EUROPEAN INVESTMENT FUND

Rating Action & Rationale

EthiFinance Ratings affirms European Investment Fund’s long-term rating at “AAA”, maintaining its “Stable” outlook.

The AAA credit rating of the EIF reflects the strong support of its shareholders, including the European Investment Bank and the European Commission, benefiting from their maximum creditworthiness. Our credit rating considers the EIF’s strategic importance to its shareholders based on its mandate to improve access to finance to small and medium-sized enterprises across Europe. The EIF operates within a well-defined risk management framework and its activities are highly diversified across financial instruments, sectors, and geographies, mitigating risks and ensuring broad market coverage. The Fund earns commissions on EIB mandates, EC mandates and regional and funds of funds mandates, with commission income accounting for 60% of total income in 2023 (2022: 60%). The EIF’s financial flexibility is strong due to the absence of financial debt, with liabilities primarily consisting of an operational funding line from the EIB to finance guaranteed funded operations, which are private equity investments acquired by the Fund on behalf of the EU (represented by the EC) under the InvestEU Programme. The loan repayment is secured by cash inflows and backed by an EU guarantee. 

The EIF's profitability remains at high levels, despite some historical volatility in its private equity investments, which have impacted its short-term profitability due to fluctuations in their value. In addition, if adverse economic conditions were to affect SMEs, the EIF's profitability could be impacted, as the Fund may have to compensate the beneficiaries of the guarantees.

Executive Summary 

The European Investment Fund (hereinafter, EIF or the Fund) is an integral part of the European Investment Bank Group, the European Union’s lending arm. EIF provides risk finance to small and medium-sized enterprises (SMEs) across Europe. Its shareholders include the European Investment Bank (EIB), the European Union (EU), represented by the European Commission (EC), and various public and private financial institutions. 

Fundamentals 

• Strong support from its shareholders, which include the European Investment Bank (EIB) and the European Union (EU), represented by the European Commission (EC), whose maximum creditworthiness underpins the AAA credit rating. The strong willingness of EIF shareholders to provide support stems from the Fund’s strategic importance to them, reinforced by their majority ownership (89.5%). EIF shareholder's support provides an uplift over its stand-alone credit rating, which according to EthiFinance Ratings is at AA+.
• Mandate to enhance European small and medium-sized enterprises (SMEs) access to finance by developing and offering targeted financial products to intermediaries, including various financial institutions.
• The EIF, as part of the European Investment Bank Group, plays a pivotal role in supporting EU public policy goals through the design and deployment of financial instruments.
• Robust risk management framework. Activities are guided by mandates from the EIB, EC, and other third parties, which include clear guidelines that limit discretion, ensuring alignment with its mission and adherence to defined risk parameters.
• High diversification, operating across a wide range of financial instruments, sectors, and geographies, supporting SMEs through investments, guarantees, and other initiatives, ensuring broad market coverage and risk distribution.
• Strong financial flexibility due to the absence of financial debt, with liabilities primarily consisting of an operational funding line from the EIB under the InvestEU Programme to finance guaranteed funded operations, which are private equity investments acquired by the Fund on behalf of the EU (represented by the EC) under the InvestEU Programme. Since the loan repayment is secured by cash inflows and backed by an EU guarantee, there is no significant financial risk to the EIF.
• High profitability with a pre-tax margin of 53% in 2023 (2022: 21%), despite some historical volatility in profits mainly due to fluctuations in the fair values of PE investments at FVTPL. In addition, the Fund had an EBITDA/AUM ratio of 0.26% in 2023 (2022: 0.17%). According to EthiFinance Ratings’ asset managers methodology, the Fund’s profitability is assessed within the upper range.  
• The Fund earns commissions on EIB mandates, EC mandates and regional and funds of funds mandates. Commission income represented 60% of total income in 2023 (2022: 60%). 

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Main Ratios

Outlook

The "Stable" outlook reflects EIF's robust support from its shareholder base, as previously reflected by the explicit support by the EU and its member states during the Covid-19 crisis. Additionally, it considers the critical role the EIF plays in Europe by fostering access to finance for SMEs.  

Rating Sensitivities

Factors that individually or collectively could impact the rating: 

•          Factors which could lead to an upgrade

Not applicable.

