1 Risk-Sharing Finance Facility An innovative financing instrument for more investment in RDI towards the Innovation Union EC – DG RTD – Directorate B

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Risk-Sharing Finance Facility An innovative financing instrument for more investment in RDI towards the Innovation Union

EC – DG RTD – Directorate B – Unit B-04 – RSFF Designated Service – 18 October 2010 – Not legally binding

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Table of Contents

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What? RSFF mechanism

Where are we now? Results, outlook, project examples

1. Why? Introduction

RSFF – Risk-Sharing Finance FacilityInnovative loans for innovative ideas

Summary

How? Beneficiaries, eligibility, implementation, products

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What’s next? RSFF interim evaluation preparing the future

RSFF on the ground: Some project examples6.

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Why RSFF? RDI investment & finance gap in Europe

Europe is facing…..

A lack of private investment in R&D: a key factor for Europe’s relatively weak total investment in R&D (data for 2006+2007: EU 1.84%, US 2.68%, JP 3.40%)

A market gap for RDI investment finance; financing is scarce for such risky projects, particularly since the economic and financial crisis (2008/2009)

Impact of the crisis on public and private finance, survival of innovative SMEs: Major challenges to address with reduced means

Europe is reacting…..

Through dedicated support programmes for R&D, in addition to national support schemes in the EU Member States; grant funding

also through new “EU Financial instruments” using other forms of funding than grants

Innovation Union: involving all actors, to notably tackle under-investment

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Table of Contents

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3.

What? RSFF mechanism


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Why? Introduction


Summary


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Risk-Sharing Finance Facility (RSFF): definition

December 2005: European Council: EIB and EC invited to examine a financing facility with risk‑sharing components & leverage effect for an additional investment in R&D of €10 billion

5 June 2007: RSFF Co-operation Agreement signed by Commissioner Potočnik and EIB President Maystadt

RSFF: an innovative debt-financing instrument (loans)co-developped by the EC and the EIBto financially support risky investments in RDI, notably by private companies

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RSFF key principles

Provide loans for riskier but creditworthy RDI projects

by risk-sharing between the European Community and the EIB

Generate a leverage effect: volume of extra lending by EIB and its partner banks is a 4 to 6 multiple of the Community funds provided to the facility – a 12 to 18 multiple in terms of Projects costs

Demand-driven: projects supported on a “first come, first served” basis (market-based instrument)

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Risk-Sharing Finance Facility Risk-sharing EC/ EIB and leverage effect

allows EIB to provideRSFF loans and guarantees

of up to € 10 billion coming from capital markets

FP 7 Contribution: up to € 1 billion

EIB Contribution:up to € 1 billion

up to € 2 billion for Risk coverage

for potential losses (non-repayment of RSFF loans by borrower/ beneficiary)

for RDI investments

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EU financial instruments: Support for companies at their various stages

Risk Capital1 CIP Resources (SME)2 RSFF (SME / MidCap)3

Entrepreneur, friends, family

Business Angels

Seed/Early Stage VC Funds

Formal VC Funds

Bank Loans and Guarantees

Seed / Start-Up Phase Emerging Growth PhaseMore established companies

investing in R&D an Innovation

Facility: High Growth Innovative SME Scheme (GIF), Ecotech

Purpose: IP financing, technology transfer, seed financing, investment readiness

Target Group: VC Funds, Business Angels

EIF Product: Fund-of-Funds

Facility: CIP Guarantee schemes

Purpose: Growth financing for SMEs

Target Group: Formal VC Funds, CLOs

EIF Product: SME guarantees (loans, microcredit, equity/mezzanine, securitisation

Facility: RSFF

Purpose: RDI financing

Target Group: SMEs/MidCaps, larger companies

EIB Product: Loans (incl. Mezzanine), Funded Risk Sharing Facilities with Banks (Investors)

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RSFF added-value for the borrower and the Research Community

Up to additional EUR 10 billion funding for RDI

Diversification and increased access to financing: additional supply of loans/guarantees from EIB, especially in the context of a scarce access to credit for risky RDI projects

Customised offer: debt financing adapted to project implementation and the borrower’s repayment capacity (maturity, grace period, repayment modalities)

Reasonable financing costs: non-subsidised loans but advantage of EIB’s AAA based funding and its non-profit lending policy reduces overall project cost

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Table of Contents

1.

2. What? RSFF mechanism


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Why? Introduction


Summary


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Beneficiaries of RSFF financing

Mid-Caps and large corporates (typically unrated / sub investment grade / turnaround situations)

SMEs

Research Institutes

Universities

Special Purpose / Project Companies

Research Infrastructure promoters

Any size and ownershiplegal entity establised in MS or AC

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Eligible project costs

Project capital expenditures in tangible assets.

