Explanatory Memorandum to COM(2014)66 - Participation of the EU in the capital increase of the European Investment Fund - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2014)66 - Participation of the EU in the capital increase of the European Investment Fund. |
|---|---|
| source | COM(2014)66  |
| date | 06-02-2014 |
The European Investment Fund (EIF) was founded in 1994 to 'stimulate sustained and balanced growth within the Community'. Article 2 of the EIF Statutes commits the EIF to support EU policy objectives. The current activities of the EIF cover on the one hand investments in venture capital and lower mid-market funds as well as mezzanine funds to improve the availability of risk capital for high-growth and innovative SMEs. On the other hand, it provides guarantees and credit enhancement through securitisation to improve the lending capacity of financial intermediaries and thus the availability and terms of debt for beneficiary SMEs. The EIF operates using either its own funds or by managing mandates on behalf of the EIB, the Commission or national and regional governments.
The EIF's statutory goal to support EU policies has been reflected in the exceptional growth of both equity investments and guarantees during the recent crisis. It is expected that this effort will result in a total of EUR 1.5bn of commitments in private equity funds leveraging EUR 6.4bn in 2013. In terms of guarantees, the EIF expects to commit in 2013 EUR 1.9bn, catalysing EUR 7.5bn in loans to SMEs.
Following the capital increase of the EIF in 2007, the subscribed capital amounts to EUR 3 billion divided into 3 000 shares each with a nominal value of EUR 1 million. The paid-in capital of the EIF is currently EUR 600 million (i.e. 20 % of subscribed capital). As of October 2013, the EIF is owned by the EIB (62.1 %), the European Union (30 %) and 24 public and private financial institutions (7.9 %).
The European Council of June 2012 requested to develop the action of the EIF, particularly as regards its venture capital activity, in liaison with existing national structures. In June 2013, the European Council called for an increase in the credit enhancement capacity of the EIF. The call was made in the context of the 'New Investment Plan for Europe', which places particular emphasis on SME finance, a core activity of the EIF. In October, the European Council requested all efforts to continue to restore normal lending to the economy and facilitate financing of investment, particularly with respect to SMEs.
In response to the conclusions of the European Council, the EIF has identified a number of financing solutions for further supporting SMEs and for ensuring the highest impact of its funds. Two principal delivery channels are proposed for their implementation:
· Facilitating the supply of debt finance to SMEs through credit enhancement operations, including the SME Initiative; and
· Creating additional investment capacity for private equity, mezzanine and venture and growth capital.
EIF own resources will be key to support these activities as well as to ensure alignment of interest with other mandates, including EU mandates such as Horizon 2020 and COSME, through co-investment.
As a result of these initiatives, the EIF is expected to double its overall guarantee and venture capital exposure over the coming years. Each of EIF's business lines involves different risks, which are reflected by a certain level of economic capital allocation needing to be set aside. For risk management considerations, the sum of the capital allocation should not exceed EIF own funds. Given the growth plans described above, the current buffer is expected to decrease rapidly. As a consequence, an increase in EIF's available capital is required in order to meet statutory capital requirements and to maintain its AAA credit rating, which is crucial for the EIF credit enhancement activity.
· Scenario 1: Increase of paid-in portion from 20% to 40%
· Scenario 2: Increase of subscribed capital with paid-in portion of 20%
Whereas under scenario 1, all existing shareholders would be obliged to participate or sell their shares in the EIF as differing paid-in ratios per share would not be possible, scenario 2 leaves the choice to existing shareholders whether to subscribe or not to new shares, proportionally to their current stake in EIF's capital.
In September 2013, the options for the increase in the EIF's capital were informally discussed by EIF management with all EIF financial institution shareholders who provided positive feedback on the capital increase as such. However, the notion that shareholders would be obliged to participate or lose their entire shareholding was not considered acceptable. In addition, there was a broad consensus about the importance of maintaining the EIF's tripartite ownership structure. EIF thus retained only scenario 2 in its final proposal.
On 26 November 2013, the EIF Board of Directors approved, as to its rationale, the increase in the EIF subscribed capital by up to EUR 1,500 million, of which 20 % will be paid-in. This would imply the subscription of 450 additional shares by the EU. The technical modalities and process will be submitted to the Board of Directors in due course. In line with the Statutes of the EIF, a capital increase has to be approved by the General Meeting of the EIF where the Commission has a blocking minority for this decision.[3]
In December 2013, the EIB Board of Directors approved the EIF capital increase and authorised the submission to the EIB Board of Governors.
