bidders conference 27/01/10 presentation slides

North West Business Finance

Fund and Loan Management Services

Welcome Steven Broomhead – Chief Executive

NWDA

Introduction David Read – Head of Business Finance

NWDA

NW Region • Largest region outside of the South East

• Home to 247,000 businesses and a strong regional economy

• Moving from traditional industries to new priority sectors:– Biomedical– Energy and Environmental Technologies– Advanced Engineering and Material– Food and Drink– Digital and Creative Industries– Business and Professional Services

• Large SME base, suffering from lack of funding options caused, in part, by the credit crunch

• Large academic and commercial research presence with an active “spin-out” culture

North West Operational Programme (NWOP)

• NWDA has been allocated €755 million from ERDF to spend in the Northwest between 2007 and 2013

• The NWOP has four priority areas for funding of which the VCLF delivers under Priorities 1 and 2

• The NWOP aims by December 2015 to: – create 26,700 additional net jobs– create 2500 businesses– improve the region's annual Gross Value Added by £1.17bn– 25% reduction in additional carbon dioxide emissions

• VCLF plays a significant part in achieving these outputs

VCLF Investment Framework

• Programme requires 40% in the Merseyside phasing-in area and 60% in the rest of North West.

• Priority 1 Stimulating Enterprise and Supporting Growth in Target and Markets: – Action Area 1.1 - Developing high value new enterprise– Action Area 1.2 - Developing higher added-value activity in target

regional sectors

• Priority 2 Stimulating Enterprise & Supporting Successful Businesses:– Action Area 2.1 - Exploiting the science and R&D base of the region– Action Area 2.2 - Encouraging innovation to improve productivity in

all companies

JEREMIE

• JEREMIE - Joint European REsources for MIcro to medium Enterprises

• European Commission and European Investment Bank (EIB) initiative

• EIB provide the private match funding

• EIF to act as an advisor to NWBF / EIB

JESSICA

• JESSICA - Joint European Support for Sustainable Investment in City Areas

• £100m for development of Regional Strategic Sites through loan, equity and guarantee.

• Returns to be invested in an ‘evergreen’ legacy fund

• Funding via Urban Development Funds (UDFs)

• UDF procurement notice to be issued at the end of March

• Opportunity to partner with public sector as EIB require UDFs to be FSA regulated

VCLF approvals

• All central government approvals– BIS CPRG approval – Economic case– CLG stage 1 and 2 Approval – ERDF investment– Secretary of state approval - 5 2 c private company– BIS approval to regional JEREMIE funds – Compliance with Solutions for Business

• EIB Board approval in principle of €102m loan

• ERDF and private sector funding totalling £184m was drawn down at the end of November 2009

NW Business Finance LtdDavid Read – Director, NWBF

Objectives of NWBF

• To create a lasting Evergreen legacy fund for the region after the end of the ERDF programme in 2015

• To establish a major, single branded region-wide VCLF in the North West, operating alongside other forms of SME support

• Improve the survival of new businesses and assist the development of key sectors in the region

• To provide a range of debt and equity finance that SMEs require to grow and generate additional wealth

Holding Fund

• NWBF is a newly established company limited by guarantee• 5 members, NWDA plus four private sector individuals• Fund of funds, NWBF, will oversee the administration of the

funds and will contract with fund managers for them to run, via limited partnership structures

• NWBF Board will be advised by an Investment Advisory Panel, made up of people including those with proven VC experience, either as providers or users

• Allocation of funding between the VCLF will be decided by the NWBF Board

• Additional follow-on funding available from the recycling of existing ERDF and NWDA backed funds after December 2015

Structure – Holding Fund model

NWBF Ltd

Funds (LPs)

Carried Interest Limited PartnerGeneral Partner

MEMBERS

Fund Manager

Management

AgreementManagement

ServicesDevelopment Capital Fund

Investments

to

SMEs

ERDF Grant €102m

EIB Loan €102m

Legacy Fund and interim VC fundand realisations

Investment Advisory

Panel (IAP)

Venture Capital Fund

Loans Fund

Priority Sector Growth Fund

VCLF Structure

• Funding model – co-finance/co-investment

• NWBF Board to provide strategic guidance for the company and fund manager

• Clear distinction in the roles and responsibilities of holding fund and fund managers

• Meet requirements of ERDF grant funding and JEREMIE programme

• Strategic alignment with the wider business support network to support deal flow i.e. BLNW Access to Finance service

