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IFS2020 REVIEW OF ACCESS TO
EQUITY FINANCE
Mapping Review of Access to equity finance in
Ireland with a focus on access by SMEs and
issues relating to investor interest
March 2018
Banking Division, SME Credit & Lending
Department of Finance | IFS2020 Review of Access to Equity Finance
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INTRODUCTION
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INTRODUCTION
The Department of Finance (the Department) is tasked under IFS 2020
with undertaking a mapping review of access to equity finance in Ireland.1
According to IFS 2020, the following issues should be considered:
Access to equity finance by Small and Medium-Sized Enterprises
(SMEs);
Investor interest in investing in SMEs; and
If Ireland has a sufficiently coordinated equity finance market.
This mapping review outlines the current situation in relation to equity
finance for SMEs. It looks at the background to equity financing of SMEs,
including access to equity finance and investor interest in equity finance,
the types of equity finance available and the barriers to SMEs accessing
equity finance.
The context of this IFS 2020 commitment relates to deleveraging by the
banks, a consequent reduction of risk appetite in bank lending to SMEs
since the financial crisis/recession and an overreliance by Irish SMEs on
bank finance.2 Recent Department of Finance SME Credit Demand
Surveys have shown that some Irish SMEs are reluctant to avail of equity
finance as an alternative to debt finance.3 It is critical that the reasons
behind this reluctance are examined, especially in the context of less
available bank finance.
1http://www.finance.gov.ie/sites/default/files/17-01-16%20IFS2020%20Action%20Plan%20FINAL%20for%20web_0.pdf Measure 7. 2 According to an AIB study, the majority, 56%, of SMEs continue to rely on bank financing. https://group.aib.ie/content/dam/aib/group/Docs/Press%20Releases/2017/equity-finance-the-irish-equity-challenge.pdf 3 http://www.finance.gov.ie/publications/data-statistics
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The issue of access to equity finance by SMEs and investor interest
should also be considered in light of the European Commission Action
Plan on Building a Capital Markets Union, which states as one of its key
principles that it should “help mobilise capital in Europe and channel it
to companies, including SMEs”.4 Additionally, it is worth noting that, in
a European context, the supply of equity financing in proportion to GDP
has increased but is significantly below the levels in the United States
of America.5
In order to examine these issues, the Department used a wide range of
sources. The Department undertook a survey of providers of equity to
SMEs. The latest wave of the Department of Finance SME Credit
Demand Survey, which asks SMEs if they have enquired about non-
bank funding, was also considered.6 Reports and information from
both providers of equity to SMEs and advisors on equity finance for
SMEs, are also utilised to map the current situation in relation to the
equity finance market in Ireland.
4 http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015DC0468&from=EN 5 Deloitte, European Growth Capital – Direct Equity and Quasi-equity Financing, 29 July 2016 6 http://www.finance.gov.ie/sites/default/files/170227%20SME%20credit%20demand%20survey.pdf
The Department undertook a survey
of providers of equity finance to
SMEs and eleven responses to the
survey were received.
The aim of the survey was to reach
as large an audience as possible,
while recognising that the market
for SME equity investment in Ireland
is relatively small.
Three of the responses were from
public sector bodies and eight were
from the private sector. Of the
responses from public sector
bodies, only one, Enterprise Ireland,
invests directly in SMEs. InterTrade
Ireland helps to prepare SMEs for
equity investment, but does not
provide investment funds. The
Ireland Strategic Investment Fund
(ISIF) provides funds to private
investors to invest on their behalf.
The Department sent the survey to
a broad range of SME-related
organisations who are involved in
providing finance or information to
SMEs. These organisations were
asked to complete the survey if they
were involved in providing equity to
SMEs. They were also asked to
distribute the survey to other
relevant organisations involved in
the provision of equity financing to
SMEs.
This resulted in the survey being
completed by a broad range of
organisations.
Equity Finance Survey
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BACKGROUND
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BACKGROUND
EQUITY FINANCE
Equity financing is the process of raising capital through the sale of
shares in an enterprise. It refers to the sale of an ownership interest to
raise funds for business purposes.7 It is important to note that there is
a distinction in terms of the visible and invisible, or hidden, equity
market. The visible market includes equity deals that are publically
announced, whereas in the case of the invisible market, deals are
private and undisclosed. The British Business Bank in its equity research
has previously noted that, as a result of the invisible market, there can
be incomplete or missing data available on equity finance to SMEs.8 In
an Irish context, this is also likely to be due to the size of Irish SMEs and
a large reliance by them on financing support from family and friends.