The December European Council also called on the Commission and the EIB to further enhance the capacity of the EIF through an increase in its capital with a view to reaching final agreement by May 2014.
The capital increase should be complemented by a new EIB Risk Enhancement Mandate (EREM), amounting to up to EUR 2.3 billion for the period 2014-2016. Thanks to (i) the increased capacity created by the capital increase and (ii) the new EIB's mandate, the EIF expects to deploy annually between EUR 2 billion and EUR 3 billion for credit enhancement transactions (catalysing between EUR 11 billion and EUR 20 billion of SME lending per annum) starting in 2014 and reaching a peak in 2015. Moreover, additional private equity commitments of EUR 400 million will be deployed.
In the context of the capital increase, a reinforcement of the current public-private shareholding structure will be sought through a full participation from the financial institution shareholders. It is also an opportunity for broadening the EIF shareholder base by attracting more like-minded, national/regional promotional institutions, in line with the Commission sponsored external evaluation and the spirit of June 2012 European Council conclusions.
Considering the need to respond to the conclusions of the European Council in a timely manner and given the urgency to support the EU policy goals in the field of growth and job creation in the post-crisis environment, the capacity created by EIF's capital increase is sought to be enhanced already in 2014. A conclusion of the ordinary legislative procedure would be necessary to enable the EU to support the capital increase in the EIF's General Meeting in spring 2014. Otherwise, a delay to 2015 would occur.
Contents
As required by Council Decision 2007/247/EC approving the EU participation in the previous capital increase of the EIF, the Commission carried out in 2012 an external evaluation of the EIF own resources activity. This evaluation took into account the views of various stakeholders, ranging from representatives from Member States, the EIB, the financial institutions to the Commission. Furthermore, the evaluators consulted financial institutions shareholders, private equity/venture capital fund managers who had received investment from EIF’s own resources, originators of securitisation transactions with EIF involvement as well as representatives of relevant industry bodies. This evaluation confirmed the added value of the EU shareholding on the following grounds:
· Through the EU shareholding, the European Commission is represented in the General Meeting of the EIF and in the EIF’s Board of Directors (with two out of seven members) which gives the EU significant influence over the setting of the EIF's strategic and operational objectives. This helps to promote and anchor key EU policy objectives in the EIF's operations;
· The EU shareholding creates a framework for the promotion of EU policies in a working relationship with the EIB and other financial public and private shareholders. The joint Board activity with other shareholders, and the EIB in particular, supports greater organisational understanding and stronger working relationships between key stakeholders in the SME financing landscape;
· Credit rating stability: The joint shareholding partnership of the EIB and the EU in the EIF has provided the underpinning for the AAA/Aaa rating of the EIF. A strong credit rating is crucial for EIF's financing instruments to be effective.
While EIF own resources activity generates considerable added value in the financial markets, reflecting the EIF’s market orientated approach to delivery of policy impacts, the evaluation also identified a number of areas in which the policy impact of EIF own resources activity could be enhanced. Following the conclusions of the evaluation, the Commission has prepared a follow-up action plan which was presented to the Council and the Parliament in November 2012 and is currently being implemented. The main conclusions of the evaluation and the appropriate actions taken as requested by the Commission are the following:
· There is a need to reinforce the clarity of EU policy objectives to be achieved by the EIF. In this context, the desired balance of financial and policy returns as well as the desired level of dividend distribution should be reviewed. At the Commission's request, the EIF has prepared a report to the Board on the value added framework of the EIF as well as a review of the ex-post impact assessment which were finalized in April 2013. As a consequence, an ex-post impact assessment report will be introduced collecting data on the real impact of individual transactions on SMEs. Furthermore, the Commission requested a reassessment of the EIF's dividend policy. In 2013, a decision was taken by the Annual General Meeting of the EIF to depart from the standard 40% dividend pay-out ratio (from the net profit) and to distribute 20% of the net profit as dividends. The decision will be reviewed again in the 2014 Annual General Meeting.
