Dr. Helmut Kraemer-Eis

Head of Research & Market Analysis

Chief Economist, European Investment Fund (EIF)

Institut der Deutschen Wirtschaft, Köln, 23.08.2019

Der Zugang zu Finanzierungsquellen

in Zeiten des Strukturwandels

- Impulsvortrag -

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EIF in a

3

EIF: background info

OBJECTIVETo support smart, sustainable

and inclusive growth for the

benefit of European SMEs.

HOWBy offering a wide range of

targeted products to support

SMEs and mid-caps, ranging

from venture capital to

guarantees and microfinance.

WHEREWorking with financial intermediaries

across the EU-28 and EFTA

countries, candidate and potential

candidate countries.

Shareholders

58.7% European

Investment Bank (EIB)

29.7% European

Union*

11.6% 32 public and

private financial

institutions

Strong capital

baseof EUR 4.5bn

AAA-rated

by the three major

rating agencies

Over 20 years

of market experience

in SME financing

*Represented by the European Commission

4

Overall commitments*

EUR 10.1bn (2018)

EUR 9.3bn (2017)

EUR 9.45bn (2016)

EUR 7 bn (2015)

EUR 3.3bn (2014)

Partners

600 private equity

funds

400 banks, guarantee

and promotional

institutions

Leveraged volumes*

EUR 43.7bn (2018)

EUR 35.4bn (2017)

EUR 42.7bn (2016)

EUR 26.9bn (2015)

EUR 13.9bn (2014)

SMEs supported

over 1.5 million since

1994

280,000 in 2018

2.8m jobs supported in

2018

*in equity, guarantees, securitisation and inclusive finance

EIF: activity

Resources and

mandators

European Investment

Bank

EIF own resources

European Commission

Member States/regions

Managing authorities

Public institutions

Other third parties

Intermediaries and

counterparts

Fund managers

Commercial banks

Development and

promotional banks

Guarantee institutions

Leasing companies

Corporates

Business angels

Microfinance

institutions

micro-

enterprises,

SMEs

and small

mid-caps

5

EIF: Support for different development stages

via intermediated business model!

Source: EIF

Impacted by Fintech&

Impacting Fintech

SME Development Stages

DEVELOPMENT

HIGHER RISK LOWER RISK

Technology Transfer

Microcredit

VC Seed & Early Stage

PRE-SEED PHASE SEED PHASE START-UP PHASE EMERGING GROWTH

Impact Investing

Portfolio Guarantees & Credit Enhancement

VC Funds, Lower Mid Market & Mezzanine Funds

Business Angels

Debt Funds

6

Access to Finance remains a significant issue

Percentage of SMEs reporting access to finance to be a

serious issue (ECB, SAFE):

Declining for the Euro area as a

whole, but clearly a persistent

structural problem ...

Affecting some countries

more than others …

The EIF SME Access to

Finance Index (ESAF):

Country heterogeneity in

access to finance issues

for all SME financing

instruments …

Sources: EIF Working Papers 2019/57 & 58

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Sw

eden

Germ

any

Fin

land

Slo

venia

Belg

ium

United K

ingdom

France

Austria

Czech Republic

Neth

erla

nds

Malta

Esto

nia

Denm

ark

Lithuania

Pola

nd

Spain

Luxem

bourg

Portu

gal

Italy

Croatia

Hungary

Slo

vakia

Latv

ia

Irela

nd

Bulg

aria

Rom

ania

Cyprus

Greece

2017 2018

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

HY1

/20

12

HY2

/20

12

HY1

/20

13

HY2

/20

13

HY1

/20

14

HY2

/20

14

HY1

/20

15

HY2

/20

15

HY1

/20

16

HY2

/20

16

HY1

/20

17

HY2

/20

17

HY1

/20

18

HY2

/20

18

Euro area

0% 20% 40% 60%

FI

SK

NL

FR

DE

AT

BE

EA

ES

IE

PT

IT

GR

HY1/2018

HY2/2018

0

2

4

6

8

10

12

14

16

18

0

10

20

30

40

50

60

70

80

90

% of to

tal securitis

ation

bn EU

R

SMESec (lhs) Share of SMESec in Total Sec (rhs)

