private & confidential © 2013 hm government european structural and investment funds delivery...
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Private & confidential © 2013 HM Government
European Structural and Investment Funds Delivery Conference
Friday 17th May 2013
Financial Engineering Instruments
Private & confidential © 2013 HM Government
Models for Financial Instruments:
• Access to Finance• Social Housing• Local Impact Fund• Urban Development
Private & confidential © 2013 HM Government
SME Competitiveness: Access to Finance
Private & confidential © 2013 HM Government
The unavailability of finance options appears to be particularly problematic in the UK
SME Competitiveness is one of the top 4 priorities for ERDF The Commission has recommended that the UK focus on Access to Finance
as a country specific recommendation Analysis of the UK against European comparators shows that SME
investment is relatively small in absolute terms, and also as a share of total private sector investment.
Private & confidential © 2013 HM Government
SME lending in real terms has fallen 25% since its peak in 2009 and is now almost 10% lower than in 2006
There has been a reduction in demand - confidence to borrow and invest has been held back
Impact of the Financial Crisis
There are a number of constraints on bank lending and equity finance, which are structural and long term
Demand for finance can be expected to increase as firms’ confidence in future economic performance improves
Early stage SMEs are particularly affected but can have a disproportionate impact on growth
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Access to finance is identified as being amongst the biggest obstacles to business success
6Base: All SME Employers (3817/4768)
• Main obstacles include:– Economy (38%)– Taxation etc (12%)– Competition in market
(10%)– Cash flow (10%)– Regulations (8%)– Obtaining finance (7%)– Shortage of skills generally
(2%)– Recruiting staff (2%)
Source: Small Business Survey 2012
Private & confidential © 2013 HM Government
Demand side factors Only around one in ten SMEs apply for a loan or overdraft
each year
Banks report that demand for finance has declined and the use of external finance by larger SMEs (10 employees or more) has declined significantly
Around 8% of SMEs would like a loan but are dissuaded from applying
Younger firms and those with turnover of less than £10m are less able to substitute other forms of finance
Whilst demand is muted, many businesses are still seeking finance
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Type of finance sought – by employment size
16%
4%
17%17%
44%
6%9%
14%
28%
41%
5%6%7%
37%
50%
6%7%8%
35%
48%
Asset financeGrantLeasing/HPOverdraftBank loan
Medium
Small
Micro
All that applied
Base: All SME Employers that sought finance in the last 12 months (1409). H6
Source: Small Business Survey 2012
Bank debt is the most important source of finance for UK SMEs
Loan rejection rates in the UK in 2011 were twice those in France and Germany. 24% of SMEs applying for an overdraft and 34% for a loan ended the borrowing process without a facility
Margins for facilities have also increased
Supply side issues: Debt Finance
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Venture Capital and Angel investments are important for early stage high growth businesses lacking track record or collateral and seen to be higher risk
The private sector has migrated away from the smaller end of the market towards larger private equity deals
BVCA Reported equity investments
050
100150200250300350400450500
2007 2008 2009 2010 2011
£mn
LaterStageVCEarlyStage
Start-up
Seed
Supply side issues: Equity Finance
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“Market Failures”
Banking concentration - In 2009, the largest five banking groups held approximately 90% of the SME banking market share
Constraints on supply of long term bank finance – The expense and capital requirements associated with longer term funding make long term finance less attractive
Lack of track record and collateral - Smaller and newer firms find it harder to raise bank finance
Regulatory changes - De-leveraging of bank balance sheets and implementing new regulatory requirements
Equity finance – There is a long recognised structural finance gap, whereby the high costs of due diligence, relative to deal size, make smaller equity investments (around £250k to £5m of investment) uneconomic
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The 2014-20 Funding Period
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We consider the following criteria to be essential in the delivery model for financial instruments for access to finance:
Strategic coherence with national policy A clear and influential role for LEPs Recognition of the fact that this is not a greenfield site Value for money and efficiency Scale as a key requirement Sustainability throughout successive funding rounds and development of market capacity in the long term Operationally workable Allows for re-use of legacy returns across historic regional boundaries Allows for match funding Allows for ERDF compliance
Private & confidential © 2013 HM Government
Venture Capital and Loan Funds have attracted ERDF funding in England since 1995, with a significant number of funds being established as part of the 2000-2006 ERDF programme
In the past key issues have been around: Delays in delivery Lack of strategic fit with economic strategies Fund size Cost of multiple delivery models and fund structures
A 2009 National Audit Office review established that SME schemes generally operate most effectively at sufficient scale; the experience of RDA funds, and of the Regional Venture Capital Fund programme, is that small funds, most with highly-constrained investment criteria, perform worst against their financial and economic output objectives.
