Guidelines on State Aid to Promote Risk Finance Investments

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On 15 January the Commission adopted the fourth set of guidelines for the programming period 2014-2020 [the first three were those on broadband, SGEI, and regional aid]. The latest guidelines replaced those on risk capital for SMEs. What is immediately noticeable from the title of the new guidelines is that they are not confined only to funding in the form of equity capital, nor do they concern exclusively SMEs. This article reviews the main provisions of the guidelines and identifies their new features.The new architecture of State aid control

Before examining the guidelines, it is worth stressing that, unlike the old guidelines, any notified measure will be subject to detailed assessment on the basis of the “common principles of compatibility”, which in fact are the new, improved version of the balancing test. The idea of the balancing of the positive and negative effects of State aid is retained, but the principles are now elaborated in more detail and more cohesively. The intention of the Commission is to induce Member States to use as much as possible the General Block Exemption Regulation.

So now the guidelines do not overlap, as the old ones did, with the GBER. A State aid measure will in the future fall either within the GBER or within the guidelines, but not in both. Given that proving the compatibility of State aid in the future will not be a routine task, but rather a complex exercise with uncertain outcome [because an authorisation by the Commission will not be a foregone conclusion], the Member States will have a pretty strong incentive to utilise as much as possible the GBER. Commission services will be relieved from assessing unproblematic and insignificant measures but, perhaps perversely, the unintended outcome of the modernisation initiative may be to hamper our understanding of the nature and effects of the large majority of State aid granted under the GBER. This is because that aid will not be subject to notification and ex ante scrutiny by the Commission, whose reasoning and results are published.

What is new?

Three new features stand out. First, funding will not have to be mostly in the form of equity, as is currently required, as loans and guarantees will also be allowable. Second, funding will not have to be provided up to the expansion stage of an SME, but it may be granted several years after the first commercial sale of the recipient. Third, funding is not limited only to SMEs – i.e. enterprises with fewer than 250 employees – but it may be granted to larger enterprises [so called “small mid-caps”] with up to 500 employees.

Rationale of guidelines

Although the guidelines clearly state that there is no general market failure for SME finance, they recognise that funding for SMEs suffers from asymmetric information. Because many SMEs do not have a proven track record, they cannot demonstrate their credit worthiness to potential funders. This creates a “funding gap”. Member States have to demonstrate the existence of such funding gap for the SMEs they target through State aid measures. In this case, access to funding for SMEs is an objective of common interest.

Scope of the guidelines

The guidelines apply to any risk finance measure that falls outside the GBER. However, the following measures are excluded from the scope of the guidelines: Ad-hoc aid, funding that is not channelled through financial intermediaries, large enterprises [except small or innovative mid-caps], listed companies, measures that do not involve private investors, measures that eliminate all risk for private investors, measures which allow private investors to obtain all the benefits from investment, measures that support management buy-outs, undertakings in financial difficulty as defined in the rescue and restructuring guidelines, firms which are recipients of illegal aid which is not fully recovered, export aid, and measures which constitute non-severable violation of EU law [e.g. they mandate the use of domestic products or require that investors are headquartered in the funding Member State].

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Notification obligation

Member States must notify all aid which does not fall within the GBER. However, they do not have to notify measures which do not constitute State aid, either because they satisfy the “market economy operator test” or because the aid is de minimis in compliance with Regulation 1407/2013.

The market economy operator test

Measures that conform to the MEOT do not contain State aid. This is the case in the following situations.

For investors: Investments must be on a pari passu basis with those of the public sources. They are considered to be pari passu when they are:

i) On the same terms: Private and public investors share the same risks and rewards.

ii) Made simultaneously: Private and public investors participate in the same investment transaction.

iii) Of real economic significance: Private investors have at least 30% share.

For intermediaries and/or managers: Normally, the financial intermediary and/or manager are a channel for the flow of aid and do not derive any advantage, unless they also invest. At any rate, managers must not be overcompensated. This is case when managers are competitively selected. In the case of a public intermediary or manager who is not competitively selected, the fee it receives must be capped and linked to its performance. It is interesting that the guidelines observe that a possibly larger turnover for intermediaries/managers as a result of a risk finance measure is a secondary effect and does not constitute State aid.