Lending & securitisation

7

In recent months,

outstanding loans (to NFCs)

have started to pick up

again, driven by record low

borrowing costs

SME securitization (SMESec):

Despite lifting regulatory fog

(STS) still a difficult market

Source: EIF Working Paper 2019/57 (June-2019, based on data from ECB and AFME)

1%

2%

3%

4%

5%

6%

7%

2.0

2.5

3.0

3.5

4.0

4.5

5.0

tr EU

R

Loans to NFCs (LHS)

Composite cost-of-borrowing indicator (RHS)

8

Selected “alternatives”

Equity: Venture Capital

Debt: Alternative lending

Both: Fintech

Many different drivers, ie market needs, technology, and regulation

9

After 10 difficult years, Venture Capital activity is beyond pre-crisis levels

Venture Capital: market activity (Europe)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fundraising Investment Divestment

bn EUR

Source: EIF Working Paper 2019/57 (June-2019), based on data from Invest Europe

VC: Average fund sizes

10

There is a group of US VC funds that is

significantly larger than European peers.

Expanding globally, often leading

European funding rounds in digital tech.

High relevance for scale-up financing.

Different funding needs in digital space

than for traditional growth models

(flexibility is key).

Average US VC backed company

receives 5x higher amounts compared to

European peers.

Source: EIF Working Paper 2019/57 (June-2019), based on data from Invest Europe

0

20

40

60

80

100

120

140

160

180

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

m EU

R

Europe US

European VC funds remain smaller than US

funds

VC: overview by geography (2018)

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Untapped potential

for VC in Europe

VC investments by country of portfolio company, % of GDP

European VC

market is

heterogeneous

across countries

Lagging behind key

peers

Hubs, not countries,

act as the beating

heart of VC

Source: EIF Working Paper 2019/57 (June-2019), based on data from Invest Europe and OECD

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

Israel

United Sta

tes

Canada

South

A

fric

a

Korea

Fin

land

Denm

ark

Irela

nd

Sw

eden

United Kin

gdom

Sw

itzerla

nd

France

Belg

ium

Esto

nia

Hungary

Neth

erla

nds

European to

tal

Germ

any

Spain

Icela

nd

Luxem

bourg

Greece

Norw

ay

Austria

Cyprus

North

-M

acedonia

Portu

gal

Malta

Bulg

aria

Italy

Serbia

Pola

nd

Czech Republic

Latv

ia

Lithuania

Slo

vakia

Croatia

Ukrain

e

Slo

venia

Rom

ania

2018* 2014-2018 average**

*2018, or latest available year.

**2014-2018 average, if available.

Source: Invest Europe, OECD (2018b)

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VC investments catalysed by EIF

HIGHER RISK LOWER RISK

Source: EIF Working Paper 2016/34, updated with 2018 data

Spatial distribution of EIF backed investments (2001 and 2018)

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European VC hubs

The backbone of the ecosystem

• VC hubs communicate:

consistent cross-investment

routes among mature hubs.

• Hubs originated 83% of all

invested amounts. 63%

invested within national

borders, 37% cross-border.

• Through promotion of cross-

border oriented VC firms, EIF

supports the build-up of an

European VC market.

VC: Germany tops the list of most promising countries

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0

40

80

120

160

200

240

280

320

360

400

440

Austria

Belg

ium

Bulg

aria

Croatia

Cyprus

Czech Republic

Denm

ark

Esto

nia

Fin

land

France

Germ

any

Greece

Hungary

Irela

nd

Italy

Latv

ia

Lithuania

Luxem

bourg

Malta

Neth

erla

nds

Norw

ay

Pola

nd

Portu

gal

Rom

ania

Slo

vakia

Slo

venia

Spain

Sw

eden

Sw

itzerla

nd

Turkey

United Kin

gdom

Oth

er European country

Most important target countries for current VC investments

Most promising countries for VC investments in the next 12mths

No of respondents

Source: forthcoming EIF Working Paper (Sept-2019)

VC: Main challenges for European GPs

15Source: forthcoming EIF Working Paper (Sept-2019)

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Alternative lending

Strong activity increase in Europe.