Therefore, the key difficulty with assessing SME access to equity finance
and the amount of equity finance provided to SMEs is that the majority
of equity investment is undertaken on an individual basis. Much of the
information is private and it is therefore very difficult to accurately
measure or fully assess the equity finance market for SMEs.
The role of equity finance is to provide a long-term focus and alignment
of incentives between the SME and the investor. It is different from
debt, in that it does not need to be serviced or repaid on a continuous
basis or in the immediate term. It can assist with reinforcing the
credibility of a business plan and the reputation of the SME. Equity
finance can also provide the SME with access to expertise and
networking capabilities.9
7 http://www.investopedia.com/terms/e/equityfinancing.asp 8 http://british-business-bank.co.uk/wp-content/uploads/2015/03/050315-Equity-report-FINAL.pdf 9 Deloitte, European Growth Capital – Direct Equity and Quasi-equity Financing, 29 July 2016
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Types of Equity Finance
There are different types of equity finance and these are appropriate at
different stages of the company life cycle:
Figure 1.
Source: AIB (Ipsos MRBI) study, 2016
Figure 2.
Source: Deloitte, European Growth Capital – Direct Equity and Quasi-equity Financing, 29 July 2016
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Figures 1 and 2, above, illustrate the equity funding options and equity
funding needs of European SMEs across their life cycle. As can be seen,
angel investment and seed capital are typically required by start-up
companies, at the outset of their business. Venture capital and private
equity are generally used for growth and expansion purposes.
Figure 3.
Source: Deloitte, European Growth Capital – Direct Equity and Quasi-equity Financing, 29 July 2016
Figure 3, above, outlines the level of equity provided to SMEs, at various
stages of investment (seed, venture, growth) and the sources of this
equity finance. It can be seen that the majority of equity finance comes
from private sources; however, private sources do not provide seed
capital for start-up companies. The only source for this is national
initiatives.
HOW DOES EQUITY INVESTMENT WORK IN PRACTICE?
The below chart (Figure 4) from the Halo Business Angel Network
(HBAN) gives an outline of the stages of the equity investment process
and how this operates.
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Figure 4.
Deal Sourcing Deal sourcing can be proactive or reactive. Most deal sourcing comes through members, through
their networks and their interactions with other players in the ecosystem.
Deal Screening Applications are normally centralised and managed with a software package. Initial screening can
be informal (conducted by some members) or formal (conducted by a group or network manager).
Initial Feedback/coaching Companies passing the initial screening will be contacted and may receive some coaching regarding
the expectations of investors and how to better present the company.
Company presentations Selected companies may then be invited to present to the members at an event, normally held
every 4-6 weeks. Typically 2-4 companies present. The investors then discuss aspects of the
company and potential deal in a ‘closed’ session.
Due diligence Due diligence is normally done on a formal basis and includes: a competitive analysis, validation of
product and IP, an assessment of the company’s structure, financials and contracts, a check of
compliance issues and reference checks on the team.
Investment and team negotiations If members remain interested, term sheets need to be prepared and the company valuation
negotiated. Increasingly, angel groups and networks use standardised term sheet templates. The
company may present to members a final time.
Investment Interested members can then invest as an individual or form a syndicate to invest in the company.
The final documents are drawn up and a lawyer is usually engaged in the process. There is a formal
signing of documents and the agreed-upon funding is collected.
Post-investment support After the investment, investors often monitor, mentor and assist the companies with expertise and
connections. In addition, the investors often work closely with the company to facilitate an exit at
the appropriate time.
Source: HBAN10
10 http://www.hban.org/_fileupload/HBANGuide%28Entrepreneur%29.pdf OECD (2011a), summarised from ACA, EBAN and Tech Coast Angel materials.
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INVESTMENT CRITERIA
It is difficult to specify the exact criteria investors use to make
investment decisions. According to our survey, information investors
look for in order to make investment decisions include business plans
and financial information. Investors have also indicated that the
management team of a company is an important factor when making
an investment decision.
In general, funds allow investors the opportunity to choose their own
investment decisions, based on risk appetite and expertise. However,
some of the funds that responded to the survey indicated that the
investment decision was made on behalf of the investor by the fund.11
Each individual equity fund or investor will have individual and specific
criteria. Below are two examples to give an indication of criteria funds
or investors consider when deciding whether or not to provide equity
to an SME.
11 http://www.hban.org/_fileupload/HBANGuide%28Entrepreneur%29.pdf
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Example 1.