•          Factors which could lead to a downgrade

The rating could be downgraded if the EIF’s critical role in enhancing access to finance for SMEs in Europe weakens, leading to a reduction in strategic support from its shareholders. Furthermore, a substantial deterioration of the Fund’s financial profile could negatively impact the rating, particularly if financial flexibility is impaired by the issuance of debt or if profitability declines, with a sustained pre-tax income margin below 15% and an EBITDA/AUM ratio falling below 0.1%. 

Company Profile

As part of the European Investment Bank Group, the EIF is a key provider of risk finance to small and medium-sized enterprises (SMEs) across Europe. As of 31 December 2023, the EIF had an authorized capital of €7.370bn, divided into 7,370 shares with a nominal value of €1m each. The EIB held 59.8% of the issued shares, the EU represented by the EC held 29.7% and 38 financial institutions held 10.5%. The Fund carries out its activities using either its own resources or those provided by the EIB, the EC, any EU Member States or other third parties.

As of 31 December 2023, total assets under management (AuM), defined as the initial resources and contributions allocated to each mandate, amounted to €90.88bn (2022: €82.30bn). The EIF has committed €14.9bn during the year (2022: €9.2bn).

The EIF was incorporated on June 14th, 1994, in Luxembourg, as an international financial institution to contribute to the pursuit of the objectives of the EU. Its two main activities include the provision of guarantees and the acquisition, holding, managing and disposal of equity participations of SMEs within the EU and the EFTA countries.

The AAA / Stable credit rating reflects EIF’s strong shareholder support and its strategic role in advancing EU objectives by fostering a sustainable financing ecosystem for SMEs. 

EthiFinance Ratings highlights the EIF's strong geographic diversification, ensuring a balanced distribution of recipients across countries and sectors. As of 31 December 2023, the EIF's financial guarantees were spread over 41 countries, with Romania holding the largest share at 15.0% (2022: Spain 13.2%), followed by Spain at 11.4% (2022: Poland 12.9%) and Poland at 9.1% (2022: France 10.3%).

The EIF’s PE investment activity is mainly focused on Europe, with limited exposure outside the region. As of 31 December 2023, France had the largest weight with 11.4% (2022: 12.1%), followed by the United Kingdom with 8.3% (2022: 9.8%) and the United States with 7.3% (2022: 9.0%). 

The Fund's risk management adheres to strict standards and controls, guided by mandates from the EIB, EC, and others. This framework limits discretion, ensuring alignment with its mission and risk parameters, which EthiFinance Ratings considers a key strength.

The credit risk is managed by risk management policies covered by the statutes and the EIF Credit Risk Policy Guidelines. The statutes of the EIF limit guarantee operations to five times the subscribed capital, as per amendment approved by the Board of Directors. This amounted to €7.37bn at the end of 2023. Hence, the €8.97bn exposure at risk, together with the funded exposure of €534.5m in respect of ABS investments, was below the statutory limit of €36.85bn. Only 0.2% of the financial guarantees had a rating below investment grade. 

Financial Profile

Results and Profitability

In 2023, interest and similar income surged by 212% to €55.78m (2022: €17.85m) driven by higher interest rates, which increased the interest income from debt investments, money-market instruments and bank current accounts. 

Net income from PE investments increased by 32% to €64.39m (2022: €48.69m), driven by higher dividend income. 

Net result from financial guarantee operations declined by 14% to €60.46m (2022: €70.04m), which mainly include guarantees for certain tranches of notes (senior and/or mezzanine tranches) issued through SME securitization transactions. 

Commission income rose by 31% to €265.64m (2022: €203.15m) driven by higher commissions on EIB mandates, EC mandates, and Regional and Funds of Funds mandates. Commissions from EIB mandates accounted for 28%, EC mandates for 34%, and Regional and Funds of Funds mandates for 38%.

Net result on financial operations amounted to €-2.11m (2022: €-183k), declining primarily due to higher losses from transactions and cash positions in foreign currencies, despite a reduction in realized losses on debt investments at amortized cost.

