Thomas Barrett | Director, New Products and Special Transactions Department, European Investment Bank

European Investment Bank

EIB Financing of European Research, Development and Innovation (RDI)

Thomas C. Barrett

Brussels, 24 November 2010

Innovation Union and Industrial Policy

Briefing for Journalists

European Investment Bank 2

‘‘ A Europe of Zero Risk would be a Europe of Zero Innovation‘‘

Commissioner Máire Geoghegan-Quinn, Strasbourg 2010

Role of Innovative Finance

What is the role of Equity /Risk Capital?

What is the role of Debt ?

What is the role of the Public Sector?


Why invest in innovation?

Increasing average R&D investment in innovation across EU27 to 3% of GDP by 2020 would:

increase GDP by 3%

reduce unemployment by 1.5%

Although in the long-run innovation and employment creation go hand in hand:

there will be frictional and structural employment issues

the labour market needs to be flexible and well-functioning

education is critical

The Europe 2020 Agenda calls for smart, sustainable and inclusive growth, requiring:

the right innovation environment

appropriate risk-sharing arrangements to better leverage limited public funds


The innovation problem

The European Innovation Scoreboard for 2009 indicates a considerable “Innovation Gap”:

22% between the EU27 and the US

30% between the EU27 and Japan

New competitors (e.g. Brazil, Russia, India and China) increase the pressure on the EU to remain globally competitive in terms of the quality of its:

research of innovative goods and services

ability to attract researchers and innovators


Why doesn’t Europe innovate enough ?

The UK Community Innovation Survey (2005) identifies the most important barriers to innovation:

cost-related

market-related

regulation-related

knowledge-related

• European firms are likely to invest less in RDI than their US or Japanese counterparts because RDI returns are consistently lower in Europe

• Public policy must aim at increasing returns to investments in innovation in Europe


How can public policy increase the returns to innovation ?

• Public RDI policy of the past generation focused on the supposed superiority of the public sector to pick technological winners

Current RDI approaches seek to place the private-sector in the strategic driving seat:

European Technology Platform (ETP) initiative – 36 industry-led ETP initiatives designed to define R&D priorities– A number of ETPs involving dedicated PPPs already exist

• The role of the public sector is to establish an environment in which innovation can thrive


How can public policy promote an environment for innovation ?

Spill-over effects are critical.

Human capital investment a key driver of spill-over benefits.

Two implications for public policy:

importance of clusters

importance of education


Maximising spill-over benefits

The importance of clusters:

Local proximities to research and education institutions:

50% of R&D in the OECD area performed by 10% of its regions

85% of clustered European firms claim their competitiveness has increased

Europe lags behind the US in average cluster strength

The nurturing of clusters is a focus of public sector regional/urban policies

The importance of education:

Tertiary education is key for a skilled workforce necessary for innovative firms

Role of tertiary education in basic/fundamental research


How should the public sector fund RDI ?

Insufficient access to appropriate finance partly explains Europe’s investment gap

Commission Member States have established a number of support instruments:

High Growth and Innovative SME Facility (GIF)

Risk Sharing Finance Facility (RSFF) complemented in some countries by the JEREMIE scheme

• Efficiency and effectiveness of these instruments already demonstrated


Grant funding for innovation

Grants play an important role in achieving policy objectives when:

the valuation of an investment to a promoter and its social value differ

socially valuable investments need to be made affordable to an investor

• Risks of grant funding:– incentive to maximise the grant component of an investment– danger of over-investing

• Where possible grants should be:– related to the achievement of outputs of investment programmes– risks to promoters should be allocated to private partners when efficient.


The role of PPPs in RDI

PPPs can enhance R&D impact by:

improving the leverage of public support to business R&D through cost and risk sharing

mobilising human and financial resources of the private sector

opening new avenues for commercial spill-overs from public-research

upgrading knowledge infrastructures

promoting the creation of regional clusters

• EPEC has launched an important project with Partnerschaften Deutschland exploring further how PPPs can be used to support RDI activity


Conclusion

Europe’s priorities of smarter, sustainable and inclusive growth demand new thinking about options for investing in innovation.

