The British Business Bank’s £130m Investment Fund for Wales (IFW) deployed £10m of capital to support the growth of indigenous firms in its maiden year as it looks to accelerate deal flow.
The economic development bank of the UK Government launched the fund last November, alongside similar funds to back the scaling-up plans of businesses in Northern Ireland and Scotland. The bank also operates a number of established regional specific funds in England, including its Midlands Engine and Northern Powerhouse funds.
The IFW consists of £50m assigned for equity investments up to £5m per deal, which is funded managed by Foresight, a small loans fund from £25,000 to £100,000, managed by BCRS Business Loans, and a larger debt fund up to £2m, managed FW Capital – a subsidiary of the Development Bank of Wales.
Some £40m of the £130m was deliberately held back in reserve. However, British Business Bank director, with responsibility for funds in the devolved nations and regions, Mark Sterritt, said the intention is to start a phased release of the balance towards the end of the IFW’s just commenced second year. The fund has a five year deployment time frame and a further five year realisation period. Management fees are included in the £130m allocation.
On the performance of the IFW to date, Mr Sterritt said: “We are really pleased at the impact so far and are delighted that we have already reached the £10m investment milestone with all three elements on or ahead of target. When the fund was launched it was new to the marketplace so you would expect a little bit of a lead in time.
“Also BCRS (Midlands-based) didn’t have a footprint in Wales previously and similarly Foresight, although they had done deals in Wales before, didn’t have an office in Wales, which they now have in Cardiff, as well as a presence at M-Sparc in Anglesey. We are very comfortable and happy with the selections we have made in Wales across the full programme. And in years two and three we would expect an acceleration in deployment.”
On the yet to be deployed capital, Mr Sterritt said: “The reason why we held back £40m in what we call an investor reserve, which we have done across all our funds, is that one, it gives a bit of incentive for managers to perform very strongly. It also gives flexibility, so if market conditions change substantially we have a significant amount of reserve where we could potentially deploy a whole new fund if needed in the marketplace.
“However, that really hasn’t come around, so at this stage the plan is to deploy that capital amongst the three. What the split will be, it is difficult to say, but all three managers will be making their pitches to us. Conversations are beginning to happen now, as we have to be realistic and give enough time for it to be deployed over the remaining four years. So, now in the second year of the fund, I think we will be in a position to make an allocation towards the end of it and then the three years beyond that to deploy the remaining capital.”
Mr Sterritt said he is confident that the IFW will leverage more co-investment on deals from private sector funders, as well as investing alongside other publicly funded players in Wales with the Development Bank of Wales and the £50m Innovation Investment Capital (IIC) Fund from the Cardiff Capital Region, which is managed by Capricorn.
He added “I am confident that deals in the future will include more private capital and hopefully in addition with those indigenous funders (development bank and IIC fund) as well, where I know there are good conversations happening. The reason why I have confidence is that the economic data is there to say that deals get done, but also speaking to all three managers they are spending a lot of time out and about across the whole of Wales. It is not a matter of sitting there and waiting for deals to come in. We were confident launching the fund that the demand was there and are confident that there is significant and quality deal flow across the whole of Wales.”
To date the equity element of the IFW has made three investments. While there was a small element of private sector investment alongside, the lion’s share in co-investment on two of them was from the British Business Bank’s Midlands Engine Fund – due to the recipient companies in Ever Trek and Assured Insights having a presence in both Wales and the Midlands.
However, its latest equity deal into Caerphilly-based Drone Evolution, with a £800,000-plus investment, was a round not followed by the Development Bank of Wales, which as a result has seen its equity stake diluted.
Mr Sterritt said there is potential for the IFW to secure additional funding, while in the future also seeing other British Business Welsh specific funds. In a recent boost the bank is now able to reinvest returns from deals, both debt and equity, that previously went to the Treasury. The bank is also being positioned as the conduit to deploy potentially billions from both public and private pension funds – as part of the UK Government’s strategy of getting pension funds to mandate more capital to support the growth of UK firms.
Of the £90m already allocated, there are minimum targets (totalling 50% of the amount) to invest in the four regions of Wales. The highest is for south-east Wales, due to having the biggest business population, at just under £19m. It is anticipated that similar geographical targets on value will be applied to the £40m investor reserve when deployed.
While the fund managers will receive management fees from the £130m, Foresight will also take a share of any upside from profitable equity exit deals under what is a commercial fund. That is likely to be within the industry norm of around 20%.
On the potential to reinvest returns back into the fund and the potential for new funds for Wales in the future, Mr Sterritt said: “The aspiration is this fund will be successful and give us commercial returns. The ambition, and this is certainly mine, is to have successful funds in the devolved nations within the bank.
“When we first launched regional funds in England, like the Midlands Engine and Northern Powerhouse, they secured mid-term top ups as they were successfully deploying capital, and that gave us the mandate to go and do successor funds there. If we can demonstrate there is a commercial opportunity we will be looking to extend these funds (devolved nations).”
If adding further capital to the existing IFW, the British Business Bank would likely split it out amongst the existing fund managers, providing they continue to perform in line with expectations. However ,the bank would still have discretion to introduce a new fund manager(s).
If a brand new fund is launched in Wales, it would be opened up to the marketplace via requests for proposals.
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