Diverse spectrum: e.g. venture debt funds, distressed debt funds,

mezzanine debt funds, direct lending funds, micro-finance funds,

crowdfunding platforms.

Many regulatory actions at national level ► fragmented regulatory

environment for alternative lenders ► potentially hindering the scaling

up across Europe.

Several actions at European level, e.g. ELTIF (e.g. applicable to loan

funds, review in 2019), EU Fintech action plan.

Development of an integrated European market for alternative lending is

necessary.

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Fintech – boon or bane?

Fintech definition from FSB

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“Technologically enabled financial innovation that

could result in new business models, applications,

processes, or products with an associated material

effect on financial markets and institutions and the

provision of financial services”.

Financial Stability Board (FSB)

Financial Stability Implications from FinTech:

Supervisory and Regulatory Issues that Merit Authorities’ Attention

June 2017

What disruptive technologies have done to other industries

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Retail commerce

Urban transportationDon’t own any cars

Hospitality / hotelsDon’t own any beds

Combustion engine

manufacturers

Disruptive technologies enabling the rise of Fintech

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Mobile smart phones (2007)

iPhone was introduced in 2007. Mobile phones free the users of financial services from having to

go to fixed service locations.

Cloud computing (2006)

Amazon Web Services introduced in 2006. Cloud computing frees providers of financial services

from having fixed location IT/computing/data services.

Blockchain / DLT (2008)

Blockchains allow to process (smart) contracts and transactions outside the traditional

intermediary system relying on banks, freeing both users and providers of financial services from

maintaining and protecting multiple ledgers of transactions/contracts.

Artificial intelligence (AI)

The term AI was first coined at the Dartmouth conference in summer 1956. Since 2000, a major

leap forward in developing AI / ML, potentially replacing human reasoning by software application

in a wide range of sectors, incl. financial services.

Source: A. Kirilenko, Imperial College Business School, UK

Big data use

Ways to systematically extract and analyse data that is too large or too complex to be dealt with

by traditional software and approaches.

Technology, in combination with regulation and behavioral changes cause pressure to adjust

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INSURANCE

ADVISORY

ASSET

MANAGEMENT

LENDING/

FINANCING

MONEY

TRANSFER

Source: A. Kirilenko, Imperial College Business School, UK

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Fintechs are not only the small and agile

start-ups!

CBInsights (2018): “From payments to lending to

insurance to checking accounts, Amazon is

attacking financial services from every angle

without applying to be a conventional bank”.

Paypal started to offer short term financing so far in four

countries (US, UK, D, Au), so far 500k loans (USD 6bn +) to

170k companies (FAZ 2019).

Applecard, Googlepay etc. etc., more to come

Big techs start to be very active – i.e. based on unique

access to data and technology.

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Regulatory challenges: support emerging market without creating bubbles

Many actions (examples):

European Commission

Fintech action plan (2018)

https://ec.europa.eu/info/publications/180308-action-plan-fintech_en

• Part of the Capital Markets Union

• 19 steps to enable innovative business models to scale up, support the

uptake of new technologies, increase cybersecurity and the integrity of

the financial system, incl

- EU FinTech Laboratory

- Strategy on distributed ledger technology and blockchain

- Public consultations

- Regulatory sandboxes (framework for Fintechs to conduct live

experiments in a controlled environment)

