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


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Global economic trends: Why it’s time to invest in innovation

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

  1. 1. 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
  2. 2. 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?
  3. 3. European Investment Bank 3 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
  4. 4. European Investment Bank 4 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
  5. 5. European Investment Bank 5 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
  6. 6. European Investment Bank 6 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
  7. 7. European Investment Bank 7 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
  8. 8. European Investment Bank 8 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
  9. 9. European Investment Bank 9 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
  10. 10. European Investment Bank 10 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.
  11. 11. European Investment Bank 11 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
  12. 12. European Investment Bank 12 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
  13. 13. European Investment Bank 13 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.
  14. 14. European Investment Bank 14 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
  15. 15. European Investment Bank 15 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 Bank Financing of research, development and innovation (RDI) i2i Approvals 00 00 00 00 00 00 00 2000 2001 2002 2003 2004 2005 2006 2007 R Total EUR 104bn ICT: EUR 17bn Industrial RDI: EUR 53bn 2008 Geographical split of RDI approvals in 2009 000 000 2009 DE 23% IT 13% ES 13%FR 11% SE 8% GB 8% Others 10% CZ 2% BE 2% PT 2% TR 2% FI 3% PL 3%
  16. 16. European Investment Bank 16 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
  17. 17. European Investment Bank 17 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
  18. 18. European Investment Bank 18 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 Beneficiaries Low/Sub Investment Grade EIB (RSFF) 2007 - 2013 EUR 1bnEUR 1bn Approx. EUR 10bn Debt Financing Own Resources Role of Debt in Financing Innovation Case Study: The Risk Sharing Finance Facility (RSFF)
  19. 19. European Investment Bank 19 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 Patent Remove the remaining barriers to VC funds operating cross borders Simplify the listing processes of innovative companies in European stock exchanges Dynamic 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 GDP US 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 funding To 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)
  20. 20. European Investment Bank 20 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
  21. 21. European Investment Bank 21 Risk Sharing Finance Facility Results 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) Target 2,145 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 EURm APPROVALS SIGNATURES DISBURSEMENTS 7914 14 12 7 36 1525 12812 335276
  22. 22. European Investment Bank 22 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 SI 0.2% Other 14% TR 3% UK 9% RO 0.2% PL 1.4% SE 11% LU 0.8% LT 0.1% BG 0.6% BE 1.4% AT 0.6% NL 7% DE 20% DK 0.8%ES 17% FI 6% FR 9% IL 1.7% HU 3% IT 6%
  23. 23. European Investment Bank 23 ALPHASAT Project Cost: EUR 598m RSFF 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 MEDINVEST Project Cost: EUR229m RSFF Financing : EUR 30m Financing of RDI activities in the field of medical devices/technologies The 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
  24. 24. European Investment Bank 24 RSFF Mid-Term Review Main 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.
  25. 25. European Investment Bank 25 Contacts Thomas C. Barrett Tel: +352 43 79 87006 Jukka Luukkanen Marc D’hooge Nicholas Jennett Tel. + 352 43 79 86412 Tel. + 352 43 79 87211 Tel. + 352 43 79 87320