The following criteria and marking scheme apply to applicants for
Enterprise Ireland’s Seed and Venture Capital Scheme (SVC).12
12https://www.enterprise-ireland.com/en/Invest-in-Emerging-Companies/Seed-and-Venture-Capital-Scheme/SVC-Programme-2013-to-2018-Guidelines-Call-3.pdf
Enterprise Ireland (EI) Investment Criteria Investment Strategy Proposed stage, size, sectors, geography, fit with EI objectives and this specific call and overall objectives of SVC 2013-2018. 20/100
Investment Experience, Team Skills & Experience, Record & Capacity General investment experience/profile of the proposed investment team and record in previous funds. 20/100
Connectivity & Capability Access to deal-flow, strength of relationships with investment and entrepreneurial communities and ability to add value to investees. Time commitment to other funds and investee companies. 20/100
Governance Fund size, financial model of lifetime and fund and costs. Proposal to reflect current competitive market practices. General governance, including financial robustness of proposed general partner (GP) vehicle and regulatory status. 10/100
Ability to close fund in a timely manner Co-investor commitments secured to date. Likely dates of first and final closings of the fund. 30/100
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Example 2.
The following criteria and have been identified as the top three
investment criteria by HBAN.13 HBAN note that it appears that venture
capital investors are less focused on what the company does and are
more interested in return on investment. Angel investors, on the other
hand, tend to focus more on what the company does and bring their
expertise to bear on the development of the company.
SUMMARY It can be seen that equity is one of the key financing drivers for start-up
companies and for the growth of businesses and there are different
types of equity, from different sources, needed at different stages of
the corporate life cycle. There are no general criteria that all investors
use when deciding whether to invest equity in a company; this tends to
be on a specific, individual basis. However, the management team,
financial documentation and business plans and the opportunity to
achieve return on/realise the investment tend to be important
considerations for investors.
13 http://www.hban.org/_fileupload/HBANGuide%28Entrepreneur%29.pdf based on an InterTradeIreland survey in May 2011 of venture fund capital managers on the island of Ireland.
HBAN Investment Criteria
1. Management Team “People (investors) invest in people”. Investors spend time getting comfortable with the management team and will assess knowledge of the market, ability to execute the business plan and track record. Investors tend not to back “one-man bands” and avoid family businesses with family members actively involved in the business. It may be noted that, sometimes, early stage business do not have a fully developed or full time management team.
2. Exit Opportunity
“A marriage with a planned divorce”.
3. Revenue Potential The ‘sell’ is not a ‘product sell’ but a ‘commercial opportunity sell’. Entrepreneurs may miss this point, as they are passionate about their product.
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EQUITY FINANCE
MARKET FOR SMES IN
IRELAND
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DEMAND FOR EQUITY FINANCE BY
SMES
The Department of Finance commissions biannual surveys to ascertain
the demand for credit by SMEs. This survey series is the most
comprehensive survey of SME credit demand in Ireland, covering 1,500
respondents and involving over 6,000 direct telephone calls to SMEs.
SMEs of all sizes trading in all sectors, excluding property development
and speculative activities, are included. The survey covers demand for
credit from both bank and non-bank sources.
The number of enquiries made for non-bank finance has been steadily
decreasing since the first wave of the Credit Demand Survey in
September 2011. The latest wave of the Credit Demand Survey,
October 2016 – March 2017, shows that only 8% of SMEs have sought
non-bank finance.14 It also shows that:
1% of SMEs have requested venture capital finance, this has
not changed compared to the previous wave of the survey;
1% of SMEs have requested financing from the Microfinance
Loan Fund Scheme, this has not changed compared to the
previous wave of the survey;
1% of SMEs have requested financing from Business Angels or
Investors, this this has not changed compared to the previous
wave of the survey;
1% of SMES have sought equity from family or friends, this is a
reduction of 1% compared to the previous wave of the survey;
1% of SMEs have sought equity from business partners, this
has not changed compared to the previous wave of the survey.
14 http://www.finance.gov.ie/sites/default/files/170227%20SME%20credit%20demand%20survey.pdf
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A large number of Irish SMEs do not have any debt; 50% according to the
latest Central Bank SME Market Report.15 The main reason given by SMEs
for not applying for bank finance was that they did not need it.16
According to an AIB survey, 71% of SMEs have stated that they reinvest
their profits in this business and it appears that cash flow and use of own
resources/profits may substantially explain why SMEs do not consider
that they need finance.17 The lack of willingness to access finance, or a
belief that finance is not required, can potentially act as an impediment
to the growth and expansion of SMEs.
Figure 5.