Basel Committee on Banking Supervision

Sound practices on the implications of fintech developments for

banks and bank supervisors (2018):

https://www.bis.org/bcbs/publ/d431.htm

LEVEL PLAYING

FIELD

FINANCIAL STABILITY

CONSUMER PROTECTION

CYBER-SECURITY

DATA PRIVACY / KYC / AML

Source: EIF Working Paper 2019 (June-2019), based on data from Cambridge Center of Alternative Finance (2019)

Fintechs as source/channel of financing

CrowdFunding in Europe

A growing (but maturing?) market…

… and business models of new entrants and incumbent firms are changing

0

5,000

10,000

15,000

20,000

25,000

Businesses supported

+102%

+62%

+53%

+66%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Total business transaction

volume (mEUR)

+77%+71%

30,000

40,000

50,000

60,000

70,000

80,000

Average transaction

size (EUR)

+163%

+166%

+110%

+47%

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25

Direct competition, but also growing partnerships and integration between

Fintechs and banks.

Partnerships also outside banking (e.g. microfinance and crowdlending, BA/VC

financing and crowdinvesting).

Incumbent firms under pressure

How do they respond?

IMITATION(e.g. introduction of

dedicated ownplatforms)

PARTNERSHIPS (e.g., joint ventures, common platforms, labelling of common

products)

INTEGRATION targets (M&A)

Long-term trends shaping financial services

Technological progress (to continue with high

speed).

Rise of the millennials and digital natives with

mobile devices and social media as part of

their lives (“cultural change”).

Technological progress has potential to reduce

the traditional issues in small business lending (fix

cost issue & asymmetric information) (?)

Fintechs are changing the way SME financing

is supplied and demanded.

Banks as “first point of contact” also in the

future?

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Fintechs…

… as investees: many Fintechs in the EIF portfolio and also funds that are

entirely focused on Fintech

… as intermediaries for guarantee transactions

… that were VC investees and turned into guarantee intermediaries

A Fintech that grew a market leader in crowdfunding became counterpart for

securitization transactions

Examples of relevance for EIF

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VC survey

Blockchain technology and digitisation for contract design

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Concluding remarks (1/3)

General market

SMEs’ Access to Finance improved since the crisis, but structural issues persist as

well as cross country heterogeneity (+ economic outlook ?)

Lending / SMESec: a lot of liquidity; banks are looking for risk transfer

Long term pressure on bank profitability (also due to monetary policy, normalization

now outside range of vision, from cyclical issue to structural problem?)

VC market in Europe is still underdeveloped compared to peers, but on a positive

path (see also EIF’s VC survey)

Alternative instruments, also in the lending space, increase in importance (in line

with the EC’s CMU plan)

Concluding remarks (2/3)

Fintech 1

Fintechs and new market players lead to increased competition, changing business

models, and new types of cooperation

The financing ecosystem is changing significantly, driven by technology, regulation

and also behavioral changes

there are pro’s and con’s (depending on the perspective)

more diverse palette of financing alternatives for SMEs

incumbent firms must have Fintech strategies (important:

market presence, speed, admin processes, risk management, etc.)

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Concluding remarks (3/3)

Fintech 2

adverse selection? … a signal?

Fintechs still have to go through the cycle. Handelsblatt (01.07.19): “Wenige

glänzen, viele scheitern: Bei Fintechs rollt die Pleitewelle”

Level the (regulatory) playing field (eg UK’s Financial Conduct Authority (FC): new

regulatory requirements for UK marketplace lending in June 2019)

Technology (and its impact) needs to be understood and manageable

Be open for changes, but also critical – the emperor can be naked

For EIF: be open for needs to change / adjust the business model and value chain

Antwort auf die gestellte Frage …

Q.: … “benötigt die digitale Oekonomie neue

Finanzierungsmodelle”?

A.: Der Markt generiert bereits viele neue Ansätze und

Modelle. Etablierte Marktakteure stehen unter

erheblichem Anpassungsdruck.

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Thank you

… for your attention!

Dr. Helmut Kraemer-Eis

Head of Research & Market Analysis,Chief Economist

http://www.eif.org/news_centre/research/index.htm