Access to appropriate sources of finance constitutes one of the most significant constraints on promoting innovation and the competitiveness of European small businesses and start-ups. Market deficiencies lead to a lack of financial support for young growth-oriented European companies and for entrepreneurship in general. This necessitates public actions to overcome these hindrances and to leverage the limited amounts of private finance available to close this investment gap. The most important weaknesses are the following:
- Lack of private investment in start-up businesses: Research has consistently shown that the most prominent and permanent market deficiencies are in the seed and start-up stages of firm development.
- Fragmented venture capital markets hinder business growth: A single European venture capital market is needed to overcome the fragmentation and small scale that currently characterise the sector. The necessary scale and the strong participation of private investors that are the hallmarks of a self-sustaining venture capital market can only be achieved at European level. The goal of EU involvement is to promote the development of a self-sustaining, strong venture capital sector.
- Gaps in the availability of loans: A discernible gap exists in the lending to small and medium-sized enterprises with European and global ambitions. Bank lend less to smaller firms where the risk is higher because this is more expensive due to higher administrative costs and higher capital requirements. Overall, this leads to loan pricing that in many cases makes lending unattractive for SMEs.
To overcome these market deficiencies, the Commission proposes a set of financial instruments for financing firms with growth potential. The following instruments are proposed for the next programming period 2014-2020 using the EU Equity and Debt Platforms:
- The facility for start-up investment is designed to promote early-stage venture capital investment and the emergence of new venture capital funds, stimulate knowledge transfer, and support the creation of a European market in intellectual property.
- The Equity Facility for Growth has the goal of providing a boost to the European venture capital market by investing in venture capital funds, increasing considerably the volume of investment in the growth of enterprises across borders.
- The loan facility aims to facilitate access to lending of firms that have higher risk or do not have available sufficient collateral, but aim to grow and internationalise their activities.
Success by 2014: The EU has in place a set of instruments that provide public and private investors new opportunities to invest in European firms, overcoming market deficiencies and improving the availability of loan and equity finance.
Success by 2020: A large number of growth-oriented SMEs find it easier to attract equity investors and can find financing for their expansion. New practices of knowledge transfer facilitate setting up new firms. The European venture capital industry can attract institutional investors and is less dependent on public investment.
The facility for start-up investment is expected to be implemented by the European Investment Fund (EIF) based on a mandate from the Commission and aims to invest in funds which make equity or quasi equity investments in SMEs and small midcaps in the seed and start-up phase. This facility will be funded from the Horizon 2020 programme.
The Equity Facility for Growht (EFG) is expected to be implemented by the European Investment Fund (EIF) based on a mandate from the Commission and aims to invest in funds which make equity or quasi equity investments in SMEs in their growth and expansion stage which have a catalytic effect on the development of the European VC market. This facility will be funded from the COSME programme.
Both facilities will make investments on a pari-passu basis.
Both facilities will be separate windows under a single EU equity financial instrument supporting EU enterprises' growth and R&I.
The Loan Guarantee Facility (LGF) is expected to be implemented by the European Investment Fund (EIF) based on a mandate from the Commission. This facility will provide direct and counter-guarantees to financial intermediaries which provide financing to SMEs with a perceived higher risk or who have insufficient collateral. The facility will also be able to support securitisation transactions of SME loan portfolios. The LGF will be funded from the COSME programme.
The LGF is a window of a single EU debt financial instrument for EU enterprises' growth and R&I. The this facility forms part of a single EU debt financial instrument for EU enterprises' growth and R&I. It is complemented by the SME window of the RSFF (see Innovation Union Commitment N° 12).