NWBF Board

• Up to 10 Board directors

• Responsibilities:– Agree, review and monitor the delivery of the Holding

Fund Investment Strategy– Decide on the appointment of fund managers, based on

the procurement, IAP and EIF’s/EIB’s recommendations– Review the performance of individual funds against their

agreed Business Plans– Review the Holding Fund’s financial standing and sign off

the annual audited accounts– Ensure compliance with the ERDF funding agreements– Ensure the proper and efficient conduct of the Holding

Fund

Investment Advisory Panel

• Panel is made up of:– 5 independent members to be appointed– Board Director - NWBF– Managing Director - NWBF– Observers: EIF/EIB and BIS representative

• Responsibilities to advise the Board on:– Structuring of Investment policies and Investment Funds– Maintaining and updating NWBF Business plan over the fund

lifetime– Portfolio management - maintaining overview of Funds

performance– Contractual arrangements with individual Fund Managers– Reviewing fund manager reports and reporting on portfolio to

stakeholders

Funding outputs• Jobs created and Safeguarded 14,000

• Businesses supported financially 800

• Private sector Leverage £92.4m

• Private match funding (EIB) £92.4m

• Increase in GVA £300m

• Businesses Created 200

• Business Start up support 300

Investment TimescalesBiggest public VCLF in the Europe benefited as a result of the fluctuation in exchange rates

Challenging investment profile to achieve the ERDF requirements, however the economic climate shows a significant demand to support businesses in the recovery

A possible investment profile of the overall VCLF up to end of 2015 is:

2010 - £15.8m

2011 - £33m

2012 - £34m

2013 - £34m

2014 - £34m

2015 - £34m

Total - £184.8m

Invitation to Tender Format and DocumentationRachel Laver - NWDA

Format Of ITT

• Four Volumes

1 – Instructions

2 – Selection Criteria

3 – Award criteria

4 – Legal Documentation

Volume 2 Selection Criteria

• Tells us about your organisation

• Request accounts

• Adherence to Equal Opportunities

• FSA Authorisation as a Fund Manager

• Environmental/Sustainability policy

• Questions 1-10 are pass/fail or Information Only

• Question 11 Technical Ability and Experience – weighted questions to be scored

• 50% Pass mark

Volume 3, Section 1Service Delivery and Approach

• 11 questions. Questions 2-11 weighted and scored

• How you propose to deliver each lot tendering for

• No of words correlates to weighting of question.

• Stage 1 score is not carried forward

• 85% of total score.

Volume 3, Section 2Pricing Schedule

• Excel Workbook

• 15% of Tender Score– 10% for financial and economic outputs– 3% Lowest price will receive maximum score– 2% for the most advantageous hurdle rate

• Instructions for completion are on front Sheet

• Three worksheets to complete:– Data Entry– Fund manager P&L– Fund Manager Staff Costs

• Only pricing models completed using the workbook will be accepted

Format of Submission

• Clearly mark which Lot tendering for

• Answer all questions

• Adhere to word Limits

• Clearly reference all attachments

• Submit 3 hard copies and 1 cd Rom

• Tenders to be submitted 12 noon 5th March

What you need to submit

• Appendix F Checklist

• Volume 2 completed

• Volume 3 completed with attachments– Pricing schedule– Procurement certificates

• Volume 4 nothing to be returned. Please confirm agreement subject to contract, terms and conditions

Process for assessment of tenders

• Stage 1 Selection criteria review – 50% required to progress to stage 2

• Stage 2 Award – Approach and service delivery 85%– Pricing Schedule 15%

• Validation and Interviews

• Tender scoring and moderation

• Appointment to Framework

• Mini competition following appointment to panel

Timetable

• Clarifications up to 24th February

• Tenders due By noon 5th March

• Validation Visits 22nd March – 9th April

• Interviews 12th - 16th April

• Framework Agreements signed 13th May

• Mini Competition End of May

• Award of Funds Mid June

Structure of FundsDavid Read - NWDA

NW approach to developing VCLF • Evaluation of Current VCLFs

– Considered VCLF models and approaches and whether still appropriate and fit for purpose

– Assessed the financial performance of the VCLFs against targets

– Assessed the effectiveness of the management and governance of the VCLFs

– Assessed the emerging outcomes and impacts achieved by the VCLF’s and value for money

• Reviewed recommendations from:– Regeneris Study of ERDF VCLFs (June 2007)

– European Commission ‘Comparative Study of VCLFs

– Key learning points have been included in the development of the NW VCLF

– Market testing with Fund Managers from across the UK

Funds

Initial allocation of funds will be as follows:

Fund size range

Development Capital Fund £45m - £125m

Expansion capital

Venture Capital Fund £30m - £100m

Early Stage; Proof of concept, start and seed

Loan Fund £35m - £50m

Loans of £50k - £250k

Priority Sectors Growth Fund £45m - £125m

Sector focused

Funds

• The Board have provided an indicative value for each fund

• The IAP will provide advice and the Board will decide the value of the initial awards

• Initially likely around £155m will be allocated following this procurement

• Balance of funds will be retained enabling flexibility to respond to market conditions

Investment and Returns

• Investment period ends 31/12/15

• All realisations prioritised for EIB loan repayment

• After EIB repaid surplus realisation will be transferred to legacy fund for future re-allocation

• Evergreen funding model to run in perpetuity for the benefit of the NW region

Framework AgreementMartin Vincent – Mace & Jones

Framework Agreement

Purpose:

• To create a formal panel of service providers

• To establish the “rules” of the panel and membership

Framework Agreement

Panel membership:

• No guarantee of any / any level of business / opportunity

• Tenders submitted and accepted will potentially bind tenderers for the term of the framework

Framework Agreement

Rules:

• Funds allocated by NWBF Board

• Mini-competition process

– Builds on tender– Responsive

• “Award” is an opportunity to enter into the Limited Partnership Agreement

Legal AgreementsPatricia Grinyer – Mace & Jones

Limited Partnership Agreement and Management Agreement

• Structure for the funds is Limited Partnership - although an exception may be made for the loan fund (Lot 3)

• Limited Partnership not Limited Liability Partnership

• General Partner vs. Limited Partner

• Parties –

1. General Partner 2. NWBF 3. Carried Interest Partner

• “Consent” – NWBF consent

• Management Agreement - Partnership (acting through the General Partner) appoints the Manager

General Provisions of the Limited Partnership Agreement

The Limited Partnership Agreement sets out -

• The Terms and Conditions of the Investment Loan

• The Terms and Conditions of the Management Project Loan

• Operation and Management of Partnership

• Removal of the General Partner

• Distributions of the Partnership

• Obligations of NWBF’s Funders

Investment Loan

• Made available from NWBF to the Partnership

• Manager to provide requisite notices

• Must be invested in the Investment Loan Commitment Period

• May be increased by Consent - voluntary or imposed increases/decreases

• General Partner’s responsibility to ensure it makes investments which are in accordance with Investment Policy and the Manager shall be liable for losses/costs incurred as result of breach

• Investment Project Approval Request confirmation

Management Project Loan

• This is the General Partner’s share (i.e. a prior call on profits) The GP receives the GPS in the first instance by drawing down in full from the MPL

• Advanced quarterly

• First payment on the Closing Date

• Manager must provide the Management Project Loan Drawdown Notice

• Must have provided quarterly report

Operation and Management of the Partnership

• Through the General Partner – the Partnership will appoint the Manager on the terms of the Management Agreement

• Management Agreement cannot be amended without Consent

• Cost of appointing the Manager is borne by the General Partner

• Manager must be FSA regulated (NB only applies to Lots 1, 2 and 4)

• Manager has responsibility for ensuring they have adequate staff, insurance etc.

• General Partner vests various powers to the Fund Manager

Operation and Management of the Partnership (2)

• Management Agreement sets out the obligations – mirrors Limited Partnership Agreement

• Removal of General Partner shall cause the Manager to cease to be a manager of the Partnership

• Can charge an arrangement fee and monitoring fee to the SME

• Fund Manager tenders will be attached to the LPA as it forms the basis on which bidders are appointed

Operation and Management of the Partnership (3)

• Reporting Requirements (quarterly and annually)

• Agree and prepare Annual Budgets and Marketing Plan

• Removal of General Partner either

– by Consent without cause (GP shall be entitled to retain a fraction of the General Partners Share)

– by Consent with cause (negligence/wilful default/breach of conditions/bankruptcy/insolvency/failure to provide information when required…)

• Conflict of Interest policy

• Payments of Fees/Expenses

• Dispute Resolution

Allocation of Debts/Liabilities and Obligations of the Partnership

• All capital receipts applied in reduction of the Investment Loan and Management Project Loan

Allocation of Profit

• to pay General Partner’s Share (this is in effect a prior call on profits and will be paid to the General partner by way of a Management Project Loan)

• then to NWBF solely – until all to NWBF until the reallocation point (i.e. the later of (1) the occurrence of the Investment Loan, Management Project Loan, EIB Loans (of NWBF) are repaid in full and (2) liquidation of the partnership)

Allocation of Debts/Liabilities and Obligations of the Partnership (2)

• Following the reallocation point, payments to be made to Carried Interest Partner

