Finance for Business North East Fund

Andrew Davison

Margaret Fay OBE

Robert DrummondFinance for Business North East

Robert DrummondRobert Drummond

19721972 3i – Leeds & London Regional Director3i – Leeds & London Regional Director

19841984 NatWest Ventures - MDNatWest Ventures - MD

19901990 Grosvenor Ventures – MDGrosvenor Ventures – MD

Chairman of BVCA - TV Series The AdventurersChairman of BVCA - TV Series The Adventurers

19941994 Business Angel, NED & Expert WitnessBusiness Angel, NED & Expert Witness

National Business Angel NetworkNational Business Angel Network

20042004 Chrysalis VCT Plc - ChChrysalis VCT Plc - Ch

20092009 N East Finance –Advisory Board ChN East Finance –Advisory Board Ch

NED of AIM listed and private companiesNED of AIM listed and private companies

Why Build Business on Why Build Business on Debt?Debt?

• Leverage or gearing increases returns Leverage or gearing increases returns but the risk is greaterbut the risk is greater

• Debt avoids dilution of shareholdersDebt avoids dilution of shareholders

• High debt companies can grow faster?High debt companies can grow faster?

• High debt companies are less High debt companies are less interesting to predators?interesting to predators?

Banks & Excessive Risk – Banks & Excessive Risk – Why?Why?

• Bank ExecsBank Execs BonusesBonuses Long Term ?Long Term ?• PublicPublic House price volatilityHouse price volatility Cyclical Economy High TaxCyclical Economy High Tax• GovernmentGovernment Long Term disaster but Long Term disaster but can help re-can help re-

electionelection• InvestorsInvestors Short Term GainsShort Term Gains Long Term LossesLong Term Losses• Large CosLarge Cos Short Term GrowthShort Term Growth Long Term DeclineLong Term Decline• Private EquityPrivate Equity Heads we win tails you loseHeads we win tails you lose• Small CosSmall Cos A mirage that evaporatesA mirage that evaporates• Venture CapitalVenture Capital No benefit except timing skills countNo benefit except timing skills count

What Effect Does It Have on the Community?

Court Cavendish 1988/89 Court Cavendish 1988/89 £26m£26m

DEBT76%

MEZANINE12%

EQUITY12%

UK VC DevelopmentUK VC Development

19451945 Early DaysEarly Days

ICFC, Gresham Trust, Charterhouse, Merchant BanksICFC, Gresham Trust, Charterhouse, Merchant Banks

19701970 Maturity of People & MethodsMaturity of People & Methods

Option demise, Skill sets improveOption demise, Skill sets improve

19801980 Rapid GrowthRapid Growth

US VC Invasion, Law on Buy-outs, BVCA US VC Invasion, Law on Buy-outs, BVCA 11stst BUST UK BUST UK EconomicsEconomics

19901990 Deal Size GrowthDeal Size Growth

LBO Funds, Syndication ends, Advisors rule LBO Funds, Syndication ends, Advisors rule 22ndnd BUST IT & Tech BUST IT & Tech

20002000 Private Equity v Venture CapitalPrivate Equity v Venture Capital

Market driven, Soft Debt, Greed & Short Term Market driven, Soft Debt, Greed & Short Term 33rdrd BUST World BUST World LeverageLeverage

The VC & PE World in Mid The VC & PE World in Mid 20082008

• USA USA 60%60%

• EuropeEurope 30%30%

• Of which UK Of which UK 15% 15%

• Rest of the WorldRest of the World 10%10%

UK UK Private Equity Statistics Private Equity Statistics 20072007

• 1330 UK companies backed with £12bn1330 UK companies backed with £12bn

• £29bn raised - 75% came from overseas mostly US£29bn raised - 75% came from overseas mostly US

• £5.4bn fees – 28% Corp Legal£5.4bn fees – 28% Corp Legal

• 9300 Execs Direct 6200 Indirect 20,000 others 9300 Execs Direct 6200 Indirect 20,000 others

Deals TodayDeals Today

Deal SizeDeal Size Driven ByDriven By Operators Operators

0 - £200K 0 - £200K Micro PrivacyMicro Privacy BAngels SubsidisedBAngels Subsidised

