European Investment Fund: Backing sustainable development
Francesco Battazzi explains how the European Investment Fund is deploying investments to support and develop the green economy across Europe
Established in 1994, the European Investment Fund (EIF) is part of one of the world’s largest multilateral development banks, the European Investment Bank (EIB). It is also one of the most active investors in Europe’s private credit sector.
As head of the fund’s private credit division since January 2019, Francesco Battazzi (pictured) is responsible for investments in senior private credit funds specialising in asset-based, senior and unitranche financing to small- and medium-sized enterprises (SMEs) and mid-market companies across Europe.
According to Battazzi, the EIF has made commitments to approximately 170 private credit funds, totalling around €6.7bn (£5.6bn) since 2007. To date, these investments have provided new financing to more than 8,500 SMEs and mid-market companies, primarily within the EU.
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“Private credit funds are critical players in the financial ecosystem, offering risk-based, non-dilutive and tailor-made financing solutions that cater to the unique growth needs of businesses, unlike traditional bank financing,” Battazzi explains. “The EIF has maintained a long-term investment approach, continuing to allocate funds during challenging periods, such as the Covid-19 crisis and the macroeconomic turbulence that followed the Ukraine war, which disrupted allocations to alternative investments”.
Battazzi, who joined the EIF in 2009 as head of analytics and new products before becoming a leading member of the private debt team in 2015, positions the EIF as a leading and unique investor in Europe, which actively supports European private credit funds to grow, diversify, and reach their final close.
“Our participation as a AAA-rated cornerstone investor in selected funds is crucial for general partners in their fundraising efforts, we encourage other private investors to enter this market,” he says. “In 2022, we invested in 23 private credit funds and around 20 in 2023, despite a challenging fundraising environment where 70 per cent of funds secure only 20 per cent of overall fundraising volumes, according to Preqin data.
“With a long-standing investment track record as a fund-of-funds investor in the lower mid-market, the EIF is well-equipped to offer valuable guidance, especially to new or first-time teams and strategies as well as in new geographies. Investing in pan-European funds and exploring opportunities in emerging regions aligns with our mission, bolstered by our unique expertise across various jurisdictions.”
The green agenda
Battazzi says the current investment strategy sees the EIF invest in around 20 credit funds, with commitments typically ranging from €20m to €40m. It targets commingled funds that focus on providing risk financing to SMEs and small mid-cap companies.
The EIF’s geographical scope is limited to Europe by statute. Specifically, to the member states of the EU, candidate countries, potential candidate countries, and European Free Trade Association countries.
In its private debt investment activities, the fund encompasses a range of strategies, including classic senior debt, unitranche, growth debt and asset-based financing, as well as subordinate and hybrid debt-equity instruments, primarily under the InvestEU programme which aims to mobilise €145bn in investments.
“While generalist investment strategies are essential for a competitive capital market, the EIF has increasingly focused its allocations on specialised fund managers,” Battazzi says. “Acting as an anchor investor, the EIF supports new thematic funds focused in areas critical to environmental sustainability and energy transition.
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“A growing portion of EIF investments are dedicated to promoting sustainability and green transition within the European private debt market, with many funds qualifying as Article 9 financial products under the Sustainable Finance Disclosure Regulation, targeting environmentally sustainable investment objectives.”
These funds typically provide non-dilutive financing for businesses pursuing sustainable green investments or requiring capital expenditure financing for the green transition. In support of these goals, the EIF has established the EIF Climate Action and Environmental Sustainability Criteria, which are designed to foster the transition to a climate-neutral economy.
“These criteria prioritise initiatives that combat global warming, focusing on energy transition, climate adaptation, and mitigation. They serve as the foundation for all EIF investments, guiding expectations at the commitment level and facilitating ex-post portfolio monitoring and reporting,” he adds. “An increasingly important area of interest is innovation, we consider private credit as a means to offer non-dilutive financing options for European cleantech and deeptech companies.”
Battazzi emphasises that the EIF’s private credit activity is limited to investments in funds. “In certain instances, these private credit funds originate from peer-to-peer platforms, which we refer to as marketplace lenders,” he says. “While marketplace lenders provide a financing channel of critical importance for small businesses, they represent a marginal portion of EIF’s overall investment activity.”
The main reason, he explains, is due to investors’ reluctance to tap into the very small end of business financing. Battazzi says it has been difficult for them to fundraise among institutional investors and reach target fund size.
Venture and growth
Asked what criteria the EIF uses for selecting private debt funds and what due diligence process it employs, Battazzi points to the fund’s 30-year history as a fund-of-funds investor in the European lower mid-market.
The EIF employs a comprehensive due diligence process,” he says. “Selection is grounded in detailed and thorough commercial, compliance, and legal assessments, considering various factors such as strategy, team, track record, market conditions, and fund terms. This process includes legal negotiations and the implementation of relevant policy objectives, primarily aimed at supporting access to finance for European SMEs and small mid-caps, while also addressing other important policy goals related to gender equality, sustainable economy, and market development.”
In terms of where investment is focused, Battazzi says the fund is increasingly focused on supporting the venture and growth debt market, including accelerating innovation and digitalisation, as well as promoting developments in cleantech and agri-food technology.
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“In February 2022, the EIF published the EIF ESG Principles, which outline the policies and procedures regarding the consideration of environmental, social, and governance (ESG) aspects in its transactions and operations, focusing on the assessment, management, and reporting of ESG factors,” Battazzi says.
He says these principles are central to the EIF’s activities and are supported by various frameworks, including the Sustainable Development Goals (SDGs). The EIF addresses a wide range of SDGs, such as access to decent jobs, innovation and infrastructure, reducing inequality, and combating climate change.
“The EIF maps its contributions to these goals through alignment with the public policy goals, enabling effective monitoring of its support for achieving them. Additionally, the EIF emphasises climate action and environmental sustainability, reinforcing its commitment to sustainable practices.
“It aligns with the Paris Agreements by defining high greenhouse gas emission sectors and restricting financing to these assets unless they meet specific sustainability criteria. An ESG questionnaire assesses management companies’ policies regarding climate issues, and those with assets under management exceeding €500m are required to disclose climate-related information following the recommendations of the Task Force on Climate-Related Financial Disclosures.”
On top of this, the EIF incorporates a climate risk assessment model in its investment decisions, considering both physical and transition risks to guide its choices.
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