and managed) and Silk Road Fund resources into private equity and venture capital funds in Europe, particularly those interested in cross border expansion.
Building private equity across Europe
Making sure that as many different European geographies as possible have access to growth financing is important for European growth as a whole. In 2019, we continued to set up investment programmes combining European structural funds, NPI, EC and our own resources, which are then invested into country or region-specific funds (see the Cohesion & Regional Chapter).
Materialising value creation
In 2019, funds financed by the EIF have provided financing to more than 4000 lower mid-market companies in the EU lower mid-market representing a total of EUR 26.1bn mobilised volumes. This financing will be instrumental in implementing strong value creation initiatives.