Improving Access to Finance for SMEs

1
Improving Access to Finance for SMEs

• Access to Finance/Investment Fund Management
  Directorate

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Investment Fund Management/Access to Finance

• Key principles
• Strong analytical policy base
• Transparent consultation
• Identification of market weaknesses and gaps
• Use of market mechanisms

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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.

4
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 industrys 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

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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

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Range of Programmes Currently Managed by IFM

• Small Firms Loan Guarantee
• Phoenix Fund for CDFIs
• UK High Tech Fund
• Regional Venture Capital Funds
• Bridges Community Development Venture Capital
  Fund
• Early Growth Funds
• Enterprise Capital Funds

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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 lt2 years old,
  otherwise 250,000, maximum term 10 years.
• Use currently around 7,000 loans per annum.

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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.

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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.

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Investment Fund ManagementRegional Venture
Capital Funds

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

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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

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Investment Fund ManagementEarly Growth Funds
Co Investment Model

• Government invests alongside private investors /
  business angels
• Government investment on terms pari-passu with
  private investors

Private investors
Government
Investment / Profits
Investment / Profits
SMEs
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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.

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Enterprise Capital Funds

• Objectives
• Increase 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.

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Enterprise Capital Funds

• 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
Government
Private Investors
Fund
Investment/profit
Profit share
Investment profit
SME
SME
SME
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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

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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)