Appendix 1 STAGE 2: INVESTMENT DECISION Project title: London Co-Investment Fund 3-line project description and purpose: A finance scheme focused on leveraging equity funding to help address the funding gap faced by early stage growth SMEs as they emerge from private accelerators, incubators and support programmes. Lead delivery team: Economic and Business Policy with contract management by the ESF Delivery Team. Planned delivery start and end dates: September 2014 June 2023 (could be extended if reinvestment takes place). A- CHANGES 1- What has changed since the Stage 1 Strategic Case was completed? No significant points were raised by IPB on the content of the Stage 1 paper (proposals around SMEWFL s existing governance arrangements raised are discussed in a separate ESF Delivery Team paper). Further progress has been made in terms of: Final draft version of LCIF Business Plan (subject to IPB s comments) produced, including a profile of 25m repayment on an early as possible basis, further evidence around business plan assumptions and further development of the risk register. Independent assessment of LCIF Business Plan assumptions commissioned and completed in collaboration with GLA Finance. Options around different options for how the operational costs could be funded have been modelled.. GVA outcomes remodelled in line with GLA Economics recommendations and re-profiling of investment returns (increasing the estimated surplus from 19m to 20.8m). Work with TfL legal to develop the funding agreement (although external specialist legal support may be required to model and articulate repayment requirements). In the context of earlier SME Finance Funds that the GLA/LDA has supported, lessons learned are being applied, specifically: Strong focus on jobs and growth outcomes in addition to finance provision to SMEs this fund sets out clear targets for jobs and growth outcomes and how these will be measured and managed. Requirement for repayment requirement for the GLA s investment to be repaid to incentivise and drive financial performance with clear timeframes as to how this will be achieved. Lowering costs need to design fund to reduce what can be considerable fund management costs (operating structures, fees and processes). The LCIF model piggybacks on the co-investors expertise and processes and limits the co-investment partners to a 2.5% fee on the amounts they invest. Enabling maximum funding leverage need to ensure the ability to generate the greatest possible amounts of private (and potential public) funding. The LCIF will be required to generate at least 2.9 for every 1 public investment made by the GLA in SMEs and discussions have been initiated on potential sources of European Funding. Seeking leverage on a deal by deal basis this can help ensure quality assurance by ensuring each deal has strong private sector support and is part of the proposed LCIF model.
Ensuring fund is of reasonable size experience of smaller funds is that they can be less effective (particularly in terms of managing risk across an investment portfolio), costs can be disproportionate and it can be difficult to attract the desirable investors and investor commitment. Attracting the right co-investment partners proposing to procure any partners through a competitive procurement process. Learning lessons from previous procurement processes Need to make process effective in attracting and selecting the required investors e.g. early stage funding/venture funds in this instance. Effective governance, performance management and evaluation processes. B- PROJECT DETAILS 2- Proposed timetable and project milestones The fund launch is planned for the autumn however this is reliant on achieving approvals to the timescales indicated below. Should there be any delays in approval this will result in a delay to the fund launch as there are minimum timescales requirements for Funding London to undertake the OJEU procurement of investment partners. Milestones, deliverables and promotional activity GLA lead Planned date 1 Mayoral Decision April 2 Agreement of Contract April/May 3 Procurement of Co-Investors by LCIF April September 4 Announcement: September 5 First investments Late Autumn 6 Independent evaluation 2017/18 7 Repayment begins (approximately) 2020 8 Repayment ends (approximately) 2022 8 Delivery End Date 2023 9 Project Closure (without reinvestment): 2023
