JEREMIE implementation with a Regional Development Agency - The case of Andalucía: challenges, achievements and perspectives Francisco Jiménez- Stefan Mathesius Agencia IDEA Brussels, 30 th November 2010
Index Situation analysis of Andalusia Strategy, Organization and Implementation Investment Strategy and Objectives JEREMIE s implementation milestones Operative management model Andalusia bases its future model on reimbursable instruments JEREMIE structure and operations Structure of JEREMIE Fund Andalusia Leverage Mechanism of JEREMIE Financial instruments Target group: late start-up, growth, expansion Viable projects vs. suitable projects Results and impacts Lessons Learned 2
Situation Analysis of Andalusia GEOGRAPHIC SITUATION Convergence objective Unemployment rate: 28% Employment rate: 42% GDP: -0,1% CPI: 2,1% Trade deficit : -11,5% (national) Domestic deficit: -9,8% (national) Income per capita: 79% of European level Population: 8,3 M Surface 87.000 km2 MACROECONOMIC DATA 2010 CARACTERISTICS OF ANDALUSIAN ENTERPRISES Family companies SME: 95% Micro enterprises (<10 employees) 99,9% SME 80% employment in SME Only 430 enterprises > SME Main activity / employment Sectors: Tourism Construction Agriculture Strategic Sectors: Public Administration Renewable Energies (thermo solar)/ Clean tech Agribusiness Aeronautics TIME Biotech Fuente: INE *ratio between total number of employees and population over 16 years and older) 3
Index Situation analysis of Andalusia Strategy, Organization and Implementation Investment Strategy and Objectives JEREMIE s implementation milestones Operative management model Andalusia bases its future model on reimbursable instruments JEREMIE structure and operations Structure of JEREMIE Fund Andalusia Leverage Mechanism of JEREMIE Financial instruments Target group: late start-up, growth, expansion Viable projects vs. suitable projects Results and impacts Lessons Learned 4
Investment Strategy and Objectives INVESTMENT STRATEGY Investment in companies with high growth potential. Encourage consolidation process in key sectors to obtain critical mass. Global validity of the business model and value proposition. Financial instruments that facilitate cofinancing mechanisms: Equity + Mezzanine capital OBJECTIVES Competitiveness and globalization of Andalusian enterprises. Creation of sustainable and qualified jobs Catalization of change of the Andalusian economic model. Facilitation of access to finance ; reactivation and normalization of the financial market 5
JEREMIE implementation milestones 14Oct 2009 5 Nov 2009 24 Feb 2009 Financing agreement CEH (Regional Economy & Treasury Ministry), CICE (Regional Innovation, Science & Enterprise Ministry): Creation Holding Fund JEREMIE 235 M Holding Fund Manager = IDEA Agency* 24Jun 2009 Public tender: JEREMIE Multiinstrument 185 M JEREMIE Risk Capital 50 M JEREMIE s definition/design, objetives, programs/funds and structures. Adjudication Intermediary: JEREMIE Multiinstrument: SOPREA 14 Oct 2009 Adjudication Intermediary JEREMIE Risk Capital SGR: INVERCARIA SGECR Operative launch Negotiation and closing private investment 25 M (saving banks) 4 Oct 2010 Constitution and operative launch *Innovation and Development Agency of Andalusia 6
Operative Management Model Deal Flow Generation IDEA territorial Net + Intermediates (Technological and scientific parks/centres, Business schools,, business associations, etc.) Entry & Assignation JEREMIE Unit (IDEA) Holding Fund Debt /Subordinated debt Equity Analysis and investment SOPREA S.A. INVERCARIA S.G.E.C.R. 7
Andalusia bases its future model on reimbursable instruments 2009 2010 T1 T2 T3 T4 T1 T2 T3 T4 JEREMIE JEREMIE Multiinstrument JEREMIE Risk Capital FCR Definition/ Design Definition/ Design operative operative Business Development Fund Definition/ Design operative Renewable Energy Fund Definition/ Design operative Sustainable Economy Fund Definition/ Design operative Total Funds und management (M ) 185 185 185 469 544 8
Index Situation analysis of Andalusia Strategy, Organization and Implementation Investment Strategy and Objectives JEREMIE s implementation milestones Operative management model Andalusia bases its future model on reimbursable instruments JEREMIE structure and operations Structure of JEREMIE Fund Andalusia Leverage Mechanism of JEREMIE Financial instruments Target group: late start-up, growth, expansion Viable projects vs. suitable projects Results and impacts Lessons Learned 9
Structure of JEREMIE Fund Andalusia Ministry of Economy, Innovation and Science of Andalusia ERDF European Regional Development Fund 30% 235 M 70% JEREMIE FUND (Holding Fund) 185 M 50 M Innovation and Development Agency of Andalusia Private Participants (savings banks) 25 M Fund Manager: SOPREA S.A. FONDO MULTIINSTRUMENTO FONDO JEREMIE Risk Capital FCR (regulated by Spanish financial authority) Fund Manager: INVERCARIA S.G.E.C.R. Co-investors - ICO-AXIS - VC-Funds - Financial institutions 10
