European Structural and Investment Funds
Delivery Conference
Friday 17th May 2013
Financial Engineering Instruments
Private & confidential © 2013 HM Government
Models for Financial Instruments:
•
•
•
•
Access to Finance
Social Housing
Local Impact Fund
Urban Development
Private & confidential © 2013 HM Government
SME Competitiveness: Access to Finance
Private & confidential © 2013 HM Government
The unavailability of finance options appears to be
particularly problematic in the UK
 SME Competitiveness is one of the top 4 priorities for ERDF
 The Commission has recommended that the UK focus on Access to Finance as a
country specific recommendation
 Analysis of the UK against European comparators shows that SME investment is
relatively small in absolute terms, and also as a share of total private sector
investment.
Private & confidential © 2013 HM Government
Impact of the Financial Crisis
 SME lending in real terms has fallen 25% since its peak in 2009
and is now almost 10% lower than in 2006
 There has been a reduction in demand - confidence to borrow
and invest has been held back
 There are a number of constraints on bank lending and equity
finance, which are structural and long term
 Demand for finance can be expected to increase as firms’
confidence in future economic performance improves
 Early stage SMEs are particularly affected but can have a
disproportionate impact on growth
Private & confidential © 2013 HM Government
Access to finance is identified as being amongst the
biggest obstacles to business success
• Main obstacles include:
– Economy (38%)
– Taxation etc (12%)
– Competition in market (10%)
– Cash flow (10%)
– Regulations (8%)
– Obtaining finance (7%)
– Shortage of skills generally
(2%)
– Recruiting staff (2%)
Source: Small Business Survey 2012
Private & confidential © 2013 HM Government
Base: All SME Employers (3817/4768)
6
Demand side factors
 Only around one in ten SMEs apply for a loan or overdraft each year
 Banks report that demand for finance has declined and the use of
external finance by larger SMEs (10 employees or more) has declined
significantly
 Around 8% of SMEs would like a loan but are dissuaded from applying
 Younger firms and those with turnover of less than £10m are less able
to substitute other forms of finance
 Whilst demand is muted, many businesses are still seeking finance
Private & confidential © 2013 HM Government
Supply side issues: Debt Finance
 Bank debt is the most important source of finance for UK SMEs
 Loan rejection rates in the UK in 2011 were twice those in
France and Germany. 24% of SMEs applying for an overdraft and
34% for a loan ended the borrowing process without a facility
Type of finance sought – by employment size
 Margins for facilities have also increased
Medium
Small
50%
48%
Micro
44%
41%
All that applied
37%
35%
28%
17%
17%
14%
8% 7%
Bank loan
Overdraft
16%
7% 6%
Leasing /HP
9%
Grant
4%
6%
6%
5%
Asset finance
Source: Small Business Survey 2012
Private & confidential © 2013 HM Government
Base: All SME Employers that sought finance in the last 12 months (1409). H6
8
Supply side issues: Equity Finance
£mn
 Venture Capital and Angel investments are important for early stage
high growth businesses lacking track record or collateral and seen to
be higher risk
 The private sector has migrated away from the smaller end of the
market towards larger private equity deals
BVCA Reported equity investments
500
450
400
350
300
250
200
150
100
50
0
Later
Stage
VC
Early
Stage
Start-up
Seed
2007
Private & confidential © 2013 HM Government
2008
2009
2010
2011
“Market Failures”
 Banking concentration - In 2009, the largest five banking
groups held approximately 90% of the SME banking market
share
 Constraints on supply of long term bank finance – The
expense and capital requirements associated with longer term
funding make long term finance less attractive
 Lack of track record and collateral - Smaller and newer firms
find it harder to raise bank finance
 Regulatory changes - De-leveraging of bank balance sheets
and implementing new regulatory requirements
 Equity finance – There is a long recognised structural finance
gap, whereby the high costs of due diligence, relative to deal
size, make smaller equity investments (around £250k to £5m of
investment) uneconomic
Private & confidential © 2013 HM Government
The 2014-20 Funding Period
Private & confidential © 2013 HM Government
We consider the following criteria to be
essential in the delivery model for financial
instruments for access to finance:










Strategic coherence with national policy
A clear and influential role for LEPs
Recognition of the fact that this is not a greenfield site
Value for money and efficiency
Scale as a key requirement
Sustainability throughout successive funding rounds and development of
market capacity in the long term
Operationally workable
Allows for re-use of legacy returns across historic regional boundaries
Allows for match funding
Allows for ERDF compliance
Private & confidential © 2013 HM Government
Lessons learned from previous funding rounds
 Venture Capital and Loan Funds have attracted ERDF funding in
England since 1995, with a significant number of funds being
established as part of the 2000-2006 ERDF programme
 In the past key issues have been around:
 Delays in delivery
 Lack of strategic fit with economic strategies
 Fund size
 Cost of multiple delivery models and fund structures
 A 2009 National Audit Office review established that SME
schemes generally operate most effectively at sufficient scale;
the experience of RDA funds, and of the Regional Venture
Capital Fund programme, is that small funds, most with highlyconstrained investment criteria, perform worst against their
financial and economic output objectives.
