Improving Access to Finance for SMEs

Access to Finance/Investment Fund Management Directorate

Investment Fund Management/Access to Finance

• Key principles:

Strong analytical policy base

Transparent consultation

Identification of market weaknesses and gaps

Use of market mechanisms

Small Business Investment Taskforce

• Expert group considering the financing needs of SMEs, reports to DTI and Treasury

• Full and detailed literature review of equity funding for High Tech SMEs. Main findings include:• Size of funds and the age of investments were important,

as was the management pool making the investments. • Specialised VC firms, focussing on investments in a

limited number of industry sectors, tend to perform better than generalist VCs with a broad sector focus

• European VC firms tend to invest in earlier stage companies compared to their US counterparts. UK funds focus on later stages more than other European VC.

Risk Capital Conference 2005

• Joint UK Presidency and EU event. Bringing together international policy makers and experts. Conclusions used to support Lisbon agenda. (Innovation and Growth) Draft Conclusions:

• Policy Makers need to: • recognise that SCALE is vital to successful VC investing as portfolio

companies need to be adequately funded and returns can only be maximised by funding from beginning to exit.

• scale will generate and build experienced fund managers but scale cannot be generated by many small funds, dissipating management skills and foregoing economies of scale and scope

• Understand that the VC industry’s move to later stage is probably necessary in order that fund managers can generate the returns which will allow them to raise the larger funds they need in future

Risk Capital Conference 2005

• Policy Makers need to: • Recognise that not every decision not to invest is a market failure. VC is

not necessarily an instrument to achieve a broad variety of public policy desires.

• Accept that the market makes the best investment decisions and needs support during difficult times in order to achieve sustainability

• Understand the need to work with markets, not to compete with them or to distort them

Range of Programmes Currently Managed by IFM

• Small Firms Loan Guarantee

• Phoenix Fund for CDFI’s

• UK High Tech Fund

• Regional Venture Capital Funds

• Bridges Community Development Venture Capital Fund

• Early Growth Funds

• Enterprise Capital Funds

Small Firms Loan Guarantee - History

• Operated in conjunction with all leading high street banks and others.

• Over 100,000 guarantees issued over 24 years to enable almost £4bn of lending to over 90,000 businesses.

• Lending decision is commercial.

• SFLG covers 75% of lenders exposure, with borrower paying 2% premium to HMG.

• Maximum loan £100,000 for SMEs <2 years old, otherwise £250,000, maximum term 10 years.

• Use currently around 7,000 loans per annum.

Small Firms Loan Guarantee – Changes Following Review

• A portfolio approach.

• Performance reviewed in annual SBS audit and bilateral allocation negotiations with lenders.

• All decisions regarding use of the guarantee delegated to lender.

• Maximum loan size £250,000 for all eligible SMEs.

• 75% guarantee to lender and 2% premium to HMG remain.

• Removal of “connected persons” rule and other restrictions.

• Open to SMEs under five years old.

Investment Fund ManagementUK High Technology Fund

• Designed to address market failure in the provision of venture capital to early stage, high technology companies.

• Focussed on attracting new institutional investment into technology sector and demonstrating commercial returns possible from this asset class.

• Cornerstone investment of £20 million from UK Government, leveraging £106 million from institutional investors.

• Invests in specialist technology funds.

• Launched in 2000 with 13 year life.

Investment Fund ManagementRegional Venture Capital Funds

• Designed to address market failure in the provision of venture capital below £500,000.

• UK Government’s investment subordinated to attract investors.

• 9 Regional Venture Capital Funds investing on a commercial basis in SMEs across all of the English regions. Details of individual funds available on www.sbs.gov.uk

• UK Government investment of £80 million attracting £176million from private investors and EIF.

Investment Fund ManagementEarly Growth Funds

• Aim: To find ways of enabling the provision of small amounts of equity finance in ways that have the potential to be commercially viable

• Method: An open bidding process. SBS willing to take risk of supporting innovative models

• Result: Two models, angel co-investment and Quasi-equity

Investment Fund ManagementEarly Growth Funds – Co Investment Model

Private investors Government

SMEs

• Government invests alongside private investors / business angels

• Government investment on terms pari-passu with private investors

Investment / Profits Investment / Profits

Investment Fund Management Early Growth Funds - Quasi Equity

Accelerator Fund – Operated by Finance South East

• Loans of up to £100,000 with equity ‘kicker’ of a levy on future turnover

• Rate higher than average to reflect higher risk

• Loans made at above EU ‘reference rate’ (base + 6% min)

• Tied in with business support package to improve the chances of success for each SME.

Enterprise Capital Funds

ObjectivesIncrease the availability of growth capital to SMEs affected by the ‘equity gap’. By:

• encouraging an increased flow of private capital into the equity gap, by adjusting the risk-reward profile for private investors making such investment; and

• Lowering the barriers to entry for entrepreneurial risk capital managers by reducing the amount of private capital needed to establish a viable venture fund.

Enterprise Capital Funds

Fund

Government

Based on US SBIC model but adapted for UK - Investment of up to £2m in SMEs

• Government investment as a loan to fund• No downside protection – instead addresses risk-return

issue with enhanced return for investors. • Open to regulated managers or business angel

syndicates to run funds‘Loan’

Profit share

Private Investors Investment/profit

SME SME SME

Investment profit

Enterprise Capital Funds

• EU approval gained on 3 May 2005

• Bidding for Pathfinder round launched July 2005 with closing date of 19 September

• 45 bids to run one of up to five funds. Due diligence process underway.

• First operational funds likely in FY 06-07. If successful then likely to be further rounds.

• Details will be on www.sbs.gov.uk/financegap

Other things…

• Support the British Business Angels Association to:• Drive up standards in Business Angel Networks• Improve visibility of Business Angel finance• General industry promotion• BBAA website at www.bbaa.org.uk

• No nonsense guides to Finance• Similar to No nonsense guide to starting a business• Two guides – one targeted at ‘High growth’ SMEs• Download or order from www.businesslink.gov.uk (type “no

nonsense” into the search box)