3- Key financial facts and issues The table below shows the breakdown of project funding and project costs by calendar year. Note that where costs are indicated as revenue and will be funded from the GPF capital allocation, Funding London intends to reserve the capital against their existing reserves to be repaid from the returns. Operational Costs Funding London have proposed to fund 50% of the operational costs of managing the fund from their existing reserves. This is indicated in the project funding section of the table below and amounts to 1,589,008 over the life of the fund. It should be noted that the ESF Delivery Team will be presenting a paper on SMEWFL governance (alongside this LCIF Stage 2) which will seek approval for SMEWFL to keep the reserves from previous LDA funds that it has managed. It is from these reserves that SMEWFL intends to fund 50% of the operational costs of this fund. Overall this increases the amount of investment that can be made in businesses (as a lower proportion of the 25m is used to cover costs). Should approval not be granted, then the GPF 25m allocation will need to cover 100% of the costs of delivering the London Co- Investment Fund, which will reduce the overall amount of funding to be invested in businesses. Funding London have provided information which sets out what this scenario would look like in financial and project benefit terms alongside the Business Plan. Financials Project Title London Co-Investment Fund Capital or Fixed or 2014 2015 2016 Future Revenue? Variable years Total Description (C/R) (F/V) 0 0 0 0 0 Project Funding GLA C 2,089,744 8,112,748 8,152,156 6,645,352 25,000,000 C Funding London N/A N/A 85,381 136,334 176,491 1,240,533 1,638,739 L Total funding 2,175,125 8,249,082 8,328,647-7,885,885 26,638,739 Project Costs Investments C F 1,967,184 7,650,160 7,650,160 5,682,976 22,950,480 Set up costs C F 43,500 - - - 43,500 Fee paid to investment C F 49,180 191,254 191,254 142,074 573,762 partners (2%) Legal costs C F 44,000 165,000 165,000 112,750 486,750 Operational costs C F 71,261 242,668 322,233 1,948,085 2,584,247 - Total costs 2,175,125 8,249,082 8,328,647 7,885,885 26,638,739 Surplus/(Deficit) - - - - - - - - Confirme d/ Likely/ Possible It is proposed that the GLA invests 25m into the LCIF with returns coming back based upon the performance of the fund. This option would enable the GLA to receive full repayment of the original 25m by 2023 with additional profits (less costs) of an estimated 20.8m to follow depending upon the financial performance of those businesses. This most easily breaks down into funding during the investment phase, exit phase and repayment profile.
Investment phase Year 1 Year 2 Year 3 Quarter to Half year to Half year to Half year to Half year to Half year to Quarter to INVESTMENT PERIOD Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Sep-17 TOTAL Companies added to portfolio 18 35 35 35 35 35 17 210 Non platform 16 30 30 30 30 30 11 177 Annual investment amounts ( ) 1,967,184 3,825,080 3,825,080 3,825,080 3,825,080 3,825,080 1,857,896 22,950,482 Investment fees paid to partners ( ) 49,180 95,627 95,627 95,627 95,627 95,627 46,447 573,762 Legal costs ( ) 44,000 82,500 82,500 82,500 82,500 82,500 30,250 486,750 Total investment cashflows 2,060,364 4,003,207 4,003,207 4,003,207 4,003,207 4,003,207 1,934,594 24,010,994 GPF 50% contribution to op costs ( ) 29,381 49,175 57,159 75,080 70,661 79,919 72,576 433,950 TOTAL GPF outflows 2,089,744 4,052,382 4,060,366 4,078,288 4,073,868 4,083,127 2,007,170 24,444,944 NOTE: 604,786 of GPF is reserved for operational costs between Years five and eight Exit phase (dependent on portfolio performance) In GBP Year 6 Year 7 Year 8 Half year to Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Total Annual exit proceeds - 1x exits 327,864 765,016 765,016 765,016 765,016 765,016 765,016 1,202,168 6,120,129-3x exits 1,311,456 2,622,912 2,622,912 2,622,912 2,622,912 2,622,912 2,622,912 4,590,096 21,639,026-10x exits 1,092,880 2,185,760 2,185,760 2,185,760 2,185,760 2,185,760 2,185,760 5,464,401 19,671,842 Total inflows 2,732,200 5,573,689 5,573,689 5,573,689 5,573,689 5,573,689 5,573,689 11,256,665 47,430,996 Cummulative inflows 2,732,200 8,305,889 13,879,577 19,453,266 25,026,954 30,600,643 36,174,331 47,430,996 47,430,996 Cash reserve for costs 2,099,248 2,099,248 2,099,248 2,099,248 2,099,248 2,099,248 2,099,248 2,099,248 2,099,248 Cummulative operational costs (2,640,049) (2,793,427) (2,930,653) (3,087,832) (3,228,454) (3,386,134) (3,530,237) (3,688,257) (3,688,257) Closing