Source: DoF SME Credit Demand Survey
The percentage of SMEs seeking bank and non-bank finance clearly
illustrate the trend of falling demand; however, it can clearly also be
seen that the percentage of SMEs seeking non-bank finance is
significantly lower than those seeking bank finance.
15https://www.centralbank.ie/docs/default-source/publications/sme-market-reports/sme-market-report-2016h2.pdf?sfvrsn=4 16 According to the Department of Finance Credit Demand Survey, 86% of SMEs who did not seek bank finance stated that the reason for this was that they did not need it. http://www.finance.gov.ie/sites/default/files/170227%20SME%20credit%20demand%20survey.pdf 17https://group.aib.ie/content/dam/aib/group/Docs/Press%20Releases/2017/equity-finance-the-irish-equity-challenge.pdf
40%36% 35%
31% 32% 30%26%
23%
12% 12% 13% 11% 11% 10%7% 8%
0%5%
10%15%20%25%30%35%40%45%
% of SMEs seeking bank and non-bank finance
% of SMEs who sought bank funding
% of SMEs who sought non-bank funding
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Figure 6.
Source: DoF SME Credit Demand Survey
Figure 6, above, shows that consistently, across waves of the
Department of Finance SME Credit Demand Survey, only 1% of SMEs
are seeking Venture Capital Finance and only 1% of SMEs are seeking
Business Angel or Investor Finance. This is supported by the results of
an AIB study on equity finance that found that only 1% of SMEs said
they had secured investment from either a venture capital firm or an
equity fund.18
18https://group.aib.ie/content/dam/aib/group/Docs/Press%20Releases/2017/equity-finance-the-irish-equity-challenge.pdf
1% 1% 1% 1% 1% 1% 1% 1%1% 1% 1% 1%
2%
1% 1% 1%
0%
1%
1%
2%
2%
3%
Percentage of SMEs who sought equity funding
Venture Capital Finance Business Angel or Investor Finance
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Figure 7.
Source: DoF SME Credit Demand Survey
Figure 7, above, shows that there is a gradual trend of increasing success
rates in terms of approval for SMEs seeking non-bank finance. However,
it is important to note that the approval rate for non-bank finance for
SMEs, 60% in the latest wave of the Department of Finance SME Credit
Demand Survey, is lower than that of the approval rate for application for
bank financing for SMEs, which is 76% in the latest Department of Finance
SME Credit Demand Survey.19
Other sources of non-bank finance that Irish SMEs avail of as well as
venture capital and business angel or investor finance includes equity
from family and friends and equity from business partners. Not every
wave of the Credit Demand survey distinguishes between loans and
equity in terms of debt received from family and friends and business
partners. However, where the data is disaggregated, it is consistently
seen that only 1% of SMEs are approaching family and friends and
business partners for equity.
19 The approval rates include both applications that have been fully and partially approved. The decline rate for both bank and non-bank finance is similar, 15% and 16% respectively in the latest wave of the SME Credit Demand Survey. http://www.finance.gov.ie/sites/default/files/170227%20SME%20credit%20demand%20survey.pdf
0%10%20%30%40%50%60%70%80%90%
Success Rate of SMEs seeking non-bank financing
Fully Approved Partially Approved Declined
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ACCESS TO EQUITY FINANCE BY SMES
The Department’s equity finance survey shows that SMEs are accessing
equity finance, but in relatively small numbers. The survey indicated
that 2,760 SMEs received equity finance from the survey respondents.
To encourage SMEs to access equity funding, the providers put a lot of
effort into attracting SMEs. This is done through social media and
websites, traditional press, events, direct engagement, through
stakeholders, advisors, word of mouth and personal networks.
Many investors appear to be focused on a small cohort of industries.
The IVCA noted in their 2016 Venture Pulse publication that venture
capital investment is focused on Life Sciences, Software,
Communications and FinTech.20 Enterprise Ireland note that the
objective of their Seed and Venture Capital Programme is to support
the development of high-growth Irish companies with the potential to
grow jobs and generate large amounts of additional capital. The main
areas invested into by this programme are electronics, life sciences and
software.21 The HBAN website notes that it hopes to attract investors
interested in “early stage technology, MedTech, AgriTech & food
companies”. This suggests that a lot of equity financing of SMEs is
narrowly focused on high growth or high potential industries. This
finding suggests that SMEs in lower tech or more traditional industries
may struggle to gain access to equity finance.
20 http://www.ivca.ie/wp-content/uploads/2017/02/IVCA-Venture-Pulse-2016-060217-2.pdf 21https://www.enterprise-ireland.com/en/Publications/Reports-Published-Strategies/Seed-and-Venture-Capital-Reports/2016-Seed-and-Venture-Capital-Report.pdf
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Figure 8.