Total income amounted to €444.20m in 2023 (2022: €339.59m), up 31% due to the increase in commission income, interest and similar income and income from PE investments. This partially offset the decline in the net result from financial guarantee operations and the net result on financial operations. As of December 2023, total income was composed of commission income (60%), followed by net results from financial guarantee operations (14%), net income from PE investments (14%), and interest and similar income (13%).

Operating expenses increased by 3% to €214.83m (2022: €207.87m). The cost/income ratio improved to 48% (2022: 61%), reflecting better operational efficiency.

Operating profit rose by 74% to €229.37m (2022: €131.78m), driven by strong income generation mainly due to the increase in commission income, interest and similar income and income from PE investments.

Profit generated by the change in fair values totaled €4.37m in 2023, up €65.68m from a loss of €61.3m in 2022. This positive change was driven by the net results from financial instruments at FVTPL related to PE investments (up €29.4m), financial guarantees at FVTPL (up €18.21m), and financial instruments at FVTPL related to debt investments (up €18.53m).

Net profit surged by 232% to €233.74m (2022: €70.41m), driven by a substantial increase in operating profit and a recovery in profit from the change in fair values, compared to a loss in the previous year. Consequently, EIF’s profitability ratios improved. The return on assets (ROA) rose from 1.32% in 2022 to 3.88% in 2023. Return on equity (ROE) also increased from 1.69% to 5.22%. 

According to EthiFinance Ratings’ asset managers methodology, the EIF's profitability is positioned within the upper range of the scale, exhibiting a pre-tax income margin of 53% in 2023, up from 21% in 2022. The significant improvement reflects the EIF’s ability to maintain a high profit margin despite historical volatility. In 2022, net profit was heavily impacted by fluctuations in the fair values of PE investments at FVTPL, driven by market volatility amid rising interest rates. By contrast, in 2023, the impact of these fair value changes was considerably lower.

Additionally, the EIF’s EBITDA/AUM ratio of 0.26% in 2023, up from 0.17% in 2022, demonstrates a high return on assets under management. The AUMs grew by 10% to €90.88bn in 2023 (2022: €82.3bn). The EBITDA increased significantly by 74%, from €131.8m in 2022 to €229.45m in 2023 mainly due to the increase in commission income, interest and similar income and income from PE investments. This strong income generation was the key driver of the improvement of the ratio.

Assets 

As of 31 December 2023, assets totaled €6.55bn (2022: €5.50bn), mainly comprising debt treasury portfolio at amortised cost (36%), PE investments at FVTPL (27%), cash and cash equivalents (12%), debt investments at FVTPL (8%) and guaranteed funded operations at FVTPL (6%).

Cash and cash equivalents amounted to €813.81m (2022: €452.59m), including current accounts €446.4m and money-market instruments and short-term securities €367.4m. The effective interest rate on short-term bank deposits was 4.78% (2022: 3.60%). 

Financial instruments at amortised cost totaled €2.38bn (2022: €2.44bn), mainly including debt investments, which were primarily composed of the treasury portfolio. They are held by the Fund with the intention of collecting contractual cash flows. As part of the Fund’s business model, disposal of debt investments at amortised cost are infrequent or would be of insignificant volume. 

The treasury portfolio, which amounted to €2.35bn (2022: €2.42bn), was composed of long-term bank deposits and a long-term debt portfolio spread over 35 countries (2022: 37 countries), including bonds issued by EU sovereigns and non-EU sovereigns, as well as corporate bonds. Management of the long-term treasury portfolio has been outsourced to the EIB. The highest individual country exposures were France, Spain, the United States, Germany, and the United Kingdom, which jointly represented 46% of total nominal value. In nominal terms, 86.6% of all assets held had a duration of 5 years or less. All the securities had an investment grade, implying a low default risk. The average yield at cost in EUR was 0.57% for 2023 (2022: 0.36%). 

Financial instruments at fair value through profit or loss, which totaled €2.74bn (2022: €2.05bn), were composed of PE investments, debt investments and guaranteed funded operations. 

The exposure to PE investments reached €1.80bn (2022: €1.58bn). The PE portfolio included PE investment funds and the EIF’s exposure in the InvestEU SME window. PE funds are generally structured as Limited Partnerships, where the LPs, such as the EIF, commit a certain amount of capital to be called at the discretion of the fund manager, which is acting as GP. The PE portfolio was diversified across different investment strategies, including venture capital investments (32%), private equity (23%), private debt (23%), infrastructure (21%), and a small exposure to generalist investments via fund-of-funds vehicles (1%). 

