Enterprise Capital Fund Seminar The Second Round

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Enterprise Capital Fund SeminarThe Second Round
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Content

• Pathfinder Round and Current Status
• Changes to the Bidding Process
• Changes to the Legal Agreements
• Distribution of Returns
• ECF Myths
• What is key to Government
• Common Mistakes from the Pathfinder Round

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Current Status

• Additional 100m announced in Budget 2006
• Second round competition launched November 06,
  closing end February 07.
• Expecting to award ECF status to around 3 funds.
  
• Further round later in 2007.

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Pathfinder Round

• Objective to increase the availability of growth
  capital for 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.

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Pathfinder Round

• Bidding for Pathfinder round launched July 2005
  with closing date of 19 September 2005
• 45 bids in the pathfinder round.
• 5 funds launched
• Amadeus Capital Fund
• Catapult Growth Fund
• IQ Capital Fund
• Seraphim Capital Fund
• Sustainable Technology Fund

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The Bidding Process 1st Stage

• Mandatory information to be provided in 5 page
  summary bid
• Details of investment strategy
• Target sectors
• Target stage of investment
• Investment structures
• Summary cvs of key executive team
• Details of private investors and level of
  commitment

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The Bidding Process 1st Stage

• Continued
• Details of all fees charged to the fund investee
  company
• Co-investment agreements (if any)
• Length of investment period
• Proportion reserved for follow on investment

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The Bidding Process 1st Stage

• Continued
• Amount of Government investment required
• Level of fixed profit share to Government
• Acknowledge and agree the terms in the Limited
  Partnership Agreement
• Acknowledge and agree to the conditions of the
  Bidding Guidance.
• 3/3

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The Bidding Process 2nd stage

• Selected bids will be asked to provide
  supplementary information by end of April 07
• Supplementary information requirements detailed
  in bidding guidance
• Iterative process

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The Bidding Process 2nd stage

• The second stage will go into more detail and
  include
• Investment team track record
• Relevant skills and expertise of investment
  executives including investee mentoring
  capabilities
• Financial projections and budgets for the fund
• Fee structures

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The Bidding Process 2nd stage

• Continued
• Nature and extent of fund due diligence process
• Ability to target the equity gap
• Conflict of interest policy
• Details of the private investors

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Main Changes to the Legals

• Carried interest following removal of the General
  Partner.
• Reporting requirements of the ECF Manager
  clarified and now follow BVCA reporting template.
• Clearer treatment of the 85 rule in distribution
  of returns.

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Distribution of Returns

• Prioritised return to Government (4.5 fixed)
• Repayment of capital
• Distribution of profits
• Fixed profit share to Government
• Profit share to private investors
• Carried interest to manager
• Hurdles and catch ups can be incorporated (not
  from Government profit share).

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Some ECF Myths

• Government only wants Angel funds. FALSE
• Government wants funds to cover broad
  geographical areas/specific areas. FALSE
• Only worth bidding if you already run a
  government programme. FALSE
• Its only for high tech funds. FALSE
• ECFs must have all their private investment.
  FALSE
• You have to know what youre doing. TRUE

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What is Key for Government.

• Fund is targeting the equity gap
• Commitment of private investors
• Sound, defined investment strategy
• Strength of investment team and track record
• Value for money

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Common Mistakes from the Pathfinder Round

• Funds that were not ECFs
• No Government profit share
• Wanting Government to cornerstone the fund
• Weak private investment commitment
• Failure to define ultimate fund size and closing
  date
• Not justifying investment strategy unnecessarily
• Looking to press public sector buttons.
• 1/2

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Common Mistakes from the Pathfinder Round

• Not covering obvious conflict of interest issues
• Not justifying cost structure
• Reliance on hidden fees and costs
• Failure to address the equity gap
• 2/2

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Questions
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Enterprise Capital Fund SeminarThe Second Round