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SC on Smart Specialisation Platform for Industrial Modernisation Val ència , 8 November 2017

Enabling access-to-finance for KETs companies Innovation Finance Advisory. SC on Smart Specialisation Platform for Industrial Modernisation Val ència , 8 November 2017. Overview. EIB Group Overview Innovation Finance Advisory KETs I S tudy – Key T akeaways

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SC on Smart Specialisation Platform for Industrial Modernisation Val ència , 8 November 2017

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  1. Enabling access-to-finance for KETs companies • Innovation Finance Advisory SC on Smart Specialisation Platform for Industrial Modernisation València, 8 November 2017

  2. Overview • EIB Group Overview • Innovation Finance Advisory • KETs I Study – Key Takeaways • KETs II Study – Preliminary Results

  3. EIB at a glance The EU bank: • Established in 1958 • Shareholders are the 28 EU Member States • Around 90% of lending within the EU Total assets in 2016: EUR 573bn Lending volume in 2016: EUR 83.7bn Capital markets funding in 2016: EUR 66.4bn • World’s largest International Financial Institution: • Largest multilateral lender • Largest multilateral capital markets borrower • Primarily focused on EU but with large operations outside • Solid credit fundamentals: • AAA-rated by the three major rating agencies • Own funds in 2016 of EUR 66.2bn • Capital adequacy ratio in 2016 of 26.4% • Favourable borrowing conditions passed on to clients Key lending priorities (2016 levels of investments – EIB Group): ENVIRONMENT EUR 16.9bn INFRASTRUCTURE EUR 19.7bn INNOVATION EUR 13.5bn SMEs EUR 33.6bn

  4. EIB Group Products …covering the entire cycle of a company’s development Global Loans Mandates/ SLA Intermediaries(Banks) Funding size (EURm) Access to finance Investment Loans Quasi-equity Co-investments/Direct Equity Intermediaries(Funds) Contingent Loans < 25m PE / MidCap Funds VC / SME Funds Tech Transfer / VC VC / SME Funds Second “Valley of Death” Innovation finance gap First “Valley of Death” < 10m < 7.5m Growth Finance Gap – expansion capital EUR 7.5m-25m Seed stage < 1.0m Small MidCaps <250 employees Pre- seed Emerging MidCaps 250-500 Large MidCaps 500-3,000 Startup Stage of development Large Caps

  5. Overview • EIB Group Overview • Innovation Finance Advisory • KETs I Study – Key Takeaways • KETs II Study – Preliminary Results

  6. InnovFin Product Overview + Extension of scope via the European Investment Advisory Hub (part of Investment Plan for Europe)

  7. Innovation Finance Advisory (IFA) – What do we do? Pipeline Development Projects Advisory Market studies • Improve bankability/investment readiness • Enable earlier/ faster access to finance • Light Project Advisory • Improve framework conditions for financing • Develop “business case” for new financing mechanisms in RDI sectors • Prepare studies on increasing effectiveness of financial instruments to address specific sector/RDI policy objectives Horizontal Activities Projects Advisory InnovFin Advisory Transfer of Lessons Learned • Leverage horizontal (market) studies: • Bioeconomy • Digital Economy • Circular Economy • KETS • Life Sciences, etc… • Independent advisory • Support pipeline development • Upstream project advisory where needed (technical, financial) Investment Platforms • Leverage horizontal (market) studies to identify funding gaps • Where necessary, recommend internal EIB-managed instruments and/or Investment Platforms (IP) • Structure/implement IP that mobilise public/private investors Fostering access to finance for innovative projects

  8. IFA’s Portfolio of Market Studies (“Horizontal Activities”) RTOs • Research and Technology Organisations KETsPhase I • Key Enabling Technologies IDFF • Infectious Diseases Finance Facility KETs Phase II • Key Enabling Technologies Funding Web-Tool 2.0 Pilot LPA Light Project Advisory Agri-Food SME Instrument Road Transport • Circular Economy • Financing Pan-EU RI Bio- economy SETStrategic Energy Technology Digital Economy III Digital Innovation Hubs • Innovative Life Science • Space Technologies • Dedicated Renewable Energy and CCS Project Development Assistance (NER 300) Digital Economy II Electronic Components& Systems/Photonics Circular Bioeconomy Thematic Investment Platform Digital Economy I High Performance Computing & European Science Cloud Approved/ Ongoing Completed

  9. Overview • EIB Group Overview • Innovation Finance Advisory • KETs I Study – Key Takeaways • KETs II Study – Preliminary Results

  10. KETs Part 1– Findings from first Horizontal Activity Key Enabling Technologies Key Issues Identified (First HA on KETs) Access-to-finance: the market is favourable but only for relatively established KET companies Big is beautiful – smaller KET companies face more difficulties 1 4 Public support well suited to compensate for specific shortcomings Conservative financing eco-system not in favour of most dynamic innovators 2 5 Knowledge of KET is key for financing decisions – and in short supply with many banks 6 3 Boosting growth will require smart, well targeted actions Key findings “Key Enabling Technologies (KETs) are investments and technologies that will allow European industries to retain competitiveness and capitalise on new markets.” (EC) “KETs companies typically do not find sufficient financing in order to scale up - especially small KETs companies prior to” product commercialization phases.”