Private & confidential © 2013 HM Government
A fund-of-funds approach could build on the existing JEREMIE
model
 For the current 2007-13 programme period 3 regions in England
established a fund-of-funds structure known as a JEREMIE*. Wales also
established a JEREMIE
 The three England JEREMIEs combined ERDF funds, EIB match funding
and RDA Single Programme Funds
£125 million for
investment across 7
funds
Technology
Growth
Angel
Accelerator
(high growth
early stage)
Microloan
£90 million for
investment across 3
main funds
£155 million for
investment across 6
funds
Growth
Plus
Venture
Capital
Mezzanine
Loans Plus
Proof of
Concept
Biomedical
Digital &
Creative
Energy &
Environmental
Seedcorn
(convertible
loans and/or
equity)
* Joint European Resources for Micro to Medium Enterprises
Private & confidential © 2013 HM Government
Business Loans
Equity linked
investments (and
mezzanine loans)
We believe there are benefits to employing a
fund-of-funds structure
 Secures match funding at a holding fund level and at sufficient scale to
attract EIB funding
 Businesses looking for finance will continue to access fund managers in their
own areas; local fund delivery is considered to be a key factor
 Enables a sufficient scale of fund size to be achieved
 Portfolio approach offers a mix of finance
 Fund managers can be appointed and monitored rigorously
 The fund-of-funds structure is designed to be revolving and recycle legacy
returns back
 Auditing, reporting and other administration costs are pooled at the holding
fund level
Private & confidential © 2013 HM Government
2014-20 Proposed Delivery Models
 This could look like….
1
• Funds
can be prematched at national or
sub-national level
National Holding Fund
• Operational
Holding Fund
E.g. Venture
Capital
Holding Fund
Holding Fund
E.g. Mezzanine
E.g. Loan
fund
costs are
pooled at holding fund
level
Holding Fund
• ERDF reporting /
auditing requirements
are managed by
holding fund
E.g. Sector Specific
fund
• Local
LEP area
LEP area
LEP area
LEP area
LEP area
deal origination and
delivery
• LEPs determine investment
priorities
• Funds invest across LEP group
geographies with indicative area
targets
Private & confidential © 2013 HM Government
Or this could look like…..
• Operational
costs are
pooled at holding fund
level
• ERDF reporting /
auditing requirements
are managed by
holding fund
2
• Funds
can be prematched at national or
sub-national level
National Holding Fund
E.g. Venture
Capital
E.g. Mezzanine
E.g. Loan
fund
E.g. Sector Specific
fund
• Local
deal
origination and
delivery
Funds invest across England with some form of geographical targeting
• Investment
priorities determined
by LEP strategies &
consultation
3
LEPs collaborate to deliver a fund or series of funds
covering their combined geographic area
Private & confidential © 2013 HM Government
OR
LEPs deliver individual funds to cover their own
LEP geography
Why have we proposed a ringfence?
There is a recognised need for scale to deliver value for money and attract match funding
– Small venture capital and loan funds can be very inefficient. Management costs can become
disproportionate
– Particularly important for Venture Capital where diversification is essential
– Small funds may lack capacity to make further investments in successful companies
 ERDF Restrictions
– Need for match funding, sustainable management of legacy returns and compliance with
regulations
 Consistency of approach and provision for businesses
– Avoid a perception that there are different levels of delivery in different parts of the
country
– We would like to provide a mix of finance across broad areas so that businesses around the
country can access the type of finance that they need.
– We want to avoid frustration for businesses linked to boundary issues
 Operationally workable for Fund Managers
– Restrictive geographical coverage would lead to significant issues appointing fund managers
– Attracting fund managers with strong track record is critical to success.
– This is about attracting credible fund managers to the area for the long term and proving
that returns can be made
 Best use of resources
– For LEPs
– Ability of HMG to support LEPs
Private & confidential © 2013 HM Government

Financial Instruments:
 Social Housing Model
 Local Impact Fund (Social Sector)
 Urban Infrastructure Funds
Private & confidential © 2013 HM Government
Social Housing Model
Buy-in from LEP
ERDF and ESF
allocations
EIB/Other
investment
National Financial
Intermediary
Retrofit/new
build
projects in
LEP areas
Private & confidential © 2013 HM Government
Retrofit/new
build
projects in
LEP areas
Retrofit/new
build projects
in LEP areas
Retrofit/new
build projects
in LEP areas
Grant
Local Impact Fund
LEP ERDF
and ESF
allocations
Other
national
social
investors
Big Society
Capital
Local Impact Fund
Equity/
debt
Social sector
organisations
Private & confidential © 2013 HM Government
Local social
investors
Grant
Investment
readiness
support
Urban Infrastructure Funds
Other sources
of match
funding
ERDF
LEP
Urban Infrastructure Fund *
(Private Sector Fund
Manager)
Investment
returns
Projects
Projects
* In large LEPs, there maybe sufficient scale to create
discrete low carbon and urban development funds with
different fund managers
Private & confidential © 2013 HM Government
Projects
Project
level
investment
We are keen to hear your views
Q&A
Private & confidential © 2013 HM Government