£200k - £2m £200k - £2m V Small Privacy/TaxV Small Privacy/Tax BAs VCTrustsBAs VCTrusts

£2m - £20m£2m - £20m Small Equity Returns Small Equity Returns Trad VC CosTrad VC Cos

£20m-£200m £20m-£200m Medium VC/PrivEqMedium VC/PrivEq TradVC LB FundsTradVC LB Funds

£200m- £2bn£200m- £2bn Large Large Markets/Fees Markets/Fees LBFunds HedgeFLBFunds HedgeF

>£2bn >£2bn V LargeV Large Markets/FeesMarkets/Fees HedgeF Inv HedgeF Inv BanksBanks

2007 UK Venture Capital 2007 UK Venture Capital DataData

Type Number Value

£m Average

£m

Start ups 207 190 0.9

Early Stage 295 244 0.8

Development 595 3,817 6.4

MBO/MBI 349 7,721 22.1

1,330* 11,972

2007 UK Venture Capital 2007 UK Venture Capital DataData

Technology I ndustry Number Value £m Average

£m

Communications 34 203 6.0

Computer Hardware 40 77 1.9

Software/ I nternet 213 240 1.1

Other Electronics 45 35 0.8

Biosciences 49 76 1.5

Medical 116 169 1.5

Other 30 35 1.2

TOTAL 527 835 1.6

Where is the equity gap?Where is the equity gap?

•Rowlands review says £2m-£10mRowlands review says £2m-£10m

• I believe it is £1m-£5mI believe it is £1m-£5mICFC/3i 1970s/80sICFC/3i 1970s/80s

AIM market in good timesAIM market in good times

Few subsidized funds or Angel funding above £1mFew subsidized funds or Angel funding above £1m

Current market ConditionsCurrent market Conditions

Why is Equity so Why is Equity so Contentious?Contentious?• Big Companies can raise it cheaply and Big Companies can raise it cheaply and

shareholders rarely complainshareholders rarely complain

• Small companies are different and fight Small companies are different and fight to retain management and shareholder to retain management and shareholder controlcontrol

• The Equity Gap is real but misunderstoodThe Equity Gap is real but misunderstood

Why is there an Equity Gap?Why is there an Equity Gap?

• Traditionally it is blamed on Risk v Traditionally it is blamed on Risk v RewardReward

• Business Angels and VCs know betterBusiness Angels and VCs know better

• Some believe there is plenty availableSome believe there is plenty available

• Others believe that the suppliers are Others believe that the suppliers are too greedytoo greedy

The real reasons for the Equity The real reasons for the Equity GapGap

• Cost v RewardCost v Reward• MigrationMigration

• Time FactorsTime Factors• Rapid DecisionsRapid Decisions

• Long Investment & Exit CyclesLong Investment & Exit Cycles

• Lemons and PlumsLemons and Plums

• Banking BehaviourBanking Behaviour

Why is there an Equity Gap?Why is there an Equity Gap?

• Perception of Risk/RewardPerception of Risk/Reward

• Short termism by InvestorsShort termism by Investors

• Migration of fund managersMigration of fund managers

• Bad banking and company greedBad banking and company greed

The Cure to the Equity GapThe Cure to the Equity Gap

• No simple solutionsNo simple solutions

• A New ICFCA New ICFC

• Better structured fundsBetter structured funds

• ““Better” Paid ManagersBetter” Paid Managers

• More enlightened investorsMore enlightened investors

• Greater regional involvementGreater regional involvement

Importance of VC v GrantsImportance of VC v Grants

1.1. Direct EmploymentDirect Employment

2.2. Supplier EmploymentSupplier Employment

3.3. Local Wealth CreationLocal Wealth Creation

4.4. Fund RecyclingFund Recycling

Regional VCRegional VC

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GrantGrant

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XX

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Regional Performance Regional Performance IssuesIssues•Organisation Size & Sophistication Inadequate?Organisation Size & Sophistication Inadequate?

