While young, fast-growing, innovative small and medium-sized enterprises (SMEs) are the largest contributors to net employment and productivity growth in the EU, due to the inherent risk in their business models, banks are generally unwilling to fund their investment needs.

These firms often finance their funding needs through various forms of equity (venture capital, private equity etc.) and quasi-equity, depending on the stage of their life-cycle. Yet, the supply of equity funding such firms is thought to be below the social optimum.

The Evaluation function within the EIB Group (EIB + EIF) assessed the Group’s equity and quasi-equity support to EU-based SMEs. The evaluation focused on the operations’ relevance, additionality, impact and financial performance.

Overall, the EIB Group’s support to equity and quasi-equity markets is:

• addressing relevant market gaps, and
• makes a significant contribution to the market in terms of volumes, market development and best practices.

The EIF:

• plays a key role in the underserved venture and growth capital segments – including scale-ups - of the EU risk capital markets.
• provides significant support to firms in EU member states with less mature and underserved venture capital/private equity segments.
• contributes to the development of the EU venture capital and private equity market through structuring input.
• successfully replicates the beneficial impacts generally associated with private risk capital.

The EIB:

• is the largest venture debt supplier in the EU.
• EIB’s quasi-equity clients would have been to raise more equity, but in less favourable terms
• In the absence of the EIB quasi-equity financing the supported projects would have either been reduced in scale or delayed

Indirect equity/quasi-equity investments are:

• very heterogeneous,
• show significant variations along the spectrum of firm stages in terms of relevance, additionality, policy impact, and
• also in their contribution to the Group’s financial sustainability.

EIF’s intermediated investments into venture and growth capital – which take up about 70% of the EIF’s equity portfolio – are highly relevant, additional to the market and have a significant policy impact, but contribute less to the Group’s financial sustainability.

• For firms in the venture capital and growth stage, the financing gap appears to be more pronounced than for buyout stage companies.
• The financial value added of EIF support is higher for earlier-stage firms.
• EIF has stronger impact on growth, employment and innovation when targeting firms at earlier – venture and growth - stages

EIF investments into buyout-stage firms - about 30% of the EIF’s equity operations –are targeting more mature companies and have a smaller overall policy contribution, at the same time they added significantly to the portfolio financial sustainability compared to earlier stage. Investments into later-stage firms through funds

• have a more stable performance over time,
• have lower risk across funds, and
• are becoming cash-flow positive more rapidly.

Some elements of the EIB Group’s internal processes are not conducive to the efficient delivery of direct quasi-equity operations.

Quasi-equity clients differ significantly from typical EIB borrowers.

• Due to their dynamic business model, they face a fast-paced environment with high uncertainty.
• The EIB is still on the learning curve to accommodate the needs of such firms.

The overall time needed for quasi-equity operations to reach signature and disbursement take much longer than the market standard.

• Venture debt operations from private sources take about eight weeks to sign. At the EIB, they take more than a year.
• Clients find the EIB processes too slow to suit their business needs.

Standard EIB processes often present excessive burden to quasi-equity clients.

• This results in adverse selection of clients, and occasionally in client dissatisfaction.
• Both venture debt and thematic products display a high attrition rate, increasing the costs for operations that ultimately never materialised.

The EIF is providing stable and predictable funding all along the economic cycle, yet:

• the long time it takes to commit equity investments and build up portfolios,
• which is inherent in the indirect equity business model,
• calls into question the suitability of indirect equity investments to be used as part of initiatives designed to provide rapidly available funding to firms during economic shocks.

The EIF provides valuable support to risk capital markets through stable and predictable funding also in times of downturns and crises.

However, when it comes to new initiatives:

• On average it takes of 310 days from the appraisal authorization to signature.
•  In line with market practice, after commitment, it takes about 3 years for an equity fund manager to build up a portfolio with a value of 75% of total commitments.
•  In case of counter-cyclical measures, often new mandates need to be set up and operationalise, and this additional delay needs to be added to the timeline.

#1 : The EIB Group should reflect in its analysis, decision-making and reporting processes the heterogeneity of the policy impact and financial sustainability when it comes to the allocation of the indirect equity portfolio across stages (venture capital, growth capital and buyout-type transactions).

#2 : The EIB should conduct a review of its current operational processes related to direct quasi-equity transactions and explore alternative operational and institutional set-ups for delivery of quasi-equity operations to better respond to the specific needs of young, innovative firms, with the view of narrowing the gap in terms of flexibility and time to market between the EIB and the overall practice observed on the quasi-equity market.

#3 : The EIB Group should include in its reporting on SME activity the SME-focused transactions outside the SME PPG.