net cash 2,191,400 7,611,710 13,048,173 18,464,682 23,897,749 29,313,757 34,743,342 45,841,988 45,841,988 Repayment of 25m (25,000,000) Net available for re-investment 20,841,988 Estimated repayment profile In GBP Year 6 Year 7 Year 8 Half year to Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Total Closing net cash 2,191,400 7,611,710 13,048,173 18,464,682 23,897,749 29,313,757 34,743,342 45,841,988 45,841,988 Repayment of 25m (subject to timing of exits) 7,000,000 6,000,000 5,000,000 5,000,000 2,000,000 25,000,000 Net available for re-investment 20,841,988 reinvested amounts (subject to full repayment of GPF loan) 4,000,000 5,000,000 11,841,988 20,841,988 Balance carried forward 611,710 48,173 464,682 897,749 313,757 743,342 -
Funding London Renumeration Funding London have proposed that in the event that no decision is taken by the GLA that the LCIF can undertake a second round of investment, that Funding London can receive some form of remuneration for managing the fund. Although this would result in the GLA receiving less of the ~ 20m projected profits on top of the 25m, this would mean that: - Funding London is incentivised to deliver a high performance fund - Remuneration is performance-related - Normally fund managers or holding organisations of funds are remunerated - Funding London only receive this if no second round of investment is approved. It is recommended that consideration be given to Funding London receiving a share of the profits (once costs of the fund have been deducted) proportionate to their level of investment in the fund, which is 6%. According to the base case this would be a profit share of approximately 1.5m. It should be noted that Funding London are proposing to invest 1.6m of their reserves to cover 50% of the operational costs over the life of the fund. Other options which have been considered and could be opted for are: - To pay no fee to Funding London this may disincentivise performance - To pay a performance-related fee that is not linked to Funding London s contribution to fund costs The details of the options will need to be fully considered (in light of advice from GLA finance team, TfL legal and other relevant advisors) and negotiated with Funding London prior to entering into any agreement. It is also likely that any decisions taken around Funding London (SMEWFL) governance which is being considered under another item, may impact on the proposal for remuneration. 4- Staffing and delivery structure GLA Level We propose establishing a board to oversee the development and operation of the LCIF investment fund including senior managers from Economic and Business Policy, Regeneration and the ESF Delivery Unit (involving finance as required). This board will meet regularly to oversee the development and subsequent management of the LCIF project. The London Enterprise Panel would be given regular updates on the fund s performance with the LEP SME Working Group having oversight of the fund s activity and potentially use one of the members with equity experience as a member of the GLA s board (subject to the views of IPB on any SMEWFL governance changes). Funding London and Capital Enterprise have provided business plan of their proposals (including modelling different investment performance scenarios), which has undergone independent assessment and revisions. It is proposed that this business plan forms the basis on which the scheme is monitored and assessed. The ESF Delivery team will manage the day-to-day performance of the LCIF on the basis of the contract between the two parties, ensuring that the project is delivering its agreed outcomes to the agreed timescales, and taking action to address any performance issues. In addition performance will be evaluated through current arrangements involving: Monthly GLA performance review management meetings (with performance and finance). Monthly provision of performance data for project performance updates to the Investment and Performance Board. The GLA will regularly meet with Funding London and Capital Enterprise to review and discuss reports and evaluations of fund performance. Planned reporting and evaluation mechanisms will include: Quarterly LCIF reports detailing management, operational, financial and impact performance against the agreed targets. Annual LCIF reports on performance including wider measures, such as evaluation, case studies, user survey information.