· Given the distinctive and demonstrable value of each shareholder group in contributing to the full added value of the EIF, efforts should be made to fully maintain the tripartite structure of the EIF. The shareholding by financial institutions should at a minimum be maintained and, ideally, expanded. In response to this conclusion, the Commission requested the EIF management to make an effort in order to engage more like-minded institutions as new financial institution shareholders. The management of the EIF has also been asked to report regularly to the Board about the activities undertaken by the EIF to attract new financial institution shareholders.
· Due to the limited added value of systematic co-investment only with the Risk Capital Mandate awarded to the EIF by the EIB, the EIF will be requested to regularly co-invest with other mandates, including EU mandates like Horizon 2020 and COSME, to ensure better alignment of interest between the Commission and the EIF.
Given the availability of a recent external evaluation and in accordance with the proportionality principle and past practice, the Commission proposes not to develop a formal impact assessment.
Council Decision 94/375/EC of 6 June 1994 on Community membership of the European Investment Fund contains a specific provision on capital increases in Article 3. However, this provision is deemed excluded as legal basis for a new decision on an EIF capital increase in view of the development of the case-law of the European Court of Justice regarding so-called 'secondary legal bases'. Instead, a legal base in primary law should be proposed.
In light of the objectives and activities of the EIF, as set out in its Statutes and decisions taken by its governing bodies in accordance with the Statutes, and in light of the primary aim pursued with the capital increase, which is to
– respond to the call of the European Council to increase the credit enhancement capacity of the EIF, in particular in favour of SMEs, and
– create additional capacity for equity investment in support of SMEs and innovation research and technological development of undertakings in the Member States,
thus promoting action in support of the Union's industry, Article 173 TFEU is considered as the appropriate legal basis for the proposed capital increase.
Considering the proposed increase in subscribed capital by up to EUR 1.5 billion, the Commission will need to purchase up to 450 new shares.
The table below summarises how the EU share in EIF's capital will evolve following the proposed capital increase. It shows the capital of the EIF subscribed by the EU divided into the paid-in and callable part before and following the current capital increase.
Paid-in capital| Callable capital| Total subscribed capital after increase
Existing (before 2014)| Proposed increase| Total| Existing (before 2014)| Proposed increase| Total
| 1,| 1,350
The EU subscription to the new shares in the EIF would be made over a four year period starting in 2014. The resources needed for the purchase of 450 shares are estimated at approx. EUR 175 million. This estimate is based on EIF's projections for the development of EIF's share price during the subscription period 2014-2017. The share issue price will be based on an agreed formula, the Repurchase Share Price Undertaking (RSPU). It includes the paid-in part of the equity as well as various reserves (e.g. statutory reserve, retained earnings) and the profit of the financial year, minus the dividends paid out. The changes in the reserves are difficult to estimate given that one of the reserves reflects changes in market valuations of private equity investments made by the EIF and value changes related to EIF's treasury. The actual share price in each subscription period will be based on the audited financial statements of the previous year.
The Commission proposes that the dividends which will be paid by the EIF during the years 2014-2017 will be used to cover part of the cost of the new shares. Assuming the 2013 level of the dividend pay-out ratio of 20 % to remain constant for the next four years, the dividends to be received during this period are estimated at around EUR 11.5 million. However, it needs to be stressed that the EIF uses a dividend pay-out ratio of 33% as a working assumption for their calculations in the document proposing EIF's capital increase to its Board of Directors. If this level of dividends was assumed, the purchase of 450 shares would require approx. EUR 172 million and the estimated dividends received during 2014-2017 would reach approx. EUR 19 million. The dividends are decided annually by the General Meeting of the EIF.
Consequently, at this stage both the share issue price and the level of dividends cannot be calculated exactly for the whole period of subscription. In any case, the price to be paid by the EU for its part of the increase is not expected to exceed the sum of indicative budget appropriation for EUR 170 million plus the dividends received during 2014-2017. The Commission proposes to make use of appropriations already programmed for financial instruments under COSME and Horizon 2020 programmes to enhance access to financing for SMEs.
Like the EIF, the COSME Regulation pursues the goal of improving access to finance, particularly for SMEs, promoting entrepreneurship and entrepreneurial culture. In the Horizon 2020 Regulation, financial instruments are referred to as the main source of funding for activities close to market that are supported under the programme and EIF will play an important role in the implementation of such financial instruments. Therefore, it is proposed to use part of the appropriations available for COSME and Horizon 2020 for the proposed EIF capital increase. The necessary adjustment to the 2014 budget will be proposed separately in a draft amending budget.