Public policy should concentrate on:

enhancing the innovation environment

strategic partners defining the innovation agenda

funding based on more effective risk sharing within public sector and between public and private sectors


European Investment Bank - Profile

EIB was created by the Treaty of Rome in 1958

EIB is a not-for-profit, policy driven institution

EIB is 100% owned by the 27 EU member states

EIB has subscribed capital of EUR 232.4 bn as of 2009

EIB is AAA/Aaa rated by Moody’s, S&P and Fitch with stable outlook

EIB funds itself on the capital markets: EUR 79.4 bn in 2009

EIB signed loans amounting to EUR 79.1bn in 2009 (c.93% in EU)

EIB is the largest multilateral financing institution

EIB is the majority shareholder in the European Investment Fund

The European Investment Bank is the European Union‘s long-term financing institution. The

Bank acts as an autonomous body set up to finance capital investments furthering European

integration by promoting EU policies.


EIB GROUP : EIB/EIF product range

Risk Capital CIP Resources (SME) RSFF (SME / MidCap)

Entrepreneur, friends, family

Business Angels

Seed/Early Stage VC Funds

VC Funds

Bank Loans and Guarantees

Seed / Start-Up Phase Emerging Growth Phase Development Phase

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

Competitiveness and Innovation Program (CIP) Guarantee schemes

Growth financing for SMEs

VC Funds, CLOs

SME guarantees (loans, microcredit, equity/mezzanine, securitisation)

RSFF

Innovation financing

SMEs/MidCaps, Banks, PE Investors (sub-investment grade)

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

Special Operations

RSFF / Investment Loans

RSFF

Investment Loans

RDI financing

MidCaps/Large Corporates/Public Sector Entities (investment grade)

Guarantees

Special Operations

Later Stage Counterparts

EIF EIB


As of FYE 2009:

Since 2000, EIB financed some 590 individual RDI projects/programmes

Approvals and signatures amounted to EUR 104bn and 86bn, respectively

Transaction sizes ranged from EUR 8m to EUR 600m

Approximately 50% of the transactions were private sector investments

European Investment BankFinancing of research, development and innovation (RDI)

i2i Approvals

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2000 2001 2002 2003 2004 2005 2006 2007

mEUR

Total EUR 104bn

ICT: EUR 17bn

Industrial RDI: EUR 53bn

2008

Geographical split of RDI approvals in 2009

16,000

18,000

2009

DE23%

IT13%

ES13%FR

11%

SE8%

GB8%

Others10%

CZ 2%BE 2%

PT 2%

TR 2%

FI 3%

PL 3%


EIB

EIFEIF

High volume possible Risk profile commensurate with a debt instrument and

relatively simple structures Customized to end recipient needs EIB focusing on demonstrable transfer of benefit to final

beneficiary Risk-sharing is being developed

Small volumes High risk profile and bespoke structures Customized to intermediary needs EIF impact focused on additional capacity in market

Loans

&

Guarantees

Portfolio guarantees,

equity &

quasi- equity

EIB Group’s Tools to Support SMEs Two complementary sets of instruments

(EUR bn) 2004 2005 2006 2007 2008 2009(Forecast

)

Signed Loans (EIB) 4.6 3.9 6.2 5.2 8.1 12.7

Portfolio guarantees (EIF) 1.5 1.7 2.0 1.4 2.1 2.3

Equity funds (EIF) 0.35 0.47 0.69 0.52 0.41 0.7


Role of Risk Capital /Equity in Financing Innovation…VC is an integral part of an innovation policy

A thriving VC industry is a precondition for exploiting Europe‘s rich potential for innovation and entrepreneurship- this is primarily the role of the private sector, but public sector can facilitate by creating incentives to invest and improve regulation

