EIF’s approach to inclusive / impact financing Dr. Helmut Kraemer-Eis Head of Research & Market Analysis European Investment Fund

26 March 2015 – Regent’s University – London

Content

 EIF

 Inclusive Finance / Microfinance  Social Impact Investing / SIA

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EIF – overview

“

We pursue EU policy objectives and financial sustainability

Shareholders Unique tripartite structure: 63.7% European investment Bank (EIB), 24.3% European Commission (EC), 12% 26 public & private financial institutions (FIs)

”

Assets under management

AAA-rated

of EUR 14bn, mobilising Over EUR 77bn with other market players

By the three major rating agencies

Capital increase to EUR 4.5bn ensuring strong capital base

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EIF - How we work

“

We provide risk financing to stimulate entrepreneurship and innovation in Europe

”

 Equity financing (Tech Transfer, VC, Lower mid-market)  Debt financing (guarantees and microfinance)

Making

Offering

Working

Supporting

finance more accessible and helping SMEs and Mid-Caps to innovate and grow

a large array of targeted products to support SMEs ranging from venture capital to guarantees and microfinance to enterprises

with financial intermediaries incl. NPIs across the EU28 EFTA countries, candidate & potential candidate countries

the market in a countercyclical way

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EIF’s counterparts

“

We work with a wide range of counterparts to support SMEs

”

Resources and Mandators

Intermediaries and counterparts

 European Investment Bank

 Fund Managers

 EIF own resources  European Commission

 Development & Promotional Banks

 Member States/regions

 Guarantee Institutions

 Corporates/private

 Leasing Companies

 Public institutions

 Business Angels

 Other third parties

 Microfinance Institutions

 Commercial Banks

microMicroenterprises, PMEs SMEs et and lessmall small mid-caps

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EIF - some key figures

“

We are the prime provider of SME financing in Europe

”

Equity*

Guarantees & securitisation *

2014 commitments: EUR 1.7bn which mobilised EUR 8.2bn

2014 commitments: EUR 1.6bn which mobilised EUR 5.6bn

Microfinance*

500 venture and growth funds

2014 commitments 400 banks, guarantee and promotional EUR 51m institutions which mobilised 1.5m SME/midcaps EUR 135m supported

EUR 14bn in total outstanding commitments mobilise over EUR 77bn *unaudited figures

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EIF’s toolbox to support SMEs Public stock markets

Juncker Plan / EFSI SME Window !

Securitisation

Portfolio Guarantees

Formal VC Funds

Mezzanine Funds

Impact Investing

VC Seed & Early Stage Microcredit

Business Angels Technology Transfer PRE-SEED PHASE

SEED PHASE

START-UP PHASE

EMERGING GROWTH

DEVELOPMENT

SME Development Stages HIGHER RISK

LOWER RISK 7

Inclusive Finance / Microfinance

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What is microfinance?

 Microfinance is the provision of basic financial services to poor (low income) people (who traditionally lack access to banking and related services) – CGAP definition  Micro-credit is defined by the European Commission as a loan or lease under EUR 25,000 to support the development of self-employment and micro-enterprises. It has a double impact: an economic impact as it allows the creation of income generating

activities and a social impact as it contributes to financial inclusion and therefore to the social inclusion of individuals.  A micro-enterprise is any enterprise with fewer than 10 employees and a turnover under EUR 2m (as defined in the Commission Recommendation 2003/361/EC of 6 May 2003, as amended).

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Microfinance: developing vs developed countries Western Countries

Developing Countries Financial System Lack of developed banking system

Very well developed banking system

Lack of developed regulatory framework

Very well developed regulatory framework

Lack of client protection principles

Rules in place to protect customers' rights

Lack of financial services to everybody

Good offer of financial services, especially in more developed areas Very strict rules to provide credit (entry score system)

Social framework Lack of social protection prevent poor people to receive any sort of support Survival is a real issue

Very well developed social policies protect people from severe poverty Unemployment leads to exclusion 10

Microfinance: some facts  92% of enterprises in the EU are micro-enterprises  99% of the start-ups created in the EU every year are micro-enterprises and small enterprises  33% of these start-ups are launched by unemployed persons This means:

 Microfinance is an important market segment and has a social as well as financial component (“growth creating engine”) Source: Kraemer-Eis, Lang, Gvetadze (2014), based on data from European Commission

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Microfinance: access to finance ECB survey on the access to finance of SMEs in the Euro area:  Access to finance remained a more pressing problem for Euro area SMEs than for large firms  Share of enterprises which see access to finance as their most pressing problem is larger among micro-enterprises than among other SMEs

Source: Kraemer-Eis, Lang, Gvetadze (2014), based on data from ECB

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Microfinance market environment: no uniform picture in Europe People at risk of poverty or social exclusion