An independent evaluation of the fund by an independent qualified organisation to assess overall performance according to objectives, wider economic and market impact, and returns, including fieldwork analysis, surveys and interviews once returns begin to come back. London Co-Investment Fund Level Funding London s existing governance arrangements are discussed in a separate ESF Delivery Team IPB paper. Governance of the LCIF will be carried out by an advisory board of people with investment market experience to oversee the activities and performance of Funding London and the LCIF investment partners, Chaired by the CEO of Capital Enterprise. Advisory Board membership will be by invitation from the CEO of Capital Enterprise subject to agreement of Funding London and the approval of the London LEP SME Group. This will meet on a quarterly basis. Membership will be reviewed every three years and minutes of all advisory board meetings will be published. The remit of the board will be to: Oversee the delivery and development of, and review the impact of, the LCIF; Give guidance on the evolution of exiting products and or process on the basis of market research, market experience and market feedback; Scrutinise applications by private partners to become co-investment partners of LCIF; Where appropriate, recommend conditions to be attached to any partnership agreements with private sector funds wishing to become LCIF partners; Advise on performance milestones and scrutinise fund performance and the underlying portfolio of investments, against these milestones on a regular basis; and Review annual performance of LCIF and underlying investments and make comments as appropriate on the performance of LCIF against milestones in the year covered by an annual report. The LCIF will have a dedicated team of two full time investment managers, an executive in charge of marketing and promotions and an administrative assistant. In addition Funding London s CEO will supervise the LCIF team and Funding London s management accountant will set up the required financial reporting systems as set out below..
5- Cost benefit analysis and evaluation Costs The cost of the LCIF to the GLA is a repayable 25m. The scheme will seek to leverage a minimum of 2.9 private sector investment for every 1 of public investment into SMEs. Minus costs this will equate to 23m from the Growing Places Fund with 67m from private sector investment partners creating a scheme in excess of 90m. The full costs of the fund are indicated in the financial table under Section 3. The scheme will also leverage as much additional private sector leverage or match funding as possible and could also secure future additional European funding. The fund is expected to generate a net cash of 45.8m over the fund period, translating into a surplus of 20.8m over and above the original 25m investment. Commissioned outcomes Jobs From the 23m invested in 210 SMEs during the first three years, these businesses are expected to generate 2,653 jobs within five years from receiving the investment as set out in the table below. These job numbers reflect Funding London and Capital Enterprise s calculations based upon the experience of early stage investors. They report that their investee businesses go on to create between 15 and 20 jobs over five years. By assuming that an average of 17 jobs are created within the first three years of investment, a further four are created in the fourth year of investment and a further seven are created within the fifth year of investment. Based upon an assumption of a 33% failure rate modelled over time, the combination of the jobs created after each year from investment results in annual job creation numbers is modelled as below. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Jobs created 128 247 357 429 637 527 327 Cummulative 128 376 733 1,162 1,799 2,326 2,653 Furthermore, the of the first cohort of 210 London SMEs who will receive investment from the LCIF and its private sector partners, it is forecasted that 140 businesses (67% of the total) will survive beyond five years, hence to the maturity of the investment. These surviving businesses are estimated to create the bulk of 2,653 jobs over the period between 2015 and
2022. So of the total jobs created, 2,380 or nearly 90% are expected to continue beyond the investment period: Surviving companies GVA Calculations - base case assumptions 2015 2016 2017 2018 2019 2020 2021 2022 Basis Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Surviving companies 64 123 178 164 151 143 140 Surviving jobs 128 366 695 1,068 1,624 2,088 2,380 GVA from employment (1) 55,000 7,040,000 20,130,000 38,225,000 58,740,000 89,320,000 114,840,000 130,900,000 Total GVA 7,040,000 20,130,000 38,225,000 58,740,000 89,320,000 114,840,000 130,900,000 GVA per business 110,000 163,659 214,747 358,171 591,523 803,077 935,000 annual increase per business 110,000 53,659 51,089 143,424 233,352 211,554 131,923 average increase per business across previous years 120,381 138,615 137,500 (1) As per GLA Economics Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 64 123 178 164 151 143 140 Surviving jobs 128 366 695 1,068 1,624 2,088 2,380 Gross Value added Adopting the developing GLA Economics approach to evaluation of 55,000 GVA benefits in relation to each workforce jobs outcome (based on ASHE rather than ABS data which is believed