Source: Enterprise Ireland Seed and Venture Capital 2016 Report
Equity Stake
The average size of the equity stake taken by the investors surveyed in
the equity finance survey was 24.4%. The average size of the investment
is c. €1.8m. This is too large for the majority of Irish SMEs. SMEs will have
to adapt and restructure their businesses due to Brexit but it is likely that
this would not require that level of investment.
1
1
8
2
1
14
17
Sectoral Breakdown of Investments by Number
Technology Medical Devices Electronics Communiations
Cleantech Life Sciences Software
0.27% 2.59%
26.52%
4.87%
0.81%29.44%
35.50%
Sectoral Breakdown of Investments By Value
Technology Medical Devices Electronics Communiations
Cleantech Life Sciences Software
Department of Finance | IFS2020 Review of Access to Equity Finance
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Available Funding
The amount of available equity finance funding is difficult to accurately
ascertain, due to the fact that not all deals are done publically, as
previously noted. Also, equity financing is described as “a marriage with
a planned divorce” so investors get their money returned at a certain
point; this is a less definite point than in the case of a loan, this money
may also then be reinvested. There is a certain amount of information
available about the size of equity finance funding available. In its
November 2016 Equity Finance Outlook, AIB noted, that in 2015,
venture backed companies in Ireland raised approximately €522m
compared to €400m in 2014. €485m was raised in the first half of
2016.22 AIB has committed €130m to ten active funds since 2007.23 The
results of the Equity Finance Survey show that the respondents to the
survey have approximately €1.8bn in funds for investing in SMEs. Some
of this funding is on an annual basis, and some operates on an
evergreen basis where the funds are continually reinvested.
Breakdown of amount and type of equity funding
The Irish Venture Capital Association (“IVCA”) represents venture
capital firms who provide equity to growing unquoted companies. Their
recently published paper shows an increase in the number of
companies that have raised equity between 2011 and 2016 (see Figure
10).24 There is a general increase in the percentage of funds raised for
growth and expansion and a reduction in the number of funds using
funds raised as seed capital/for starting up (see Figure 9).
22https://group.aib.ie/content/dam/aib/group/Docs/Press%20Releases/2017/equity-finance-the-irish-equity-challenge.pdf 23https://group.aib.ie/content/dam/aib/group/Docs/Press%20Releases/2017/equity-finance-the-irish-equity-challenge.pdf 24 http://www.ivca.ie/wp-content/uploads/2017/02/IVCA-Venture-Pulse-2016-060217-2.pdf
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Figure 9.
159
189
161
142
165
221
0
50
100
150
200
250
2011 2012 2013 2014 2015 2016
Number of Companies who raised equity funds
2011
Seed/Start Up Early Stage Growth/Expansion
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2012
Seed/Start Up Early Stage Growth/Expansion
2013
Seed/Start Up Early Stage Growth/Expansion
2014
Seed/Start Up Early Stage Growth/Expansion
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Source: IVCA
2015
Seed/Start Up Early Stage Growth/Expansion
2016
Seed/Start Up Early Stage Growth/Expansion
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Figure 10.
Source: IVCA
Figure 10 above, from the IVCA, shows a significant increase, year on
year, of the volume of equity funding raised by Irish SMEs between
2011 and 2016. This represents a 223% increase between 2011 and
2016. InterTrade Ireland advised in their response to our survey that
to date, approximately €218m has been raised in equity funding, by
companies who have been shortlisted for its Annual Seedcorn Investor
Readiness Competition.
These figures from the IVCA appear to be in contrast to the trends seen
in the SME Credit Demand survey. However, it appears upon a closer
look while the amount of equity financing is steadily increasing from
2011 – 2016 (see Figure 10), the number of SMEs receiving equity
finance remains a lot more stable and consistent and the trend is much
flatter over the same time period (see Figure 9). This indicates that
companies that are obtaining equity financing are obtaining more
equity financing, rather than more companies getting equity financing.
This analysis also seems to be supported somewhat by the difference
in trend in value of investment compared to the volume (number) of
investments by angel investors (see Figure 13 and 14).
€274.4 €268.9 €284.9
€400.7
€552.1
€888.1
€0.0
€100.0
€200.0
€300.0
€400.0
€500.0
€600.0
€700.0
€800.0
€900.0
€1,000.0
2011 2012 2013 2014 2015 2016
Total Funds Raised € m
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Available Options for Equity Investment
Investment Funds
Figure 11.