Source: Kraemer-Eis, Lang, Gvetadze (2014), based on data from Eurostat

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Market environment: challenges

 Market is highly heterogeneous & less developed than microfinance market outside Europe  Broad range of microfinance institutions (e.g. small non-profit organisations or governments-owned development agencies, large commercial banks)  Broad range of microfinance services (heavily subsidised vs. fully risk-priced)  Country-specific features, depending on legal framework, economic realities, social inclusion programmes etc.  Eastern vs. Western Europe microfinance market

Ensuring a maximum outreach through a flexible investment approach

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Progress: how does it work? European Progress Microfinance Facility («Progress»):

(EUR 203m)

(EUR 500m+ / 50.000 microloans)

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Progress: key highlights

EPMF in a nutshell  Funded by EC (DG EMPL) and EIB and managed by EIF  Launched in 2011 (legal base April 2010)  EUR 180m for loan and equity instruments  EUR 23m for guarantee instruments  Social inclusion targets

Country coverage  20 countries covered by EPMF (across facility)  Active dialogue with potential intermediaries in all countries currently not covered (some of which will be targets under EaSI)

Deployment targets  By 2017/18: +EUR 500m of new micro-loan volume spread over some of 50,000 microloans  Actual inclusions at micro-borrower level have reached almost EUR 250m in Q3 2014  Excellent social outreach (annual social reporting)

Latest developments  EIF received LuxFlag label for the EPMF FCP during first half of 2014  66 contracts signed with 52 financial intermediaries

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What’s next?  EPMF investment period continues until April 2016  Programme for Employment and Social Innovation (EaSI Microfinance as EPMF successor) – sponsored by the European Commission through DG Employment  Up to EUR 80m - 150m split between funded instruments and guarantees, targeting micro-enterprises and entrepreneurs, but also social enterprises*

 EREM Cooperative Banks and Small Financial Institutions  within the EIB Group we are considering offering funding for inclusive finance to cooperative banks and small financial institutions Social enterprise means an undertaking, regardless of its legal form, and which: • in accordance with its Articles of Association, Statutes or any other statutory document establishing the business, has as its primary objective the achievement of measurable, positive social impacts rather than generating profit for its owners, members and shareholders, where the undertaking • provides services or goods which generate a social return and/or • employs a method of production of goods or services that embodies its social objective; • uses its profits first and foremost to achieve its primary objective and has in place predefined procedures and rules for any circumstances in which profits are distributed to shareholders and owners, in order to ensure that any distribution of profits does not undermine the primary objective; • is managed in an entrepreneurial, accountable and transparent way, in particular by involving workers, customers and/or stakeholders affected by its business activities. Code of Good Conduct - EU best practices in the Microfinance market http://ec.europa.eu/regional_policy/thefunds/instruments/jasmine_cgc_en.cfm#7 *Amounts to be confirmed

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Microfinance: summary of objectives

“

By supporting micro-enterprises we promote job creation, entrepreneurship and social inclusion

”

Improving

Providing

Committing

the availability of finance for micro-entrepreneurs, the self-employed and vulnerable social groups who often lack access to the commercial credit market

financial (equity and guarantees)

to the EU 2020 objectives of smart, sustainable and inclusive growth

and non financial (Technical Assistance) instruments* to increase microfinance institutions’ funding capacity & sustainability

*Jasmine – a TA program, funded by DG Regio, through which EIF has arranged ratings, institutional assessments and trainings for 70 NBFIs

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Impact Investing / SIA

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SIA – Social Impact Accelerator

Crédit Coopératif

Investors

EIB/EIF

A pan-European partnership supporting social enterprises

Deutsche Bank Other investors(?)

Public-Private Partnership Fund-of-funds

Social Impact Accelerator (“SIA”) EUR 241m Investment Capacity

Investment Targets

Final beneficiaries

Social Impact Venture Capital Fund

Social SME

Social SME

Social Impact Venture Capital Fund

Social SME

Social Impact Venture Capital Fund

Social SME

Across the EU, Candidate Countries and Potential Candidate Countries Social SME

Social Impact 20

EIF Social Impact Strategy

Social Business Models

A business model that seeks to resolve a recurring and sizeable social issue through the supply of a specific service or product. The resolution of the social issue has to be measurable and converted into a social impact metrics.

Traditional business models run in a social way

Geographically-focused business models

A business model that is not focusing on providing a service or product that resolves a social issue but which is implemented in a way that enables positive social impact. Such positive social impact shall be measurable and part of the company’s statutes.

A business model that is implemented either in a social manner or in a traditionnal manner, but which operates in a socially deprived area. The impact of such a company shall be defined ex ante and measurable.

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Lucy is 3 and has speech delay. She is using MyChoicePad at her nursery to work on her signing, build up her vocabulary and ultimately increase her level of communication so she can learn to speak words and catch up with her peers.