Leverage Mechanism of JEREMIE MULTIINSTRUMENT FUND JEREMIE VENTURE CAPITAL FUND FCR x 4,7 328 30 470 (Real Leverage) x 5,4 324 93 540 (Real Leverage) 309 Minimum Leverage (theoretical) 100 ERDF 42 30% Andalusian Government 62 > 30% Co- Investment Total investment 204 Minimum Leverage (theoretical) 100 ERDF 42 30% Andalusian Government 74 33% Private Participtaion (Sav. Banks) > 30% Co- Investment Total investment 11
Financial instruments: Risk versus Premium for Risk Premium for risk high crisis Cost/ risk relation in an efficient market Venture Capital Bank financing Mezzanine capital/ Subordinated debt Riskless low high Risk 12
Financial instruments: Guaranties versus Premium for Risk Premium for risk high Venture Capital Upside-potential Different analytic approaches Risk/guaranty Mezzanine capital/ Subordinated debt Bank financing low high Guaranties/ collaterals 13
Target group: late start-up, growth, expansion stages Cash flow Concept Prototype Creation Seed Start-up Market entry Growth (1st, 2nd round) Break even CF IPO (potential) Expansion (3rd round) t 14
Index Situation analysis of Andalusia Strategy, Organization and Implementation Investment Strategy and Objectives JEREMIE s implementation milestones Operative management model Andalusia bases its future model on reimbursable instruments JEREMIE structure and operations Structure of JEREMIE Fund Andalusia Leverage Mechanism of JEREMIE Financial instruments Target group: late start-up, growth, expansion Viable projects vs. suitable projects Results and impacts Lessons Learned 15
JEREMIE s activity results (Nov 2009 Oct 2010) ACTIVITY RESULTS # Projects: applied: 204 approved: 22 Investment volume: applied: 670 M approved: 68 M Ø-investment: 3M GENERATED IMPACT Induced investment: 220 M Leverage/Co-investment: 78% (=> JEREMIE Multiplier x 4,6) Employment: generated: 3.060 supported: 2.500 EFFICIENCY RESULTS Ø-term of resolution: 10 weeks # Operations/professional: JEREMIE: 2,8 per year Market: 0,3 per year SECTOR S COMPARISON National venture capital market s share (investment volume) : Total: 8% Start up: 16% Expansion: 24% Transactions 1-10 M : 11% 16
Index Situation analysis of Andalusia Strategy, Organization and Implementation Investment Strategy and Objectives JEREMIE s implementation milestones Operative management model Andalusia bases its future model on reimbursable instruments JEREMIE structure and operations Structure of JEREMIE Fund Andalusia Leverage Mechanism of JEREMIE Financial instruments Target group: late start-up, growth, expansion Viable projects vs. suitable projects Results and impacts Lessons Learned 17
Lessons Learned Selection of the fund manager (intermediate) is key for a successful implementation and execution of JEREMIE: Fit-in of JEREMIE into regular activity of the Intermediate Avoid conflict of interest between regular activity and JEREMIE ( commission scheme!) Close coordination and transparency between Holding Fund and Intermediates Implementation of leverage mechanism: Positioning: No competition with financial institutions (=> differentiation and complementarity: subordinated debt) Enforce Co-investment by limiting level of financing (max. 70%) Trade-off: Specific funds/mono-instrument versus macro funds/ multiinstrumental Adapt risk levels to market s necessities. (Who bears the risk? Guaranty requirement?) 18
APPENDIX 19
Instrument A: Mezzanine Capital (convertible loan/subordinated debt) PASSIVE Characteristics: Equity character (=> loss support) Equity Low collaterals (guaranty = business) Yield: fix + variable example: EURIBOR + 2% + variable(0-10%) Required profitability Mezzanine capital Debt Seniority / Priority High flexibility Convertible in capital Advantages for the entrepreneur: Improvement of the statement of financial position with no dilution Keeps operative control Interests rates and amortization related to business evolution. No personal guaranties subordinated =>leverage capacity 20
Instrument B: Venture Capital PASSIVE Characteristics : Investment in Equity (=> loss support) Venture Capital Tailor-made Temporary stage (4-8 years) and minority Without collaterals (guaranty = business) Required profitability Equity Debt Seniority / Priority High yield but 100% variable Exit scenario/ drag along option Advantages for the entrepreneur : Keeps management/operative control Stable financing (=> no cash exit ) Added value (relations + management support) Without personal guaranties Image y reputation Leverage capacity 21
Key point for JEREMIE Enthusiasts, Tekis Innovators Visioners Early Adopters Pragmatists Early majority Conservatives Late Majority Sceptics Laggards Chasm Technology adoption model 22