As the third installment of our series, we explore how the European Commission uses the ‘buckets’ concept within the Revised EIC: Bucket approach to determine project funding.
As reported in the document,
If the company and the EIC Fund consent to the proposed co-investment opportunity, financial and commercial due diligence and negotiations may then be performed jointly and in agreement with the potential coinvestor(s), however under control of the Fund to ensure sufficient due diligence and implementation of required conditions to be included in the investment documentation.
Following an initial assessment implying some level of due diligence, including KYC compliance checks (led by the EIC Fund), and market consultation (led by the Investment Advisor), a transactions’ categorization will be done into the 4 “buckets” presented below. This classification will not be static, as cases may be moved from one bucket to the other as the due diligence process evolves, based on its findings, or on the initiation of co-investment interest – resulting interalia from the de-risking operated by the EIC Accelerator support, or at later stage as the project evolves and milestones are reached.
There are 3 main “buckets”, divided as followed:
Bucket 0: No Go
Includes projects that cannot meet the mandatory requirements. Their issues in either the assessment or due diligence, at any stage, prevents any investment.
Bucket 1: Companies are non-investment ready yet
Encompasses high-risk projects not yet investor-ready, despite EIC Accelerator support.
Bucket 2: Co-investment opportunities identified.
Includes projects with immediate interest by the investors in co-investing into EIC selected companies.
Revised EIC Bucket 0: No Go
Bucket 0 will include cases for which initial assessment or due diligence, at any stage, reports substantial negative issues preventing any investment.
EIC Fund’s due diligence thoroughly examines investment operations, assessing legality and rationale, ensuring accuracy and specificity.
If any of the conditions below apply, the EIC Fund will recommend that the EC rejects the investment. This decision might prompt the EC to convene a panel of external independent experts to reassess the proposal. Specifically, the EIC Accelerator contract could terminate or cancel, as specified in the official document:
The selected innovation doesn’t exhibit the anticipated durable competitive advantage and impact.
Changes within the team have diminished the necessary skills, capabilities, and motivation for launch and growth.
Additional instances of Material Adverse Changes (MAC) have arisen since EISMEA’s initial assessment. These include significant management changes, control shifts, bad leaver provisions, or severe litigation involving shareholders.
The cap table reveals substantial misalignment among existing shareholders and the company’s interests, leading to inadequate incentives for founders and key team members.
The beneficiary either declines or cannot provide information about an existing investor/shareholder and their ultimate beneficial owner(s), posing a potential EU reputational risk.
A current shareholder and/or its ultimate beneficial owner (UBO) falls under cases of exclusion from Union support, following the EU Financial Regulation.
Financial data and documentation submitted at a proposal stage contradicts company’s books.
The company does not directly own or access alleged IP, or the subject is under litigation.
Revised EIC Bucket 1: when companies are non-investment ready yet
Bucket 1 includes cases too high-risk for regular investors, despite EIC Accelerator support.
Project potential acknowledged, needs further development and improvements at various levels.
Lack of interest may stem from issues like early technology stage, extended time to market, or small market size.
These are three types of cases are envisaged (as reported in the official document):
EC’s backing requires securing blocking minority due to operation’s alignment with vital EU interest, as per Council Decision. While preserving essential flexibility, the EIC Fund might suggest a two-tranche investment approach in Bucket 1 cases. Alternatively, it could propose a single-tranche investment using a convertible instrument.
The innovation has the potential to have a high impact by addressing a societal need or an EU priority, in particular in the case of strategic technologies: those related to the EIC Accelerator Challenges in the EIC Work Programme, defined as critical technologies and technology roadmaps in the action plan on synergies between civil, defense and space industries as well as in accordance with the update of the 2020 New Industrial Strategy.
In such cases, operating as a major investor, the EIC Fund will ensure a board member seat in the target companies. External mentoring will be sought.
In all other cases, the EIC Fund may either invest with quasi-equity or a combination of quasi-equity and equity on EIC Fund own standard terms, or propose to the EC to revert to an uncapped “grant first” support to cover up to 70% of total eligible costs of the pre-TRL9 activities, and recommend milestones that once reached, may attract co-investors and hence trigger the investment component initially awarded by the EC.
Revised EIC Bucket 2: Co-investment opportunities identified
Bucket 2 will include cases where potential investors show immediate interest in co-investing into EIC selected companies.
The EIC Fund strives for equity investments through minority investments, together with private equity fund managers or venture capital (VC) firms. Equity co-investment enables other investors to engage in profitable investments with reduced fees from private equity funds. The aim is to have qualified investors match this, covering a minimum of half the round. The objective is to achieve a 1:3 leverage for the complete EIC investment cycle.
To protect EU interests, the EIC Fund will discuss with other shareholders to avoid independent blocking minority actions. In this regard, the Investment Advisor, acting on behalf of the EIC Fund, will undertake negotiations with potential co-investors. Negotiations will address agreement terms and potential mentoring tasks within the collaboration.
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