Intangible assets:

Research staff cost

Incremental working capital requirements

Acquisition of Intellectual Property Rights

Multi-annual R&D budgets (typically 3-4 years)

Financing up to 50% of total cost except particular cases in line with EIB strategic

orientations (e.g. environment, renewable energies)

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Eligible-cost categories: from research, developement to innovation

Fundamental research EC window

Innovation EIB window partly EC window

Pilot and demonstration projects EC window

Pre-competitive development activity EC window

Industrial research EC window

Definition stage / feasibility studies EC window

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RSFF financial products: tailor-made to borrowers’ needs

Corporate Loans (senior / junior)

Guarantees

Project Finance

Mezzanine Loans

Risk Sharing Facilities with banks (for all loans of less than EUR 7.5 million)

Other structured products

Development of specific RSFF products by the EIB (notably towards SMEs)

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RSFF Project selection Roles of EIB and EC

demand-driven: projects supported on a “first come, first served” basis (no call for proposals, no expert panels)

EIB:

Screens potential RSFF projects and is responsible for all direct contacts with project promoters

Evaluates potential projects (not the EC): creditworthiness and financial viability

EC (“RSFF Designated Service”): Checks the eligibility potential RSFF projects submitted by the EIB

(decision by « Eligibility Committee »): Only RSFF projects falling into the thematic priorities of FP7 and really concern R&D are supported by the FP7 budget (for risk coverage)

Follows - up on RSFF projects and monitors the use of the EC RSFF contribution (EIB obliged to report any material change)

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Table of Contents

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Where are we now? Results, outlook, project examples4.

Why? Introduction


Summary


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RSFF results and portfolio Mid-2007 – October 2010

Volumes:

Loans approved: more than EUR 8 billion, 82 projects

=> (60% over initial expectations)

Loans signed: more than EUR 5 billion, 54 projects in 19/20 countries (MS & Associated

Countries)

Very strong demand in 2009 (despite or even because of the financial crisis): loan volume of approx. EUR 3 billion

Estimation: 300-400 news jobs created and 500 jobs safeguarded in the RDI area since 2007 (source: EIB Independent Evaluation Unit)

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RSFF results mid-2007 to October 2010 and geographical breakdown

Geographical spread: projects located in 20 countries (approved RSFF projects)

IT6%

HU3%

IL1,7%FR

9%

FI6%

ES17%

DK0,8%

DE20%

NL7%

AT0,6%BE

1,4%BG

0,6%

LT0,1%

LU0,8%

SE11%

PL1,4%

RO0,2%

UK9%

TR3%Other

14%

SI0,2%

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RSFF results mid-2007 to October 2010 and sector breakdown

BANK RISK SHARING1%ENERGY

15%

RESEARCH INFRA.

5%

LIFE SCIENCE/SPECIALITY

CHEMICALS26%

ICT14%

ENGINEERING / INDUSTRY

40%

Main sectors financed so far: engineering and automotive industry, renewable energy technologies, life sciences, ICT, Research Infrastructures, plus risk-sharing facilities with partner banks

Sectorial distribution of the RSFF signed portfolio

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Table of Contents

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Why? Introduction


Summary


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Mrs Erika MANN, Chair, CEO of ErikaMann Sprl; MEP from Germany from 1994 until summer 2009; and Senior Fellow of the Atlantic Council;

Mr Luc SOETE, Rapporteur, Director of UNU-MERIT, United Nations University; Professor of International Economic Relations, School of Business and Economics, Maastricht University; and Member of the Dutch Adviesraad voor Wetenschap en Technologie (AWT);

Mr Frank GANNON, Director General Science Foundation Ireland;

Mr Arnaud HIBON, Vice President Head of European Parliament Affairs of EADS and Director European & NATO Affairs of EUROCOPTER;

Mr Ewald NOWOTNY, Governor of the Oesterreichische Nationalbank (OeNB) and Member of the Governing Council of the European Central Bank (ECB);

Mrs Carmen VELA, Manager Director of INGENASA (SME) and Member of the Advisor Committee of the Spanish Minister of Science and Technology and the

EAG of Cell Factory.

RSFF interim evaluation 2010: IEG members

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Main conclusions by the IEG:

1. The RSFF is considered a uniquely innovative, demand-driven instrument;

2. It has been successfully introduced as a new scheme into the European Union’s research funding under FP7 and therefore helped drastically to expand the financing for RDI;

3. The RSFF had a positive dual leverage effect: Allowing EU funding for loans to finance R&D and helping private investors/ companies to finance riskier RDI activities, even in times of economic crisis (2008/2009); appears an efficient “anti-cyclical” instrument

4. The implementation of the RSFF, at a particularly difficult time, appears to have been carried out in a highly efficient and effective manner;

5. The IEG is therefore highly positive about the first roll-out phase of the RSFF.

RSFF interim evaluation 2010 (Feb-July 2010)

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The IEG made 10 recommendations for the future of the RSFF.