2012
Irish VC International VC Corporates/Privates/EI
2014
Irish VC International VC Corporates/Privates/EI
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Source: IVCA
Figure 11, above, demonstrates that largest source of equity funds to
SMEs is international venture capital, followed by Irish venture capital
and then corporate/private investors/Enterprise Ireland. International
venture capital has been a steadily increasing source of funds since
2012 onwards. However, the percentage of funds from both Irish
venture capital and capital from corporates/private
investors/Enterprise Ireland have decreased in the same period of time.
This does not mean that the funding is solely private; public bodies
including ISIF use private venture capital firms to invest on their behalf.
As Figure 12 below shows, private funds alone make up only one third
of the investment funds who responded to the equity finance survey.
The remainder have some form of public funds, they are either entirely
publically funded or a joint public-private partnership. As the table
below indicates, most funds have a low number of private investors
involved, the HBAN programmes being the exception. This indicates
that there is potential to attract private investors to this market.
2016
Irish VC International VC Corporates/Privates/EI
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Figure 12.
Source: Survey Results
Where does the investment money come from?
Private Funds State Funds Both
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Public funds for equity investment
ISIF
SME finance is a core part of the ISIF Investment strategy with an
allocation of €900m to the sector broadly. ISIF has provided €385m to
a range of financial products for SMEs, covering both debt and equity.
ISIF’s investments are focused on the easing of SME finance problems
including new finance products that facilitate productive investment
including SME equity, SME mezzanine/stretch senior debt and flexible
agri-loan finance.
ISIF has supported a number of private equity funds and it continues to
see evidence that there is a significant gap in the market, particularly
for those companies looking to raise less than €10m of equity finance.
Enterprise Ireland
Enterprise Ireland support a large number of SMEs through the Irish
venture capital sector and through direct equity investment. Their 2016
Annual Report details their equity investments.25 The Annual Report
notes that under various Seed & Venture Capital Schemes to date,
Enterprise Ireland have supported 52 funds, resulting in funds under
management of over €1.8bn. In 2016, Enterprise Ireland invested €54m
in private equity funds and committed an additional €65m to a number
of private sector fund managers.
25 https://www.enterprise-ireland.com/en/Publications/Reports-Published-Strategies/Annual-Reports/2016-Annual-Report-and-Accounts-English.pdf
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The Halo Business Angel Network (HBAN)
The HBAN, which Enterprise Ireland part funds, facilitated the investment
of a total of €13m in 2016, supporting 50 companies. Three funds
supported by Enterprise Ireland through the Development Capital Fund
Scheme have total growth capital funds of over €490m under
management. In 2015, they invested over €75m in Irish companies.
Angel Networks
One of the main sources of equity finance for SMEs are angel networks.
InterTradeIreland produced a report on the use of angel investment in
August 2016.26 The report notes that, “Business Angels are individuals
who invest their own money directly in new companies, often providing
the first round of equity capital once the entrepreneur has consumed
funding from personal savings, friends and family, and the public sector.
Business Angels also provide ‘smart money’, taking a hands-on approach
to investing, providing advice, insights, knowledge and contacts to
entrepreneurs.”27
26http://www.intertradeireland.com/media/intertradeirelandcom/researchandstatistics/publications/15.8.16FinalBusinessAngelsReport7-16.pdf 27http://www.intertradeireland.com/media/intertradeirelandcom/researchandstatistics/publications/15.8.16FinalBusinessAngelsReport7-16.pdf
Department of Finance | IFS2020 Review of Access to Equity Finance
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As the tables from this report below show, the value and volume of
angel investments continues to grow overall.
Figure 13.
Source: HBAN/Halo NI (Funding for Growth: the Business Angels Market on the Island of Ireland, p. 9)
Figure 14.
Source: HBAN/Halo NI (Funding for Growth: the Business Angels Market on the Island of Ireland, p. 9)
€4.6
€8.0
€6.5
€9.0
€8.0
€9.6
€10.9
€0.0
€2.0
€4.0
€6.0
€8.0
€10.0
€12.0
2009 2010 2011 2012 2013 2014 2015
Value of Investments €m
28
3537
4650
4850
0
10
20
30
40
50
60
2009 2010 2011 2012 2013 2014 2015
Volume of Investments (number)
Department of Finance | IFS2020 Review of Access to Equity Finance
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Angel investment is very important as it can then encourage further
investment into SMEs. In their response to the Department’s survey, the
HBAN noted that in 2016 HBAN business angels, across the island
invested €13.5m into 50 companies.28 This direct angel investment
leveraged a further €20.6m of additional public and private funds into
these companies from organisations such as Enterprise Ireland, venture
capital companies and founders. These investors took an average equity
stake of 15% in the company. Angel investors can offer businesses
support and mentoring as well as capital. Continuing to support angel
investment organisations is important for the growth of non-state
investment in SMEs.