– 25% of the Preferred Return; thereafter

– 80/20 Holding Fund/Carried Interest Partner

Obligations of Funders• General Partner/Manager must comply with the requirements

of the funders to NWBF

• Investments must be in accordance with the IOG’s and GBER. Must avoid EIB Restricted Sectors and ERDF Sensitive Sectors

• Bank Accounts – split of public and private sector monies on the downstream funds

• Warranties (for both General Partner and the Manager)

• Reporting Requirements

• Providing Security

• Block on payments of Management Project Loan and Investment Loan – Consultation Events/Review Events/Events of Default

Investment Criteria Clive Brook – Amberley Advisory

Clarification to IOG’s

• State Aid investment size limitations

• State Aid sector limitations

• EIB sector limitations

• ERDF sector limitations

• Share acquisitions

• Undertakings in difficulty

State Aid investment size limitations

Year 1 Year 2 Year 3 Year 4

Assisted

Areas

RONW Assisted

Areas

RONW Assisted

Areas

RONW Assisted Areas

RONW

1st Investment

€1.5m €1.5m

1st

Follow-on

€1.2m €0.75m

2nd

Follow-on

€1.2m €0.75m

3rd

Follow-on

€1.5m €1.5m

The “Cumulation” Rule – GBER Article 7, Clause 5a

Total Investment possible over a 4-year period:-

Assisted Area €5.4m Rest of North West €4.5m

State Aid investment size limitations (2)

Year 1 Year 2 Year 3 Year 4

Assisted

Areas

RONW Assisted

Areas

RONW Assisted

Areas

RONW Assisted Areas

RONW

1st Investment

€0.3m €0.3m

1st

Follow-on

€1.2m €1.2m

2nd

Follow-on

€1.2m €0.75m

3rd

Follow-on

€1.5m €1.5m

The “Cumulation” Rule – Scenario 1 Smaller sized investments

Total Investment possible over a 4-year period:-

Assisted Area €4.2m Rest of North West €3.75m

State Aid investment size limitations (3)

Year 1 Year 2 Year 3 Year 4

Assisted

Areas

RONW Assisted

Areas

RONW Assisted

Areas

RONW Assisted Areas

RONW

1st Investment

€0.8m €0.8m

1st

Follow-on

€1.2m €0.75m

2nd

Follow-on

€1.2m €0.75m

3rd

Follow-on

€1.5m €1.5m

The “Cumulation” Rule – Scenario 2 Smaller sized investments

Total Investment possible over a 4-year period:-

Assisted Area €4.7m Rest of North West €3.8m

State Aid sector limitations

• GBER gives no ruling on businesses whose turnover is only partially to customers in a restricted sector

• UK Government recently obtained a retrospective State Aid approval for EIS and VCT schemes

• These contained a rule that no more than 20% of a business’s turnover could be to a restricted sector, if this business was to be EIS/VCT compliant

• BIS consider it reasonable to conclude that a similar 20% rule might sensibly be applied to Risk Capital initiatives such as JEREMIE

• However, this is a “risk based” approach, there is no regulatory concession

EIB Sector Limitations• EIB loan agreement gives no ruling on businesses where

turnover is only partially to customers in a restricted sector.

• Verbal indications (which we are trying to get in writing) are that it is only businesses with turnover solely in a restricted sector which would be caught.

Examples:- OKRestricted

• Aero Engines component mfg, some engines

used on military planes. √

• Motor vehicle component mfg, some cars sold

by OEM to police forces. √

• Mobile phone decoder, used by police forces

and other security agencies √

ERDF Sector Limitations

• Still awaiting further information from ERDF

• Will provide information on website

Share acquisitions

• “Banned” under ERDF and EIB

• Assets and liability acquisitions not banned

• EIB willing to allow share purchases where present owner is retiring

• ERDF – still awaiting further information– Less of an issue than EIB due to type of sector

Undertakings in Difficulty

Defined in GBER Chapter 1, Clause 7

• Businesses under 3 years old have to be fulfilling the criteria for being the subject of collective insolvency proceedings, to be barred from taking state-aided risk capital

• Businesses over 3 years old alternatively have to have lost 50% of their capital (share capital, reserves and shareholder loans) AND that 25% has been lost in the preceding 12 months

Note: consider carefully the investment structure on start-ups and early stage investments

Panel – Questions & Answers

Timetable

• Clarifications up to 24th February

• Tenders due By noon 5th March

• Validation Visits 22nd March – 9th April

• Interviews 12th - 16th April

• Framework Agreements signed 13th May

• Mini Competition End of May

• Award of Funds Mid June