to be more robust) it is estimated that the portfolio will generate approximately 130m of GVA for the London economy over the term of the fund. Furthermore the average SME who receives LCIF investment will achieve an increase in GVA of approximately 137,000 per annum over the term of the fund. GVA is calculated on the basis of the surviving number of companies in each year as well as the surviving number of jobs in each year. The surviving number of jobs in each year is based on the assumptions set out above i.e. a portfolio company that has survived three years will have attached to it, six surviving jobs. However, if that same company fails during year 4, then those six jobs no longer count towards the surviving job total. The table below summarises the GVA calculation from the initial 210 investments: Other wider impacts We believe that the fund will also have a wider unquantified impact upon: Reducing the SME finance gap in London; Improving pipeline of viable SMEs seeking finance (particularly given the wider cohort of approximately 900 SMEs who will receive investment readiness advice and the approximately 600 SMEs who will commence a full due diligence appraisal, many of whom will go on to secure alternative sources of funding); Inward investment benefits from a stronger technology and science business base in London. Complementing the LEP s Science and Technology strategy and projects by addressing lack of risk capital barrier to the growth of these businesses. Strengthening of London s early stage finance and business support ecosystem. Evaluation In addition to the commercial/financial analysis, GLA Economics have assessed the following base case economic appraisal. The key assumptions include the jobs figures from the analysis above and the use of a GVA per job figure based on research by GLA Economics. Moreover the benefits of jobs that are sustained beyond the project are included but only for two years. Benefit Cost Ratio (BCR) is given by 157056 : 88803 = 1.77
Under this evaluation, the Benefit Cost Ratio of the scheme is 1.77 with net proceeds of 68.523 million. This takes into account benefits (jobs, GVA, additionality at 33%) minus costs (capital investments and operational costs and partner funded expenditures) with a discount rate of 3.5% over the lifetime of the scheme. Under an alternative financial model if a 6% discount rate is applied (reflecting a 3.5% interest rate and an additional 2.5% inflation rate) the scheme still delivers net proceeds of 11.367 million. These would equate to circa 10m in 2023 prices. Where a business failure rate level is estimated at 50% the present value of benefits equates to 94.234 million with a Net Present Value of 5.431 million and a BCR of 1.06. The proposal is for the GLA to loan 25 million to enable equity participation in SMEs with high growth potential by leveraging substantial private funding. Many assumptions about performance would be required to enable a robust Cost Benefit Analysis to be carried out. The figures provided by the main partner allow some order of magnitude appraisal to be attempted. On conservative assumptions, the benefits appear likely to exceed costs. On the (alternative) financial appraisal, the proposal also appears to offer a reasonable chance of being worthwhile. It has been possible to further clarify some of the detailed assumptions for the Stage 2 Paper. Important risks that remain central are the failure/survival rate of the businesses invested in and the cash multiples achieved at exit. Note on underlying assumptions The two main variables on which returns are predicated are the failure rate of the portfolio and the cash multiple on portfolio exits. Based upon evidence from potential co-investors, Funding London and Capital Enterprise have forecasted a failure rate of 33% with a 2.07 cash multiple across the portfolio based on predicted exits. They have also provided sensitivity analysis to test the implications of different failure rate and exit scenarios. These indicate that failure rate has the most significant impact upon returns and that a failure rate as high as 50% would still enable repayment of the original 25m by 2023. This assumption of repayment being realised as more of a worst case scenario was also though not unreasonable by the independent assessment of the business plan. In terms of job numbers, the projections from Capital Enterprise and Funding London are based upon information gathered from potential Co-Investors. In terms of the types of business the proposal includes an assumption that early stage businesses in the Science, Technology and Digital sectors have some key characteristics (smart leadership, leverage of technology for innovative product development, ability to impact on markets, exponential growth potential) which make significant job creation possible. Furthermore they are seen as more capitally efficient (in that they have the ability to quickly get to a size and profit level that enables a good return on exit for investors) than other investments. This is reflected in the fact according to early stage technology investor Seedcamp, their first 93 investments since 2007 went on to create over 850 jobs. Evaluation and reporting Regular Reporting Funding London will produce a quarterly progress report detailing the management, operational, financial and impact performance of the LCIF. These