Crowdfunding
Crowdfunding involves obtaining small amounts of individual funding
from a large number of different sources. Usually funding is provided by
individual investors; however, companies and institutions can also
provide finance through crowdfunding platforms. Crowdfunding is an
innovative, technology-based form of finance that can be a valuable
source of funding for SMEs, either as a complement, or as an alternative,
to traditional bank finance. Crowdfunding also provides consumers and
small investors with access to investment opportunities that offer a
higher rate of return, at a higher risk, than is generally available from
traditional credit institutions.
There are two forms of financial crowdfunding, peer-to-peer lending and
investment/equity crowdfunding. Financial crowdfunding can be
considered an investment like activity, where a return is expected by
those providing funds.29 Peer-to-peer lending is where lenders, provide
money through a crowdfunding platform, as a loan, in return for
repayment with interest.
28 http://www.hban.org/_fileupload/HBAN%20Summary%20Document%20Q1%202017.pdf 29 As opposed to non-financial crowdfunding, where there is no expectation of any financial return on the part of the funders providing money. In this type of crowdfunding, a small donation or contribution is made by a large number of individuals to support or sponsor a charitable cause or business. It is essentially philanthropic or charitable in nature. In some cases, funders may receive a non-financial reward such as a nominal promotional gift or product or it may be treated as an advance payment.
Department of Finance | IFS2020 Review of Access to Equity Finance
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The crowdfunding platform facilitates the matching of borrowers and
potential lenders. The investment model of crowdfunding generally
involves the provision of funds in return for unlisted equity or debt
securities. The investment model of crowdfunding mostly concerns
multiple investors taking an equity share in a company, although
investment may also be through other types of financial instruments.
The crowdfunding platform facilitates the matching of investors with
businesses.
The IFS 2020 2017 Action Plan committed the Government to
conducting a public consultation on the potential regulation of
crowdfunding, having regard to international best practice and in the
context of the EU Commission Action Plan on Building a Capital Markets
Union. Crowdfunding is also not currently a regulated activity in
Ireland. The Department of Finance launched a six-week public
consultation in April 2017, which closed on 2nd June 2017. The
European Commission recently proposed a pan-European regulatory
regime for crowdfunding in its 2018 work programme.
SIZE OF EQUITY INVESTMENT FROM EQUITY INVESTORS AND LEVEL OF FUNDING SOUGHT BY SMEs
Most of the equity investors we surveyed offer relatively large equity
investments, on average, €1.8m. Crowdfunding can offer smaller SMEs,
who may only require a relatively small equity injection, the
opportunity to diversify from traditional debt. For example, the AIB
study found that, as the chart below (Figure 15) shows, 26% of SMEs
surveyed were seeking equity of up to €100,000; 13% were seeking
equity between €100,000 and €200,000 and 22% were seeking equity
between €200,000 and €500,000.30
Figure 15.
30https://group.aib.ie/content/dam/aib/group/Docs/Press%20Releases/2017/equity-finance-the-irish-equity-challenge.pdf
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Source: AIB
In some cases, particularly in the early stages, crowdfunding could
potentially offer an equivalent to equity investments of seed or venture
capital.
Non-financial Benefits of Equity
The results of our survey demonstrate that equity investors offer more
than just capital for a business. They offer board representation,
management support, strategic advice, mentoring and assistance with
networking and making connections. For example, InterTrade Ireland run
an extensive education and awareness programme and have created a
number of resources, such as a “Guide to Venture Capital”31, produced in
association with the IVCA and the “Business Cube, a business planning
toolkit” 32 and run monthly equity advisory clinics and an annual venture
capital conference.
31 http://www.intertradeireland.com/media/g17/images/Venture-Capital-2015-Guide-web-version-1.pdf; 32 http://www.intertradeireland.com/media/InterTradeIrelandBusinessPlanningCubeGuide.pdf
Amount of equity funding sought
Up to €100000 €100,00 - €200,000 €200,00 - €500,000 other
Department of Finance | IFS2020 Review of Access to Equity Finance
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SME Perspective SMEs are not always aware of the benefits of equity investment and may
be more concerned with relinquishing some measure of control of their
business. In the research conducted by AIB, 77% of SMEs cited a loss of
control of their business as a reason for not using equity finance and 69%
expressed a preference for debt finance.33 According to the AIB research,
6% of SMEs indicated that the prospect of raising equity finance was very
appealing and 23% of SMEs indicated that it would be fairly appealing”.