Substantive assessment

According to the guidelines, the Commission will carry out a “substantive assessment” of three categories of notifiable measures:

i) Measures that target firms not fulfilling all the conditions of the GBER.

ii) Measures with different design parameters than those stipulated in the GBER.

iii) Measures with large budgets above the threshold defined in the GBER.

Examples of measures deviating from GBER provisions are as follows: Funding for companies with up to 500 employees [small mid-caps], firms receiving initial risk finance seven years after their first commercial sale, risk finance tranches exceeding the GBER ceiling [EUR 15 million], private participation below the ratios defined in the GBER, measures which limit the losses that can be borne by private investors, financial intermediaries and/or managers acting as co-investors.

Common assessment principles

There are seven principles, which are as follows:

i) Contribution to a well-defined objective of common interest: Although the guidelines acknowledge that access to finance for SMEs is an objective in the common interest, Member States must still identify policy targets and relevant performance indicators. This is because the identification of what is to be achieved determines the subsequent structure of the risk finance measure. In addition, intermediaries must show how their investment strategy contributes to the achievement of those policy targets. [Both of these requirements should improve the quality of state intervention to stimulate risk finance. Ex ante performance indicators will make it easier to evaluate ex post the effectiveness of a risk finance measure. Intermediaries must also prove that public contribution leverages additional private funding.]

ii) Need for state intervention: Member States must demonstrate the existence of a funding gap.

iii) Appropriateness of State aid: The aid measure must mobilise additional private funding. Intermediaries/managers must be selected through competitive procedure.

iv) Existence of an incentive effect: Private investors must provide funding above current levels or assume extra risk. In other words, public money must leverage private money with the result that total funding exceeds the budget of the measure.

v) Proportionality of aid: For final beneficiaries, aid is proportional when total funding is less than the size of funding gap. For intermediaries/managers and investors, aid is proportional when the nature and the value of the incentives are determined through open selection. When intermediaries/managers are not competitive selected, their annual management fee should not exceed 3% of the amount of funds under management. For investors who are not competitively selected, the aid is proportional when the return they obtain is less than a calculated fair rate of return [FRR].

vi) Avoidance of undue negative effects: The negative impact on competition is minimised when the risk finance does not crowd out private investors, does not strengthen the market power of financial intermediaries, does not support unviable firms in stagnant markets, does not provide large sums and the risk finance funds are of sufficiently large scale so that they can afford to provide funding without incurring disproportionately large administrative costs.

vii) Transparency: Aid must be transparent in the sense that all risk finance measures, the sums they provide and the names of beneficiaries are placed on an easily accessible internet site.


Risk finance may be cumulated with other aid with identifiable eligible costs. It may also be cumulated with other aid with non-identifiable eligible costs, and de minimis aid, but only up to the relevant ceilings fixed by the GBER.

Interestingly, the guidelines clarify that EU funds granted directly by EU institutions and therefore not flowing to intermediaries and then to final beneficiaries via a national public authority are not to be considered State aid. This is because this kind of funding cannot be classified as transfer of state resources, as that the state does not exercise control over it. The guidelines also provide that EU funds can be disregarded for the purpose of compliance with notification thresholds, but the maximum allowable ceiling of State aid may not be exceeded by the sum of public money [i.e. State aid and EU direct funding].

Ex post evaluation

In line with the objectives of the modernisation initiative, the guidelines provide for ex post evaluation by an entity other than the granting authority. The purpose of this evaluation is to measure the effectiveness of risk finance and its actual impact on competition. Ex post evaluation may be required, among others, for large schemes, schemes with regional or narrow sectorial focus and schemes with novel features.

Interestingly, the parameters of the ex post evaluation will have to be defined at the time of the notification of the measure. This implies that the granting authority will partly shape the objectives and modalities of the evaluation despite the fact that the evaluation will have to be carried out by a separate entity to ensure its impartiality.

Final provisions

According to standard practice, Member States have to submit annual reports and maintain records for ten years for each risk finance measure.

The new rules will come into force on 1/7/2014 and remain valid until 31/12/2020



Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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