However, the European VC market is still highly fragmented and the funding gap compared to the US remains high

VC in Europe accounts for just €5-6 billion a year on average; hence large institutional investors (pension funds, asset managers, banks, insurers) generally consider VC too small to justify allocating investment expertise or resources to this asset class

Europe does not yet have a community of institutional investors that fit the profile of long term partners for VC, unlike in the US where there is a dedicated VC investor base in particular managing university endowments

Underperformance of the VC asset class worldwide has not helped to attract new investors to the asset class

EU needs a robust and self-sustainable VC industry able to support bright ideas to come to market

In the EIB Group, the EIF acts as a fund of fund and has invested so far over €4bn in over 300 early stage to late stage funds. EIF manages the Risk Capital Mandate and Mezzanine Fund Facility on behalf of the EIB and the CIP on behalf of the European Commission.

EIF’s objective is to be catalytic and facilitate the fund raising process by coming in as a cornerstone investor into new funds


Banks

EIB RSFF funds complement other sources of debt capital available for low/sub investment grade RDI intensive corporates

EIB RSFF funds are highly attractive for potential beneficiaries because of:

1. Highly attractive terms & conditions (AAA rating and non-for-profit pricing)

2. Long maturities of up to 10 years or more

3. Direct EIB participation of up to EUR 300m per transaction (depending on rating)

4. Strong technology/industry expertise

5. EIB does not sell assets on the secondary market (buy and hold strategy)

6. No cross selling (just long-term lender)

7. Signalling Effect: EIB as a quality stamp

8. Debt and Mezzanine Debt Product

Investors

Final BeneficiariesLow/Sub Investment Grade

EIB (RSFF)2007 - 2013

EUR 1bnEUR 1bn

Approx. EUR 10bnDebt Financing

Own Resources

Role of Debt in Financing Innovation Case Study: The Risk Sharing Finance Facility (RSFF)


Role of the Public Sector in the making Europe more innovation-friendly

Improve the regulatory framework Creating a single innovation market by streamlining and simplifying the patent registration process, creating a single EU PatentRemove the remaining barriers to VC funds operating cross bordersSimplify the listing processes of innovative companies in European stock exchangesDynamic standardisation system to spur innovation in ICT

Look at public procurement as an opportunity to spur innovation, connect public procurement to policy objectives; use pre-commercial procurement

Public procurement accounts for 17% of the EU’s GDPUS spends at least USD49 billion a year on pre-commercial procurement

Intelligent use of Public Private Partnerships for RDI projects

Public support to create self sustainable VC market in Europe; use of public funds to mobilise private funding into seed and start-up funds

Fill the current market gaps : During the technology and start-up phase, new companies face the ‘valley of death’ where public research grants stop with no access to private finance;

Use of public funding to mobilise higher risk lending to knowledge-based companies lacking collateral (see RSFF)

Smart use of public funds to maximise leverage, diversify away from pure grant-based funding to innovative blending of grants and other public and private funding sources (e.g. RSFF) to mobilise private sector fundingTo date, contributions for the RSFF of €430m from the EU budget and €800m from the EIB, as risk sharing partners, have supported over €18billion investments, or 15 times the combined contribution to the RSFF and 42 times the EU budget contribution)


1

2

Engineering/Automotive

Energy

3

4

ICT

Life Science

Scope of Sector

EU Policy Dimension

Key RDI Trends

Strong EIB Track Record in the industry

RSFF Implementation Strategy

Rationale for Selection

Product Development Sector Know-How Long Term Financing

5 RDI Infrastructures

Risk Sharing Finance Facility - Key Sectors


Risk Sharing Finance FacilityResults 2007 – To Date

RSFF Loan amount (in EURm) and number of RSFF Operations Approved/Signed/Disbursed

2010 RSFF Signature Target: EUR 2,145m (37% achieved to date)

Target2,145

8,146

5,328

323

1,497

845

2,833

4,264

1,502

887

1,494

459

1,024

2,984

861

169

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2007 2008 2009 2010 TOTAL

EU

R m

APPROVALS

SIGNATURES

DISBURSEMENTS

7914 14 12 7 36 1525 12812 335276


RSFF – RESULTS TO DATE

Over EUR 5.3bn RSFF loans signed to date in 20 countries.