findings will be evaluated by the LCIF Advisory Board. Each year the Advisory Board will work with Funding London to produce annual report that will be published on the LCIF website and widely promoted and disseminated. All reports will be submitted to the GLA and London LEP for comment. The evaluation criteria that will be used by the advisory board and Funding London to assess the performance and impact of LCIF will be as follows: Relevance impact on London s economic development and particularly the SME equity finance gap. Economy and efficiency the efficiency of the costs of managing, administering and operating the funds. Effectiveness the extent to which the funds are achieving their targets (returns on investments, number of jobs created, total GVA created) and the critical factors in this respect Coherence and synergies How funds relate to other public sector and private initiatives and if there is any duplication.
Impacts and added value what effect the funds have overall on the London economy. Sustainability How far the funds are likely to become self-sustaining withoutpublic support, orlower amounts of public support. Repayments- An assessment of the funds progress towards securing exits of its investments and thereby its ability to return capital to the GLA/London LEP. Wider evaluation By the end of year 3 the LCIF Advisory Board will commission an independent and suitably qualified organisation to carry out an evaluation study. The objectives of the study, to be set out in the terms of reference, will be to: Undertake a fund level performance appraisal, including an analysis of outcomes, early returns, management and governance of the funds. Assess the firm level impacts, including on turnover, productivity and employment (and whether these are additional/deadweight costs). Assess finance market outcomes, in particular the extent to which the creation of these funds has increased the supply of additional finance. Consider local economy impacts, including any regeneration impacts. Evaluate the position of the LCIF to repay the 25m investment and the potential for reinvestment. 6- Procurement Fund level It is proposed that the GLA will contract with Funding London (with Capital Enterprise Chairing the Advisory Board and promoting the scheme) to act as a holding fund from which a consortium of investment partners will draw down funding when suitable SMEs investment opportunities arise that they are willing to co-invest in with the necessary private funding leverage. This would take the form of a grant funding agreement with repayment terms (being drawn up in consultation with legal and likely to require specialist legal support). Co-investor selection The model is predicated on the selection of co-investment partners who have demonstrated the required level of success and skill in investing in early stage businesses. Partners will be selected on the basis of a competitive OJEU compliant process between April and September. The LCIF Advisory board will appoint members and legal advisers to oversee and work with Funding London s CEO to ensure that the partner procurement process is OJEU compliant and effective in achieving the desired goals. The criteria for partner selection will be established on the basis of consideration of investment strategy, deal process, potfolio management, exit strategy, track record, portfolio performance, potential pipeline, investment management team experience and acceptance of standard LICF agreement. Investment Strategy The LCI will seek to only make investments alongside co-investment partners who have demonstrated an excellent track record in early stage investment in the relevant sectors, demonstrable experience of bringing in co-investment and credible proposals for the deployment of an allocation from the LCIF towards SMEs within a three year period. In order to achieve this objective the LCIF will focus on the following investment criteria when evaluating proposed investments by partners: High growth sectors for London e.g. Science, Technology and Digital. Job creation. Average size of investment per SME. Average private sector leverage meeting the 2.9 of private sector investment for every 1 LCIF investment by the LCIF. Increase in the level of funding received per SMEs facilitated by the LCIF funding. Investment Criteria As the LCIF relies on the skills and expertise of the co-investors to make investment decisions a rigorous process in place to approve co-investments is required to ensuring the aims of the LCIF are delivered via the
strict application of the investment criteria and the due diligence requirements. Set out in the standard partner agreement in order to become a contractual obligation, this includes: Investment amount and terms on same terms and rights as LCIF with appropriate leverage. Due Diligence requirements including company information, growth projections, return generation. Material Change current financials and requirement to give immediate notification of any change. Investment allocation considerations investment milestones, money allocation confirmation. Availability of information all information for partner to be made available to LCIF. Availability of due diligence reports partner reports made available and to be used by LCIF. Alignment with market practice all terms and documents to follow commercial norms for this type of investment.
