Key Features

Fund Level

Purpose - The fund must be a privately managed fund, established specifically as an ECF, for the purpose of investing equity or quasi-equity (mezzanine) capital in SMEs affected by the equity gap as defined in the Overview section. Proposed investment strategies must be both commercially viable and attractive to investors.

Location - The fund’s principal place of business must be in the UK.

Structure - Typically Prospective Managers structure their funds as English Limited Partnerships. This is a widely used structure for funds that are managed by professional fund managers on behalf of ‘passive’ third-party investors and is likely to be suitable for most Prospective Managers.

Term - ECFs will be fixed-life funds, extendable only with consent from BBFL and other investors. ECFs are not “evergreen” funds that continually recycle investment returns.

Size - There is no minimum fund size that BBFL will support but Prospective Managers will need to demonstrate that the fund size is viable given their proposed investment strategy. There is no maximum fund size for an ECF, but BBFL will commit no more than £50 million of funding to any single fund.

Commitments - BBFL will commit to providing up to 60% of the money in an ECF, or up to two thirds of the money if an ECF is targeting SMEs prior to their first commercial sale. The remainder is to be raised from private sector investors. Funds will be drawn down into each ECF on a ‘side-by-side’ basis from BBFL & private sector investors, according to their respective shares of the total funding committed to the fund.

Profit Share - BBFL will take a reduced profit share which enhances the return to the other investors where funds are commercially successful. When the original commitments have been repaid, BBFL does not take its pro rata share of profits. A Prospective Manager must offer BBFL a reduced profit share that is;

• Competitive, in order to provide BBFL with sufficient returns from successful ECFs, and to cover any losses from ECFs that underperform; but also
• Realistic, to demonstrate that their application is viable and is attractive to private investors.

The additional profit goes to private investors as an incentive to invest into venture funds rather than, for example, public markets where the risk return balance can seem more attractive. The exact amounts of public leverage and profit share and the repayment priorities are determined by a competitive bidding process to ensure the minimum necessary amount of public support in each case.

Closes - Successful managers must achieve a first close with the agreed level of private investment within six months of being advised that their application was successful. BBFL will retain the right to withdraw its offer of investment into the ECF if this condition is not met, or if at any time within the six-month window the ECF is not making satisfactory efforts to secure such commitments.

ECF managers may wish to have more than one closing for their fund. The level of BBFL investment in each fund will be fixed at the time the ECF award is made.

Prospective Managers will also be expected to achieve final closing within an agreed period. Six months after first closing may be an appropriate deadline, but Prospective Managers may propose and justify alternatives.

Sources of Private Capital - ECFs that are established and operated by an FCA-authorised fund manager, or a fund manager operating under an FCA regulatory umbrella, will be allowed to raise their private capital from any source permitted by law, so long as the appropriate due diligence has been undertaken by the fund manager and any regulatory requirements are met.

ECFs may raise capital from public-sector sources, but BBFL will not provide leverage in respect of such capital. Other venture capital funds (except fund-of-funds vehicles) will not be allowed to invest in an ECF.

Breadth of Investor Base - BBFL will require that the investor base is sufficiently diverse to safeguard its commercial interests. In general, it is envisaged that:

• not more than 50% of the private money will come from a single source; and
• at least 50% of the private money will come from sources independent of the manager.

Tax Treatment of Investors - To ensure that ECFs attract additional capital into the equity gap, rather than displacing investment that would otherwise have been channelled through the EIS or VCTs, the Government does not provide tax incentives to ECFs or their investors. Nor will BBFL support propositions that have already raised sufficient private capital to operate as a commercially viable fund.

Other Sources of Finance - Apart from the public and private capital committed to the fund at final closing, ECFs will not be permitted to raise additional finance from other sources, except where leasing equipment or raising short-term debt for the purpose of maintaining the short- term liquidity of the ECF. General borrowing by the ECF will not be permitted.

Waterfall - Income and capital proceeds of the fund are distributed in a specific order of priority – see Appendix A.