Main sectors – Engineering/Industry & Life Science/Speciality chemicals

Signed Loans by Country

Signed Loans by Sector

SI0.2%

Other14%

TR3%

UK9%

RO0.2%

PL1.4%

SE11%

LU0.8%

LT0.1%

BG0.6%

BE1.4%

AT0.6%

NL7%

DE20%

DK0.8%ES

17%

FI6%

FR9%

IL1.7%

HU3%

IT6%

BANK RISK SHARING1%ENERGY

15%

RESEARCH INFRA.

5%

LIFE SCIENCE/SPECIALITY CHEMICALS

26%

ICT14%

ENGINEERING / INDUSTRY

40%


ALPHASATProject Cost: EUR 598mRSFF Financing : EUR 225m

Alphasat is the first flight (proto-flight) mission for Alphabus, the new European platform for next generation, high power communication satellites. The program is jointly supported by ESA (European Space Agency) and CNES (Centre National d’Etudes Spatiales). The promoter will utilise the operational payload to launch an augmented version of its Broadband Global Area Network, while ESA is also including four Technology Demonstration Payloads in the launch

ANDASOL SOLAR THERMAL POWER 1 & 2

Project Cost: 2 x EUR260m

RSFF Financing: 2 x EUR 60m

Technology: “Solar-only” Parabolic Trought Power Plant

Installed Capacity: 2x 49.9 MWel

Storage: Two-tank molten salt storage for 7.7 full load hours

Project Site: Plateau of Guadix, Province Granada

Net electricity production: 2x 179.1 GWh/a

MEDINVESTProject Cost: EUR229mRSFF Financing : EUR 30m

Financing of RDI activities in the field of medical devices/technologiesThe proceeds of the EIB loan will be downstreamed to finance the RDI activities of the portfolio companies.Each portfolio company is liable and responsible for repaying the loan made to it.Distributions to the founders will be used to first repay the remaining outstanding loan to Medinvest. The most likely source of distributions are proceeds from disposal/exit.

EUROPEAN MEDTECH (OPEN INNOVATION)

Project Cost: EUR 413m

RSFF Financing: EUR 200m

Long term strategic finance in the form of a subordinated loan to fund the open innovation R&D activities in and around the High Tech Campus in Eindhoven

The RSFF Loan will be used to fund Philips’ early stage, higher risk healthcare R&D projects in the field of image-guided intervention and therapy, home healthcare and clinical decision support systems.

Philips’ R&D will take place in collaboration with SMEs, research institutes and universities across Europe.

RSFF – CASE STUDIES


RSFF Mid-Term ReviewMain Conclusions and Recommendations of the Independent Expert Group (IEG)

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

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;

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);

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

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

The IEG made 10 recommendations for the future of the RSFF.Period 2011-2013:

Additional EU contribution of up to € 500 million to RSFF coming from EC FP7.Improvement to some already supported innovation target groups (SMEs, Research Infrastructures) through introduction of specific approaches and change of risk-sharing.

Period 2013-2020: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).Rationalisation of existing/future financial schemes should be targeted.


Contacts

Thomas C. Barrett

[email protected]

Tel: +352 43 79 87006

Jukka Luukkanen Marc D’hooge Nicholas Jennett

[email protected] [email protected] [email protected]

Tel. + 352 43 79 86412 Tel. + 352 43 79 87211 Tel. + 352 43 79 87320

http://www.eib.org

Documents

Thomas Barrett | Director, New Products and Special Transactions Department, European Investment Bank