  11. Smaller KETs companies find it harder to get access to finance than larger ones Access to debt financing – by size Revenue EUR 100+ m Revenue EUR 50-100 m Revenue EUR < 10 m Revenue EUR 10-50 m Perceived difficulty1) 4.2 3.7 2.5 2.0 61% 45% 31% 18% 17% 0% 0% 0% Difficult Difficult Difficult Difficult Very Difficult Very Difficult Very Difficult Very Difficult Failure rate (companies not having received the desired funding outcome) 45% 25% 0% 0% 10% 1) Average per revenue cluster 1 = Very easy, 2 = Easy, 3 = Neutral, 4 = Difficult, 5 = Very difficult

  12. KETs- Part 1 – Recommendations & Follow-up KETs II Recommendations of First HA Focus of new HA on KETs ‘Quick Wins’ Focus on Information Asymmetries Increase Awareness of EIB/EC offerings Review EIB internal lending procedures Expand ‘indirect equity’ approach • Review the way due diligence, with particular emphasis on technological aspects, is performed by financial counterparties • Determine the needs: technology vs. technology and market / business plan • Determine the way information asymmetries should be tackled • Recommend and design potential new tools and approaches to fill the information gap – e.g. in form of a technology rating integrated in an open platform of investors, companies and experts ‘Medium-Term Actions’ Assist in assessing new technologies and their market potential Develop new financial mechanisms to provide ‘quasi-equity’ Review content / user friendliness of EIPP and other platforms Other measures (Regulatory, IP as collateral, national level) KETS 2 – Horizontal Activity on KETs Due Diligence and Risk Assessment

  13. Overview • EIB Group Overview • Innovation Finance Advisory • KETs I Study – Key Takeaways • KETs II Study – Preliminary Results

  14. KETs Part 2 – Framework Define approach and framework 0 Identify bottlenecks 1 Identify and select potential solutions 2 Define implementation plan & roadmap 3 • We identified bottlenecks based on various sources • We interviewed lenders and investors from a variety of EU countries • We supported the analysis by conducting primary and secondary research • We identified bottlenecks and confirmed information asymmetries in traditional KETs lending • We identified and selected potential ways to overcome them • We identified a number of potential ways to address the identified bottlenecks • We drew from international experience based on Country Case Studies that have been successful at tackling the identified bottlenecks • We identified key solutions and outlined implementation steps in further detail • We primarily focused on • Defining an implementation plan • Detailing the roadmap • Testing with key stakeholders KETs II Study – Preliminary Results

  15. KETs Part 2 – Approach • We took a 3-step approach • We mapped the due diligence process and requirements and have identified key challenges based on interviews with 33 financial intermediaries (commercial banks, specialised banks, specialised fund managers, VC/PE, etc. from a variety of countries) • We identified a number of potential solutions based on the experiences of a variety of highly innovative countries (South Korea, Singapore, Israel, USA, Sweden, Germany,), backed with case studies of 7 countries • We will agree on the best options and drafted the operating model and high-level action plan KETs II Study – Preliminary Results

  16. 1) Key challenges for Commercial Bank Lending to early stage KETs • Bottlenecks in traditional lending • Credit risk critical for the overall cost to lend to early stage KETs… Distribution of cost of loan • Risk Profile • High default rates are inevitable for early stage KETs developing new technology, due to the inherent uncertainties around commercial potential • Banks also face information asymmetries and challenges in discriminating among borrowers • Level of risk is difficult to assess with traditional tools • Adequate risk differentiation is too costly • Loan Size • The size of the loans needed by such companies is usually very large compared to the tangible and financial assets these companies have, and their most valuable assets (intellectual property) is difficult to monetize • Collateral • challenging to use IP as collateral due to lack of expertise and liquid IP markets • Possible complication in using IP as security in the event of default Cost of capital  Tax Probability of default (PD) 15-20% for KETs vs. 1-4% for avg. SME 70-80% ~30% Cost of credit risk Loss given default (LGD) ~100% for KETs vs 40-60% for avg. SME 20-30% Operational cost ~5% Cost of funding Average SME Early stage KETs KETs II Study – Preliminary Results

  17. 2) Key role for Public Sector to reduce information asymmetries KETs II Study – Preliminary Results

  18. 3) Fragmentation of the availability of sources of financing • Schematic representing a typical complete chain of financing • Comments • A complete chain of financing is critical for a number of reasons, especially as the lack of capital at one stage will impact other stages, both • Downstream (lack of exit opportunities and reduced returns) • Upstream (lack of investment opportunities) • Interviews and analysis show that there is significant fragmentation of capital available in Europe across • Instruments (e.g. various stages of equity, lending) • Regions / geographies • A complete chain of financing is important especially at the local / regional level as, even at a national level, significant disparities tend to emerge KETs II Study – Preliminary Results

