The launch of a new venture capital fund in the North West could not have come at a better time. Rupert Cornford reports on why the next piece of news from the RDA will be important for a changing industry.
Regional venture capitalists are champing at the bit. The slow demise of the banking sector has raised the profile of equity investors, and the chance to manage a large pot of European money is also attracting attention. A tender to manage a £204m Venture Capital Loan Fund (VCLF) – announced last year by the Northwest Regional Development Agency (NWDA) – went out in the autumn and the remaining applicants are in the advanced stages of the process. An internal announcement was expected as Insider went to press.
“If focused in the right areas, the fund can help alleviate a later stage funding shortfall for some venture capital-backed businesses,” says Simon Walker, chief executive of industry body the BVCA. “As the largest recipient of private equity and venture capital funding outside London and the South East, businesses in the North West are central to the economic health of the country. Initiatives such as this can stimulate economic development by giving companies a platform on which to grow.”
Access to finance is a key driver in the NWDA’s Finance For Business Strategy (FFB), which recognises that sufficient financial support is the catalyst for start-up, survival and growth of the region’s small business base.
The FFB recommendations set out a framework to address the three main components in the financial equation – demand, supply and intermediation services – and a recommendation to address supply is the creation of capital and loan provision to address the growing finance and equity gap.
The VCLF is one of the first initiatives in the European Regional Development Fund (ERDF) 2007 to 2013, which includes a £40m package for skills development and a £4m voucher scheme to help 1,000 businesses. It follows investment closure on most of the Merseyside Special Investment Fund at the end of 2008 – a £107m pot of European and private money launched in 1996 as part of the Objective One funding for Liverpool.
“We are at a crossroads, where funding products have come to an end, and there is little public sector money available to invest in SMEs,” says Richard Bamford, executive chairman of North West fund manager EV. “With the banks where they are and the downturn taking hold, it is crucial this fund happens as quickly as possible. Without that new public funding, the SMEs will struggle to raise money.”
So who is in the running? From what Insider has learnt, the race to win the business to run the fund consists of a series of strategic alliances and partnerships. Liverpool’s Alliance Fund Managers and EV have made a joint pitch; and NEL and Northstar are working together, both fund managers in the North East with a decent track record in this space. Another player with a good pedigree in regional venture capital, having run the Northwest Business Investment Scheme, is YFM Group, which has made a pitch to run the fund alongside Bibby and MTI, the fund manager running the University of Manchester Premier Fund.
According to David Hall, managing director at YFM, the winning team will have to prove they can adjust to the changing market.
“The fund was conceived a year ago and the need for this type of risk-based finance has become more sharply defined,” he says. “Before you had early-stage companies with funding gaps but some of the more established businesses have fallen through the net. The skill set of the team should be able to match that – there is a difference from ‘cloning to cleaning’ businesses.”
The aim of the fund, in keeping with the aims of the NWDA, is to support high-growth companies that can develop a competitive edge for the region across a range of sectors. Loans of between £50,000 and £250,000 will be available, with the limit on each equity and mezzanine investment set at £2m. While 50 per cent will come from the European public purse, with the remaining half match funded by private investors, there will be potential for co-investment.
“Getting Japanese investment banks or a syndicate of venture capitalists from the US, for example, can help a company’s expansion,” says Hall. “And the majority of businesses trade on an international scale.”
The fund also has a role to play in boosting the profile of venture capital across the UK. A survey commissioned by the BVCA indicated that 84 per cent of companies have found it “hard” to raise further finance for portfolio businesses in the past six months. Seventy-three per cent also believe investments by venture capital firms will fall in the year ahead.
The level of risk taken by a venture capital fund can act as a deterrent to risk-averse institutional investors, although the risks attached to funding a company in the seed or early-stage are offset by the rewards. But educating investors about the venture model and being more vocal about past successes will help attract new investment, according to Walker.
“There is a danger that businesses with the potential to form the cornerstone of a new innovation economy in the UK will never fulfil their potential because of the lack of liquidity,” he says. “The BVCA has been discussing with the government the role it can play in acting as a catalyst for further investment into venture capital to avert this scenario.”
But the reasons to be cheerful are many. Another BVCA report indicates that between 1995 and 2006, research and development investment by venture capital-backed firms outstripped the national average with exports 10 per cent above their counterparts. Employment also grew 6 per cent, compared with a national average of 1 per cent.
In total £434m was invested by BVCA members into more than 500 early-stage companies in the UK last year, which represents nearly 35 per cent of all companies backed by private financing in 2008.
“Past performance is not a guide to the future,” says Jonathan Diggines, chief executive at EV. “UK growth will come from new technology that will fuel demand in world markets. The UK has the skills – capital is required to exploit them.”
This fund is part of that. But whoever wins it will face an expectant market. Can venture capital be the saviour for regional businesses starved of capital because of the banking crisis? In part, it probably can. But these investment tools are only part of the answer.
“Shows such as Dragons’ Den have done wonders for the image of venture capitalism but we still don’t quite accept failure here,” says Steve Sealey, founder of Aquarius Private Equity Partners. “If you go down this route you have got to accept it can go wrong.”
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