IFS2020 REVIEW OF ACCESS TO EQUITY FINANCE · 2019. 1. 23. · Source: Deloitte, European Growth...

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

http://www.finance.gov.ie/sites/default/files/17-01-16%20IFS2020%20Action%20Plan%20FINAL%20for%20web_0.pdf

https://group.aib.ie/content/dam/aib/group/Docs/Press%20Releases/2017/equity-finance-the-irish-equity-challenge.pdf


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

http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015DC0468&from=EN

http://www.finance.gov.ie/sites/default/files/170227%20SME%20credit%20demand%20survey.pdf


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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

http://www.investopedia.com/terms/e/equityfinancing.asp

http://british-business-bank.co.uk/wp-content/uploads/2015/03/050315-Equity-report-FINAL.pdf


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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.

http://www.hban.org/_fileupload/HBANGuide%28Entrepreneur%29.pdf


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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

https://www.enterprise-ireland.com/en/Invest-in-Emerging-Companies/Seed-and-Venture-Capital-Scheme/SVC-Programme-2013-to-2018-Guidelines-Call-3.pdf

https://www.enterprise-ireland.com/en/Invest-in-Emerging-Companies/Seed-and-Venture-Capital-Scheme/SVC-Programme-2013-to-2018-Guidelines-Call-3.pdf


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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

https://www.centralbank.ie/docs/default-source/publications/sme-market-reports/sme-market-report-2016h2.pdf?sfvrsn=4

https://www.centralbank.ie/docs/default-source/publications/sme-market-reports/sme-market-report-2016h2.pdf?sfvrsn=4





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Figure 6.


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.


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

http://www.ivca.ie/wp-content/uploads/2017/02/IVCA-Venture-Pulse-2016-060217-2.pdf

https://www.enterprise-ireland.com/en/Publications/Reports-Published-Strategies/Seed-and-Venture-Capital-Reports/2016-Seed-and-Venture-Capital-Report.pdf

https://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


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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





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


22 |

2012


2013


2014



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Source: IVCA

2015


2016



24 |

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



26 |

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



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Figure 12.

Source: Survey Results

Where does the investment money come from?

Private Funds State Funds Both


28 |

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

https://www.enterprise-ireland.com/en/Publications/Reports-Published-Strategies/Annual-Reports/2016-Annual-Report-and-Accounts-English.pdf

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

http://www.intertradeireland.com/media/intertradeirelandcom/researchandstatistics/publications/15.8.16FinalBusinessAngelsReport7-16.pdf





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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)


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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.

http://www.hban.org/_fileupload/HBAN%20Summary%20Document%20Q1%202017.pdf


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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.





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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

http://www.intertradeireland.com/media/g17/images/Venture-Capital-2015-Guide-web-version-1.pdf

http://www.intertradeireland.com/media/InterTradeIrelandBusinessPlanningCubeGuide.pdf


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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.





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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


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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.


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SECTION 3 > Appendix A

Appendix B

Appendix C

Appendix 1 Survey Questions


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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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