How investments will be made Execution of investments The investment process will begin when a partner notifies the LCIF of an investment opportunity and confirms that the proposed company matches the LCIF s investment criteria. The partner will submit a notification document containing confirmation of eligibility, the requisite preliminary information on the investee company, due diligence process to be followed, identify of co-investors, and preliminary structure of the deal. The LCIF investment managers will review the notification and confirm whether the proposed investment meets the LCIF s criteria, in which case the partner is notified and the due diligence process begins. Once the partner has completed its due diligence process and is ready to proceed with the investment, the LCIF will review the due diligence documentation and the proposed investment structure and terms including a copy of the proposed investment agreement and other related documentation. Provided all is in order and the investment agreement provides for the LCIF s specific requirements to information rights, the LCIF will proceed with the investment. There will be a minimum two week notice period between the LCIF receiving required information to complete the investment, and the LCIF being able to complete the transaction. Follow-on investments in investee companies will require the same process. Management of investments Review of partner allocations Partner allocations will be made on the basis of each partner s capacity to deploy investments into the target early stage businesses as determined by: each partner s historical investment pace, strength of pipeline, average investment round and proprietary funds available to be invested. Therefore, the agreement with each partner will specify an investment plan which may include, inter alia, target sectors, target coinvestment, target number of companies, target annual investment amounts. The LCIF will review each partner s investments every six monthly to determine whether the allocations are being deployed according to the agreed three year plan. In the event that the LCIF team determines that a particular partner is significantly behind in the deployment of the funding according to the agreed plan, then the LCIF will look to reallocate some or the entire partner s remaining allocation. Outside of performance, there will be other instances where a partner s allocation may need to be redeployed; for example in the case of a partner ceasing to be able to conduct its investment activities. Portfolio monitoring The LCIF s strategy is to invest the 25m allocation over the first three years. Once an investment is made, it will be monitored via the monthly information received, as well as, where appropriate communication with the partners. There will be a specific contractual responsibility for each partner to monitor in accordance with its usual practice each of the investments in which the LCIF participates. Furthermore, it will be each partner s specific contractual responsibility that the LCIF receives the same reports and information as they themselves receive. Finally, the partners will be required to attend a minimum number of the investee companies board meetings to ensure that they are being appropriately monitored. The LCIF will secure the right to attend board meetings as an observer, and the LCIF team retains all rights to vote at investee company meetings or matters requiring shareholder vote/consent. Alternatively it can instruct the partner to act on its behalf according to the LCIF s specific instructions. Portfolio phase The LCIF s strategy is to invest the GPF allocation within the first three years of the fund. Thereafter, the LCIF team will focus on monitoring the performance of investee companies and ensuring all issues are resolved by the partners in compliance with the contractual requirements set out in the partner agreements. Based on the LCIF consortium s views, it is estimated that the portfolio will begin generating proceeds from exits as early as year eight of the fund (five years after investment). Assuming first investments are made towards the end of 2014, first exits would be expected at the end of 2019. On this basis, the portfolio phase
of the LCIF will continue until approx. mid to late 2023. Partner responsibilities during Portfolio Phase The partners will be obliged to advise promptly the LCIF of any material change which comes to its attention in relation to an investee company or in relation to the co-investment made by the LCIF in an investee company. The partners will also be obliged to be available to meet the LCIF Investment Advisory Board once or twice per annum if so requested to discuss the operation of the agreement between the LCIF and the partners and to review each partner s own business and the performance of their underlying investments. 