This month the UK Government is expected to announce the winners of the fund management mandates for the first, or commonly referred to as Pathfinder, Enterprise Capital Funds. The process is being managed by the UK Department of Trade & Industry’s (DTI) Small Business Service unit, which is in turn being advised by leading private equity fund formation law firm SJ Berwin. Lisa Bushrod reports.
Julian Brown of the Small Business Service notes that following EU state aid approval, which was granted in May last year, and announcement of the terms under which prospective managers of these funds were invited to bid, over 40 applications were received. While it is hoped to release the names of the winning bidders (those on the shortlist were privately notified some time ago) by late March, the process has to be rubber stamped by the Secretary of State for the DTI and as such no firm date is being mooted.
It’s still unclear how many fund mandates will be awarded and if the late March announcement will be for all of the Pathfinder Enterprise Capital Funds, or whether the announcement will effectively be split into two parts as other short listed prospective Enterprise Capital Fund managers come on stream. Coming on stream in the main relates to the ability of those prospective managers to raise the requisite private sector support that will ensure their Enterprise Capital Fund bid can meet its charter requirements.
The short-listed candidates are understood to be making highly varied progress in the private fund raising field, which may in the end make awarding the fund management contracts for the Pathfinder Enterprise Capital Funds an easy and self-selecting process. This might surprise, given that at the outset of the bidding process, the Small Business Scheme made clear to interested parties that those prospective fund managers able to demonstrate solid private capital commitments get a significant boost to the scoring criteria on the application. While this might seem a bit chicken and egg, the Small Business Services was only looking for in principle commitments, i.e. subject to a successful award of an Enterprise Capital Fund management contract, from private sector investors.
Brown says the Small Business Service expects to act over time as if it were a commercial fund-of-funds manager as much as it possibly can. It’s anticipated, subject to ongoing Government commitment and success of the actual Enterprise Capital Funds, that there will be an ongoing roll out programme, post the first Pathfinder funds that should be announced this month. Brown, cognisant of the concept and importance of investing across fund vintages if the return profile across these funds is to be smoothed out over time, believes it’s likely that the programme will roll out a new breed of funds approximately every 18 months. Any shorter timeframe is likely to be over ambitious, given the government involvement and timelines typically involved in the fundraising process. (For it’s part, however, the Small Business Service, only requires a 4.5% return on its capital, leaving all of the upside in the funds to the private investors and the funds’ managers.)
While other continental European countries also keen to stimulate investment in the sub £2m private company arena closely monitored the process of gaining EU state aid approval for these Enterprise Capital Funds, the impression thus far is that it’s early days in terms of a roll-out of this concept by other European governments. SJ Berwin is thought only to have met with a French government delegation interested in replicating the Enterprise Capital Funds and Brown at the Small Business Service says that while the DTI unit has received enquiries from other countries, there is a sense that most are adopting a wait-and-see how the Brits fare approach, in essence wanting to learn from the eventual UK outcome both about how to conduct the process and, possibly, how to improve upon it.
Enterprise Capital Funds were modelled on the successful SBICs (Small Business Investment Company) that were first launched in the late 1950s and have since helped finance in the region of 90,000 small to medium sized companies. In the UK they will sit above the University Challenge Funds and below the Regional Venture Capital Funds, in terms of government sponsored initiatives and the size of investment they will focus on, always in the sub £2m category.
It’s unclear how large the Enterprise Capital Funds that are eventually launched will be given that there is no upper limit. The only limits are on UK Government funding of individual Enterprise Capital Funds, which will not exceed £25m and that the state element will be no more than twice the private capital contribution, whichever is the lower amount.
With a view to surmounting the dilution problems experienced by many early stage investors, Enterprise Capital Funds will be allowed to invest more than £2m in a single company if to not do so as part of a subsequent funding round would dilute their existing stake in a company. Although there is a self-imposed cap in that any single investment cannot be for more than 10% of the Enterprise Capital Fund. It will only become clear how limiting this cap is in practice, once the size of the Pathfinder funds is announced.
For full details on the Enterprise Capital Fund application requirements go to www.sbs.gov.uk.