•Quality of fund managers affected by migrationQuality of fund managers affected by migration

•Fund limitations - market size and continuityFund limitations - market size and continuity

•Further fund rounds and exit problemsFurther fund rounds and exit problems

•The NE JEREMIE Fund has dealt with all of theseThe NE JEREMIE Fund has dealt with all of these

RMDRMD

20102010

Andrew Mitchell

A New Identity

• Moving forward the JEREMIE Funds will be known as the…

Finance for Business North East Funds

Finance for Business North EastKey Features

• £125m fund (£62.50m EIB; £62.50m ERDF / ONE)

• One North East / ERDF covering fund management costs

• Private Sector model

• 2 Company Structure:

• Holding Fund Company• Legacy Fund Company

• Fund of Funds:

• Currently six Funds……possibly more to come• Continuum of Finance• Flexibility

Objectives

• Investment in circa 850 SMEs

• 5,000+ jobs

• Generating significant private sector co-investment

• Wider impact in marketplace (professional & support services)

• £100m Legacy Fund to secure venture capital provision to 2025

• Relationship with European Investment Bank

• Financial and economic development returns

Finance for Business North East - What’s New?

• Scale & ambition - £125m of capital over five years

• Holistic and coherent response to equity gap for high growth businesses in the region

• Covering all eligible business sectors

• Prospect of significant legacy returns to support future venture capital provision in region over very long term

Finance for Business North East - What’s New?

• First of its kind in the English regions

• Engagement of major multinational partners:-

• European Investment Bank – Triple A* rated institution• EIF – largest investor in early stage VC in EU

• High calibre Investment Advisory Board (including 2 x former chairs of British Venture Capital Association)

• Step-change in regional fund management capacity

• Existing providers (NorthStar Equity Investors & NEL)

• New entrants (IP Group, FW Capital & Rivers Capital Partners)

What Finance for Business North East is not!

• These are investment funds not grant schemes – the managers are looking for a capital return on their investment

• They are not suitable for all businesses – talk to your accountant, lawyer or to Business Link (BENE) if you need advice

• The evaluation and due diligence process will be comprehensive and thorough so things won’t happen overnight (usually 2 months +)

• The funds are there to support long-term future growth - the money cannot be used to rescue difficult situations

Who will be doing what?• North East Finance

- Will manage the ‘umbrella’ holding fund- NOT involved in day-to-day investment decisions

• The fund managers

- IP Group; NorthStar Equity Investors; NEL, FW Capital; Rivers Capital Partners

- All FSA regulated- They will make the individual investment decisions

• ONE NorthEast and the European Investment Bank- Investors / stakeholders- Not involved in operation of the Fund

What does this mean to you?

• Competition and choice on your doorstep

• The most dynamic early-stage venture capital market outside London

• Access to specialist investors with expertise in all sectors and development phases

• New channels to global investors and capital markets

• Availability of VC for the right opportunities through to 2015

• Exciting opportunities for business angels and other co-investors

Finance for Business North East Funds

The Funds

• North East Technology Fund

• £25m fund

• Focussed on technology

• Investing up to £1.25m – mainly equity

• Managed by IP Group

• North East Proof of Concept Fund

• £15m fund

• Primarily technology

• Very early-stage start-ups and projects – investing £20-150k

• Managed by NorthStar Equity Investors

The Funds

• North East Accelerator Fund• £20m fund - all eligible business sectors• Early-stage businesses with high growth potential• Typical investment range £200-750k• Managed by NorthStar Equity Investors

• North East Growth Fund• £20m fund – all eligible business sectors• Established businesses requiring development capital• Typical investment £150-200k – mezzanine & equity• Managed by NEL

The Funds

• North East Growth Plus Fund• £20m fund – all eligible business sectors• Established businesses requiring larger sums of development capital• Typically investing £500k – maximum £1.25m • Managed by FW Capital

• North East Angel Fund• £7.5m fund – all eligible sectors• Start-ups and early-stage businesses• Focus on working with business angels • Typically £50-150k• Managed by Rivers Capital Partners

Duncan Lowery

Funding available up to £1.25M

Marion Bernard

Funding available up to £1.25m

Dr Richard Exley

Funding available between £50,000- £150,000

Barrie Hensby

Funding available between £50,000-£400,000

Peter Wright

Funding available up to £1.25M

Steve Garbutt

Funding available between £50,000-£150,000

Peter Robinson

Helping companies