The PE portfolio is well diversified across a large number of funds and geographies. The largest fund in the portfolio represented 1.4% of the fair value (2022: 1.6%) and the largest 10 funds represented in aggregate 9% (2022: 11%). The highest individual country exposures were France, the United Kingdom, the United States, Germany and Spain, which jointly represented 39% of total value. PE investments are also well diversified in terms of sector and activity. 

Guaranteed funded operations increased significantly from €72.82m to €401.81m. These included PE investments acquired by the Fund on behalf of the EU represented by the EC under the InvestEU Programme. The EC provides a guarantee to the EIF to invest in the guaranteed funded operations. Ultimately, all the risks and rewards belong to the EC. Therefore, the EIF is not exposed to any risk linked to the underlying guaranteed funded operations and solely to residual counterparty risk from the EC. To finance the acquisition of the guaranteed funded operations, the EIB provides a funding line to the EIF. 

Debt investments at fair value through profit or loss totaled €534.51m (2022: €402.81m). Net additions were made during the year. The debt portfolio at FTPL included financial assets with fixed or determinable payments that are not quoted in an active market. 

Financial guarantee contracts require the EIF to reimburse the holder of a debt instrument for a loss incurred because a debtor (e.g. SMEs) fails to pay when due. Financial guarantees, which represent the EIF's right to receive future premium inflows from beneficiaries, amounted to €20.37m (2022: €16.67m). Provisions for financial guarantees, which represent the EIF's obligation to compensate beneficiaries in case of debtor default, totaled €11.75m (2022: €13.05m). 

The total exposure at risk from guarantee transactions amounted to €8.97bn in 2023 (2022: €9.5bn), showing a low default rate of 0.1% (2022: 0.1%). The transactions classified as “under review” have decreased from 6.4% in 2021 to 2.5% in 2023. 

 

Funding

As of 31 December 2023, liabilities totaled €1.96bn (2022: €1.13bn), comprising provisions for financial guarantees (1%), retirement benefit obligations (23%), financial liabilities at amortised cost (45%), and other liabilities and provisions (31%), which included related parties payables, employee benefit payables, trade creditors and provision for risks and charges.

Financial liabilities at amortised cost, which refer to the funding line provided by the EIB under the InvestEU Programme, reached €874.45m (2022: €157.9m). This funding line was mainly used to finance guaranteed funded operations at FVTPL, totaling €401.81m (2022: €72.82m) and guaranteed funded operations at AC, amounting to €14.58m (2022: €0). The interest rate was 2.0% (2022: 0.2%). The funding line is classified as operational debt since it directly supports InvestEU activities, with loan repayment secured by cash inflows from the InvestEU portfolio and the EU guarantee. As it doesn’t represent typical financial borrowing, EthiFinance Ratings views the EIF's financial flexibility as strong, given the secure, operational nature of its liabilities.

Capitalization

Equity accounted for 70% of the Fund’s total assets (2022: 79%). The authorized capital amounted to €7.37bn. The EIF is mandated to allocate at least 20% of its annual net profit to a statutory reserve until the reserve reaches 10% of its subscribed capital. A minimum amount of €46.75m is required to be added in 2024 with respect to 2023. A dividend of €13.17m was distributed (2021: €15.04m). Equity covered 90% of investments on the balance sheet (2022: 97%).  

Environmental, Social & Governance

The EIF demonstrates a robust ESG profile, driven by its role as a cornerstone of sustainable economic development in the European Union. On the environmental front, the EIF actively supports projects aligned with the EU’s Green Deal, promoting investments in renewable energy, energy efficiency, and innovative green technologies. Socially, the EIF fosters inclusion and economic resilience by enabling access to finance for SMEs, startups, and underserved segments, such as women entrepreneurs and businesses in underdeveloped regions. Governance is another strength, with the EIF adhering to high transparency and accountability standards, reinforced by its affiliation with the European Investment Bank Group and alignment with EU policies.

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Scorecard

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Financial Statements