7- Impact assessments; Consultation Equalities Funding London and Capital Enterprise will be required to produce an equalities plan prior to entering into a funding agreement, setting out how they will ensure that the provision of finance and the fund is accessible to all business ownership groups. Evaluations/consultation Independent evaluation of the Business Plan for the London Co-Investment Fund. This said that while some of the performance assumptions in the business plan could be seen as optimistic it is not unreasonable to assume that at least full repayment of the 25m would be achieved as a minimum. SME Finance in London SQW and the Centre for Enterprise and Economic Development Research (November 2013), GLA commissioned research into the SME funding gap in London and how this should be addressed (included interviews with SMEs and finance providers as well as statistical and literature analysis). Business Plan for the London Co-Investment Fund, Funding London and Capital Enterprise (March 2014) included notes of consultation process with London s early stage investment community. Consistent engagement with the LEP SME Working Group, regular updates to the LEP and presentation to the LEP Digital, Science and Creative Technology Working Group. Meetings and discussions with national government, banks and other finance providers and business support organisations, including the Government Business Bank and the European Investment Bank. 8- Top project risks Risk description Mitigation / Risk response Current probability (1-4) 1 Investment, jobs & growth outcomes lower than expected 2 Project delivery problems/delays. Competitive procurement of coinvestors with investment pipeline and expertise. Investment readiness support and pipeline development. LCIF draft business plan submitted, assessed and revised on the basis of GLA input and further specialist advice to be commissioned. Robust project management/governance/reportin g/ monitoring arrangements. Operational model to follow many aspects of Scottish Co-Investment Fund model. Strong GLA/LCIF funding agreement to be drawn up with Current impact (1-4) 2 3 A 1 2 G RAG rating GLA risk owner
3 Projected returns not delivered. 4 Failure to attract or contract with credible, able investment partners appropriate legal advice. Modelling conducted on projected investor performance with sensitivity analysis of the implications of different failure rate/exit scenarios by Funding London/Capital Enterprise. Contract management by GLA. Portfolio management by LCIF to maximise returns from exits. Recruit excellent fund account managers to maximise returns Advisory Board is charged with evaluating the performance of Funding London and the Co- Investment Partners Investment Partners selected must have evidence of successful returns Funding London/Capital Enterprise have confirmed interest of potential partners and intend to promote the OJEU opportunity through all their networks and channels. Ensure robust selection criteria Engage support of the Advisory Board in selecting investment partners 2 4 R 1 3 A 9- Safeguards and exit strategy The 25m funding for the LCIF will be used to provide investments into SMEs over the first three years (2014-2017) with the returns from exits to be received from year five to year nine (2019-2023) and repayment of the 25m to the GLA in full by 2022. This would mean no continuing financial obligations or expectations from this investment. The GLA will ensure that appropriate contract provisions are included in the Funding Agreement to ensure that payment is aligned with specific, measurable, achievable, realistic and time bound milestones and an agreed profile. Where milestones or delivery of investments is delayed or not delivered payment will be withheld. The portfolio stage of the fund relies upon the expertise of the LCIF fund investment executives and Co-Investment partners to manage the process of exits to maximise returns as is normally the case in the market. Any possible delays on exits are therefore offset by the ability to secure the optimal return on investment. It should however be noted that private co-investors, who will be investing significantly greater amounts than the public investment, will be pressing for the best possible combination of speedy exits at the maximum possible rate of return. Throughout the lifetime of the fund the GLA will continually monitor fund performance and manage risks to ensure the best possible return on our investment. This will include undertaking ongoing risk assessment to make sure that any potential issues or delays are avoided or mitigated. The LCIF have proposed that an additional 168 business investments generating another 2,122 jobs with a greater impact on the finance gap could be generated if a second round of investments was undertaken using the 20.8m additional returns once the original 25m allocation has been repaid. We recommend that the proposed evaluation of the fund s performance and impact once returns begin to come back informs a
proposal for re-investment prepared by Funding London and Capital Enterprise to be put to the GLA and a possible decision at this point to undertake a second round of investment.