  19. Case study – Korea Technology Finance Corporation (KOTEC) KOTEC provides technology appraisals and credit guarantees to SME entities • Vision and strategy • Major operations MISSION To create the new growth engine for the Korean Economy by facilitating technology financing practices VISION Partner for creative business ventures, and Global Leader in technology financing Core Values TTechnology EEvolution CCreative HHarmony Diversification of SME Support Center of Creative Financing Credibility of Technology Appraisal Practice Sustainable Growth with Management Stability + + + Strategic Goals • Results • Contributions from FIs, Government (KRW1 TN) To extend areas of technology financing To expand customized financing support To heighten and sophisticate technology appraisal infrastructure To secure long‑term financial stability Strategic Tasks 15 To establish and activate Tech‑bureau (TB) To improve support for technology start‑ups and job creation To reinforce the credibility of the technology appraisal system To improve the quality of guarantee assets 10 To enhance technology and management consulting services To lead in financing the R&D activities of SMEs To create and promote demand for technology appraisal schemes To fulfil social responsibilities for clients and society in general 5 To lead the technology credit appraisal market To create a financing environment for revival To globalize technology appraisal systems and business To raise organizational dynamics and efficiency 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: KIBO annual report 2015 1. 1 EUR = 1225 KRW, as of March 2016 from Financial Institutions from the Government

  20. Offer a full “chain of financing” throughout the firm’s life cycle Sweden’s financing landscape already offers a wide variety of sources of funding for early stage KETs and is continually being extended • Comments • Sweden’s chain of financing • A complete chain of financing is critical in terms of both • Completeness of the products available (e.g. grants, debt, equity, hybrids) to ensure all sources of financing and their combinations are available depending on the specific situation of the company • Availability through all stages of the lifecycle of the company as financing gaps have impact both downstream (lack of exit opportunities, depressed valuations) and upstream (lack of investment opportunities) • At the European level, the establishment of the InnovFin Advisory team contributes to that aim • It provides advice to improve investment conditions through activities which are not project-specific • E.g. innovative financing instruments for Infectious Diseases R&D • At the national level, governments, innovation agencies and NPBs are well positioned to • Review the financing landscape • Identify potential financing gaps and market failures • In Sweden, the public and private sector play a complementary role in order to provide a complete chain of financing with • Grants (e.g. Vinnova, universities) • Debt and equity (ALMI, venture capital firms, banks…) • The MoF is now considering further supplementing the offering with SamInvest • At the regional level, local authorities also play a key role, especially with regards to establishing a smart regional strategy • Role highlighted by the European Committee of Regions • Example of the role of SAB in Saxony (see next case study)

  21. Strategic focus on clusterSaxony’s smart specialisation has enabled it to coordinate a variety of tools at all levels (EU, Federal, regional) to become a major KETs cluster • Comments • Saxony’s smart specialisation strategy • Recent regional policies by the EC have been focused on the nurturing of clusters of economic activity through smart specialisationstrategies • 5 key elements of a cluster • Critical mass as agglomeration economies and spill-over effects are magnified by having more economic activity • Related industries matter as the full value chain should be engaged • Location matters as economic interaction and geographical proximity are highly correlated • Linkages and network effects are crucial and therefore platforms for cooperation need to be created • clusters are inherently difficult to create as they emerge in a cumulative process that leverages existing advantages of the ecosystem • The Free State of Saxony provides an example of a successful smart specialisationstrategy • Developed a strategy for the local micro- and nano-electronics cluster ensuring that financing is available through grants and bank lending in coordination with KfW and the EIB and EIF initiatives • Linkages across the full supply chain were fostered by creating projects and initiatives such as Smart City • Further promoted through a number of trade associations such as “Silicon Saxony”, which ensured that local KETs companies, larger manufacturers, universities, research institutions and public authorities could communicate and cooperate • Similarly, Israel focused its resources on the high-tech sector, specifically medical and communication technology

  22. European Investment Bank Disclaimer This Presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by the European Investment Bank (“EIB”). The terms and conditions are intended as an outline for discussion purposes only and made on an indicative basis. All figures set forth in this Presentation are subject to change, to a satisfactory due diligence and to all necessary internal approvals of EIB (in particular of its credit committees). The information in this Presentation reflects the prevailing conditions and the view of EIB as of this date and are accordingly subject to change and based on carefully selected sources believed to be reliable. EIB has not independently verified this information and does not make any representation or will be liable that such information is accurate, valid, timely and complete. This Presentation is provided without any liability whatsoever by EIB and shall not constitute any obligation of EIB to extend credit facilities to the Company or to carry out a due diligence review of the aspects relevant for the financing of the Project. Neither this presentation nor any of its contents may be duplicated, published or used for any other purposes without the prior written consent of EIB. European Investment Bank

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