However, there appears to be a lack of knowledge and information about
equity finance on the part of SMEs, the AIB research shows that, 62% of
SMEs were not that or not at all familiar with equity finance. Furthermore,
61% of SMEs believed they would have to sell some or all of the business
to pay back the investor and 60% of SMEs believed that maintaining
ownership was more important than achieving growth.
This lack of knowledge of equity finance and reluctance to give up control
of the business as reason for not seeking equity finance can also be seen
in the results of the latest wave of the Credit Demand Survey. The
majority of SMEs who responded advised that they did not need this type
of financing, however, lack of knowledge was the second largest reason
given. Only 2% of SMEs surveyed indicated that they already had non-
bank financing.
SMEs are often not aware of the benefits of equity investment there may
be a need for education for SMEs to raise awareness and understanding
of equity finance, how it works and its benefits.
33https://group.aib.ie/content/dam/aib/group/Docs/Press%20Releases/2017/equity-finance-the-irish-equity-challenge.pdf
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INVESTOR PERSPECTIVE
The average size of the investment is a factor that can discourage
investors from investing in SMEs. An investment of €1.8m is too great
for a large cohort of SMEs and the amount of equity required by SMEs,
which is generally less than €500,000, is not sufficiently large to attract
investor interest. A study by Deloitte on equity in Europe has estimated
that there is a funding gap in equity financing for SMEs and Midcaps
somewhere between €40 billion and €70 billion per annum and this is
mainly derived from the high demand for small tickets, between €0.5
million and €2.5 million.34 However, as is seen, the ticket size in Ireland,
particularly for SMEs, is still smaller than this amount, with 61% of Irish
SMEs having a requirement for equity of less than €0.5 million (see
Figure 15).
Investors may not be aware of the potential returns available from
equity investment in SMEs or even how to engage in this process.
Investors may also be concerned about the level of risk involved as
there is generally less information available on SMEs and the legal and
regulatory disclosure requirements are not the same as for larger
companies. Only two respondents to the equity finance survey gave
details of the average return on the investments and the average of the
return was 11.5%, with an average period of 6.1 years before the return
is realised.35 This seems to support the fact that equity investors have a
4-6 year horizon for exiting.36
34 Deloitte, European Growth Capital – Direct Equity and Quasi-equity Financing, 29 July 2016 35 Base of six responses. 36https://group.aib.ie/content/dam/aib/group/Docs/Press%20Releases/2017/equity-finance-the-irish-equity-challenge.pdf.
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It seems that there is a variety of investors and funds that are investing in
SMEs in Ireland; however, it is not clear that there is a cohesive market,
particularly in respect of the public sector. Additionally, the distinction
between visible and invisible investment and lack of detailed information
about SMEs makes it more difficult to get a complete overview of the
equity finance market for SMEs in Ireland.
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CONCLUSIONS
Department of Finance | IFS2020 Review of Access to Equity Finance
38 |
Conclusions
Main Findings
The Department of Finance was tasked under IFS2020 with undertaking
a mapping review of access to equity finance in Ireland.
The main findings of this review are as follows:
There is a low demand for equity finance by SMEs;
SMEs do not always have a good understanding of the benefits
of equity investment;
The minimum size of available equity investments are often too
large for SMEs.
Further research
Further research into this area would be beneficial in order to ensure that
public funds are being invested in a manner that best supports the SME
market and to increase knowledge of equity finance amongst SMEs.
Department of Finance | IFS2020 Review of Access to Equity Finance
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SECTION 3 > Appendix A
Appendix B
Appendix C
Appendix 1 Survey Questions
Department of Finance | IFS2020 Review of Access to Equity Finance
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Appendix 1
Survey Questions
1. What is the name of the fund?
2. What size is the fund?
3. How many years has the fund been in existence?
4. How many SMEs have accessed equity finance via the fund?
5. How is the fund promoted to SMEs?
6. Are particular sizes of companies/sectors/industries targeted? Any
other information about the profile of companies invested in?
7. What is the process for investors looking to invest? What type of
information do they require?
8. Where does the investment money come from?
9. If private investors are involved, how many investors are involved in
the fund?
10. If the fund involves private investors, how do you attract them?
Government Buildings,
Upper Merrion Street,
Dublin 2,
D02 R583
Ireland.
T: 353 1 676 7571
F: 353 1 678 9936
www.finance.gov.ie
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