Period 2011-2013:

No.1: Immediate release of the EU contribution of € 500 million (€ 400m SP Cooperation; € 100m SP Capacities) as foreseen in the legal base of FP7

No. 5: Additional EU contribution of up to € 500 million to RSFF coming from EC FP7 Specific Programme 'Cooperation' and/or non-FP7 resources

No. 2 to 4: Improvements possible for some already supported target groups (SMEs, Research Infrastructures) through introduction of specific approaches and change of risk-sharing

Period post 2013:

No. 7, 9 and 10: Continuation and expansion of the scale and the scope of the RSFF – as a visible part of ‘FP8’ – to address future RDI financing needs with a revolving dedicated EU budget of no less than EUR 5 billion for R&D and Innovation (EU support also for Innovation)

No. 6: A certain degree of rationalisation of existing/future financial schemes should be targeted (avoiding duplication of efforts)

No. 8: Regular monitoring

RSFF interim evaluation 2010 (Feb-July 2010)

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Trend at European level to make increasingly use of financial instruments like the RSFF, in addition to traditional grant funding (REHN Group / Innovation Union)

Advantages of financial instruments:

Limited budget resources can be used in the form of risk-sharing or guarantees to mobilise private funding (« leverage effect »)

Unless risks/ losses exceed expectations, budgets for risk-sharing can be recycled and reused for further projects (revolving funds)

Flexibility to better meet the funding needs of target groups/ beneficiaries and address funding gaps in the market

New financial instruments (2014-2020) part of key documents on RDI in Europe: the “Europe 2020 Flagship Initiative” and “Innovation Union” (as “key measure”)

Context: New EU financial instruments for RDI

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Commission's response to the IEG report

Endorsement of the recommendations of the IEG.

Timing of the response.

Possible Commission Communication on the RSFF interim-evaluation.

EP and Council's position

EP and Council's official response.

Way forward for the eventual release of the second tranche of the EC contribution.

Risks

Within the budgetary discussion.

Loan volume objective and role of the EC contribution.

Next steps – Issues at Stake

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Table of Contents

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Why? Introduction


Summary


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RSFF on the ground: Some project examples

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PharmaMar: Spain’s leading biotech company dedicated to developing innovative anticancer treatments from marine origin

Biopharmaceutical research & development in the areas ofoncology and orphan diseases Different forms of cancer targetted, including rare cancers EUR 30 million RSFF loan

www.pharmamar.com

RSFF project examples Innovative anticancer treatments: helping bring 4 cancer drugs to the market

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RSFF project examples Cleaner engines: improving energy efficiency

AVL: Austrian family-owned specialist with strong reputation for producing fuel-saving technologies for powertrain systems

Offers research and development support to many major car manufacturers worldwide.

EUR 30 million RSFF loan to help AVL extend powertrain R&D and research in the areas of hydrogen fuel-cell technology, nanocomposites and engine technologies, supporting the European Union objectives of decreasing emissions and reducing the impact of transport on climate change.

www.avl.com

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Solucar Solar Thermal Power project : Europe's first commercially operating power station using the sun's energy, west of Seville (Spain)

EUR 50 million RSFF loan to further develop a large scale application of Concentrating Solar Power (CSP) technology, generating electricity without greenhouse-gas emissions

Field of mirrors to concentrate solar radiation on a tower-mounted thermal receiver

www.solucar.es

RSFF project examples Financing solar power: using indigenous renewable energy to contribute to combat climate change

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RSFF for SMEs: Successful examples

Direct RSFF loan finance: EUR 65 million for a Belgian SME for its investment in R&D and Innovation for digital cinema solutions

Indirect RSFF loan finance through an financial intermediary: EUR 30 million for an Israelian holding company/ fund investing into 5 early-stage med-tech enterprises; support for R&D and development of new medical technologies and devices

Indirect RSFF loan finance through others: EUR 200 million for Philips for its mid-term R&D activities (medical technologies), in co-operation with universities and a number of smaller and medium-sized companies (outsourcing of R&D) within the “Open Innovation” approach of Philips

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Table of Contents

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Why? Introduction


Summary


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RSFF on the ground: Some project examples

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Summary: RSFF in a nutshell

RSFF is a new instrument supported by FP 7 to provide EIB loan funding for more investment in R&D and Innovation

RSFF finance can be used complementary to an FP 7 grant, instead of an FP 7 grant or for projects not involved in FP 7 but contributing to the FP 7 objectives

RSFF financing is demand - driven, projects are supported on a “first come, first served” basis; RSFF project evaluation is made by the EIB

RSFF risk-sharing between the EC and the EIB is an internal procedure and does not affect the client/ beneficiary applying for an RSFF loan

RSFF addresses a wide range of beneficiaries

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RSFF contact in DG RTD

Directorate B – « European Research Area: Research programmes and capacities »

Unit B.04 – « Regions of Knowledge and Research Potential »

RSFF Team• Jean-David MALO, Head of Unit B.04 (02 299 38 42)• Martin KOCH• Marie-Cécile ROUILLON• Conrad GANSLANDT• Andreea Bianca PUIA

http://ec.europa.eu/invest-in-research/funding/funding02_en.htm

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RSFF contact in the EIB

Directorate for Operations in the European Union and Candidate Countries

• Thomas C. BARRETT

Division: Action for Growth Instruments Innovation 2010 Initiative (i2i)

• Marc D’HOOGE• Sarah McCANN

[email protected]

http://www.eib.org/rsff

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Thank you very much for your attention !

Documents

1 Risk-Sharing Finance Facility An innovative financing instrument for more investment in RDI towards the Innovation Union EC – DG RTD – Directorate B