Lessons learned from previous funding rounds
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A fund-of-funds approach could build on the existing JEREMIE model
Technology
Mezzanine Loans Plus
Digital & Creative
Energy & Environment
al
Biomedical
£155 million for investment across 6
funds
For the current 2007-13 programme period 3 regions in England established a fund-of-funds structure known as a JEREMIE*. Wales also established a JEREMIE
The three England JEREMIEs combined ERDF funds, EIB match funding and RDA Single Programme Funds
£90 million for investment across
3 main funds
Seedcorn (convertibl
e loans and/or equity)
Business Loans
Equity linked investments
(and mezzanine
loans)
£125 million for investment across
7 funds
Venture Capital
Accelerator (high
growth early
stage)
Growth
Growth Plus
Proof of
Concept
Angel Microloan
* Joint European Resources for Micro to Medium Enterprises
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We believe there are benefits to employing a fund-of-funds structure
Secures match funding at a holding fund level and at sufficient scale to attract EIB funding
Businesses looking for finance will continue to access fund managers in their own areas; local fund delivery is considered to be a key factor
Enables a sufficient scale of fund size to be achieved
Portfolio approach offers a mix of finance
Fund managers can be appointed and monitored rigorously
The fund-of-funds structure is designed to be revolving and recycle legacy returns back
Auditing, reporting and other administration costs are pooled at the holding fund level
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This could look like….
2014-20 Proposed Delivery Models
Holding Fund
Holding Fund
Holding Fund
E.g. Venture Capital
E.g. Mezzanine
E.g. Loan fund
E.g. Sector Specific fund
LEP area LEP area LEP area LEP area
• Local deal origination and delivery
• LEPs determine investment priorities
• Funds invest across LEP group geographies with indicative area targets
LEP area
Holding Fund
National Holding Fund
• Funds can be pre-matched at national or sub-national level
• Operational costs are pooled at holding fund level
• ERDF reporting / auditing requirements are managed by holding fund
1
Private & confidential © 2013 HM Government
Or this could look like…..
E.g. Venture Capital
E.g. Mezzanine
E.g. Loan fund
E.g. Sector Specific fund
Funds invest across England with some form of geographical targeting
• Local deal origination and delivery
• Investment priorities determined by LEP strategies & consultation
National Holding Fund
• Operational costs are pooled at holding fund level
• ERDF reporting / auditing requirements are managed by holding fund
• Funds can be pre-matched at national or sub-national level
2
3
LEPs collaborate to deliver a fund or series of funds covering their combined geographic area
LEPs deliver individual funds to cover their own LEP geography
OR
Private & confidential © 2013 HM Government
Why have we proposed a ringfence? There is a recognised need for scale to deliver value for money and attract match funding
– Small venture capital and loan funds can be very inefficient. Management costs can become disproportionate
– Particularly important for Venture Capital where diversification is essential– Small funds may lack capacity to make further investments in successful companies
ERDF Restrictions– Need for match funding, sustainable management of legacy returns and compliance with
regulations Consistency of approach and provision for businesses
– Avoid a perception that there are different levels of delivery in different parts of the country– We would like to provide a mix of finance across broad areas so that businesses around the
country can access the type of finance that they need. – We want to avoid frustration for businesses linked to boundary issues
Operationally workable for Fund Managers– Restrictive geographical coverage would lead to significant issues appointing fund managers– Attracting fund managers with strong track record is critical to success. – This is about attracting credible fund managers to the area for the long term and proving that
returns can be made Best use of resources
– For LEPs– Ability of HMG to support LEPs
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Financial Instruments:
Social Housing Model Local Impact Fund (Social Sector) Urban Infrastructure Funds
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Social Housing Model
Buy-in from LEP ERDF and ESF allocations
EIB/Other investment
National Financial Intermediary
Retrofit/new build projects in LEP areas
Retrofit/new build projects in LEP areas
Retrofit/new build projects in LEP areas
Retrofit/new build projects in LEP areas
Private & confidential © 2013 HM Government
Local Impact Fund
Local Impact Fund
LEP ERDF and ESF allocatio
ns
Social sector
organisations
Other national
social investors
Investment
readiness support
Local social
investors
Grant
GrantEquity/debt
Big Society Capital
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Urban Infrastructure Funds
LEP
ERDFOther sources of match funding
Urban Infrastructure Fund * (Private Sector Fund Manager)
Projects Projects Projects Project level investment* In large LEPs, there maybe sufficient scale to create
discrete low carbon and urban development funds with different fund managers
Investment returns
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We are keen to hear your views
Q&A