“

Charmaine is 7 with a chromosome disorder which affects her ability to understand and communicate. MyChoicePad helps her get a sense of control with communication grids created around her daily routines so she can express what she wants and needs.

At Insane Logic we want to unlock voices around the world. We believe everyone has the right to communication.

”

Richard is 19 with Downs Syndrome and had very little communication. Before using MyChoicePad everyone around him thought he was at a one word language level (“cake”), but through using the app it was discovered he could communicate at a 2 and sometimes 3 word language level ("I like cake"). His family are overjoyed and are beginning to discover a new side of Richard as he can communicate more clearly his wants and feelings.

Insane Logic has created the award winning language development programme 'MyChoicePad'. It brings together proven speech and language therapy techniques and market leading technology to deliver language development via tablet computers. MyChoicePad helps children, young people and adults who have speech, language or communication needs. 22

SIA: Five funds in SIA’s current portfolio

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Fund:

Social Venture Fund II

Portfolio composition:

Manager:

Ananda Ventures GmbH

•

Fund size:

EUR 22.3m

EIF’s invt:

EUR 10m

Vintage:

2013

Insane Logic: an education technology social enterprise that creates mobile tools to improve language development and communication skills for children and adults with learning and communication difficulties

Sector:

Technology-enabled social enterprises

•

Stage:

Growth capital

Geography:

Germany and Germanspeaking geographies

Ordermed: supports people with chronic illnesses, as well as their carers, in procuring and using medication in a simple and secure manner. Ordermed helps patients to maintain a centralised overview of their medication with the help of an internet portal and a mobile app, in order to avoid severe drug interactions and to improve medication therapy

•

Little Bird : a specialised web-based application in the efficient allocation of daycare center places

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Fund:

Bridges Social Impact Bond Fund

Manager:

Bridges Ventures LLP

Fund size:

GBP 22.5m

EIF’s invt:

GBP 5m

Vintage:

2013

Sector:

Early intervention service providers

Stage:

No stage, service providers will be Social Sector Organisations

Geography:

UK

Portfolio composition: T&T Innovation: deals with the provision of supportive programmes to vulnerable young people in Manchester, in order to improve education and behaviour outcomes IAAM: a programme developed by 18 voluntary adoption agencies that will support local authorities’ adoption services by finding, training and supporting families to adopt children who are recognised as harder-toplace MTFC Innovation: first SIB helping young people with challenging emotional and behavioural difficulties move back into family settings

Foster Care Support : designed to provide a therapeutic fostering programme for children living in residential care homes in Birmingham

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Fund:

Impact Ventures UK

Portfolio composition:

Manager:

LGT Venture Philanthropy

Fund size:

GBP 36.0m

EIF’s invt:

GBP 7.5m

K10: specialises in connecting the unemployed to apprenticeships with reputable construction companies in London

Vintage:

2013

Sector:

Generalist

Stage:

Growth capital

Geography:

UK

Buddy: digital toll supporting mental health services and continuity of care Big White Wall: 24/7 safe space for mental health support Homes for Good: ensures sustainable housing for underserved in Scotland

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Fund:

Oltre II

Manager:

Oltre Ventures

Fund size:

EUR 15.4m

EIF invt:

EUR 10.0m

Vintage:

2015

Sector:

Generalist

Stage:

Early stage

Geography:

Italy

Fund:

BAC Impact Partenaires III

Manager:

Impact Partenaires

Fund size:

EUR 44.0m

EIF invt:

EUR 10.0m

Vintage:

2015

Sector:

Generalist

Stage:

Early stage

Geography:

France

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SIA’s Next 12 Months

“

Building the market infrastructure for this emerging asset class to achieve long term sustainability

Invest 2 deals to be signed in Q1 2015 3 due diligences to take place in Q1 2015

”

Diversify

Raise

Provide

geographically through technical assistance on the set up of investment proposals from geographies not represented in SIA’s portfolio

additional external funds. SIA subscription period extended to 31 July 2015 following interest from a number of institutions in the public and private space

advice on the set-up of funds incl. structuring and legal input, helping impact investors to establish institutional investors’ standards and best practice

In 2015 we aim to commit at least EUR 50m to social impact funds 28

Concluding remarks Compared to the «traditional» EIF activities …



Overall sub-portfolios small



Small transactions (!)

But … 

Significant growth potential



High impact



EIF’s catalytic role!

2 dedicated teams for these activities Micro: http://www.eif.org/what_we_do/microfinance/progress/index.htm

SIA: http://www.eif.org/what_we_do/equity/sia/index.htm 29

Thank you for your attention!

Helmut Kraemer-Eis [email protected]

Further information can be found here: http://www.eif.org/news_centre/research/index.htm

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