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Enterprise Capital Fund Frequently Asked Questions

Q1. Will a bid be more likely to succeed if it favours a particular geographical region or business sector?

The key element in any bid to run an ECF will be that it identifies and targets an equity gap. The response to the Bridging the Finance Gap consultation has suggested that this is not restricted to particular sectors or geographical areas. As a result there are no specific regional or sectoral targets for ECFs. Bidders are welcome to target businesses in particular sectors or localities where they can demonstrate the existence of commercial opportunity and an equity gap and these applications will be assessed on the same basis as any other.

Q2. Is there a minimum level of government profit share that is acceptable?

There is no pre-determined minimum acceptable level of profit share. The model for a long term ECF programme envisages that returns from successful ECFs will balance out any losses from those that are not successful. Because of this, government will not accept a position where there is zero or practically zero profit share.

Q3. What is the maximum level of funding that will be awarded to an ECF?

There will be no maximum fund size for an ECF, but the government will commit no more than £25 million to a single fund and no more than twice the private capital, whichever is lower. 

Q4. Why has the government set a maximum level of £2 million for each investment in the ECF?

This maximum is required as part of the system to ensure that investments are made in the equity gap. An ECF can invest up to this level and may co-invest with other investors so long as the total amount invested does not exceed the £2 million maximum.

Q5. Can an ECF invest more than £2 million in a particular company?

We recognise that allowing funds to have the ability to follow on successful investments to avoid undue dilution is necessary in order to get the best returns for both government and private investors. Therefore, we plan to allow ECFs to invest more than £2 million where this is done to avoid dilution and so long as the total cost of the ECF's investment in any one company does not exceed ten per cent of the total fund size.

Q6. How will you treat any European Investment Fund investment in an ECF?

Any investment by the European Investment Fund (EIF) will be treated as public funding and so the government will not provide leverage against it. The EIF have their own investment criteria and rules, one of these is that they do not invest in funds that have more than 50 per cent public funding. This would mean that an ECF with EIF investment would be severely restricted in the amount of public leverage that it could apply for.

Q7. Can ECF's be 'evergreen' funds?

'Evergreen' funds that retain the proceeds of their realisations for subsequent investments will not be acceptable. ECFs will have a fixed life of approximately ten years extendable only with the consent of the government and the other investors.

Q8. Will the repayment of government capital occur before the repayment of capital to the other investors?

Once the government's prioritised return has been paid the return of capital to government and private investors will be determined by the terms of the applicants bid. Government will accept terms where capital repayments are made on a pari-passu basis, but will not accept a position where the private capital is repaid first.

Q9. When must a bid for an ECF be received?

There will be no formal closing date for this round which has the potential to extend beyond a single funding year. However, those wishing to bid are strongly advised to contact Capital for Enterprise Ltd (“CfEL”) before 30 June 2008. CfEL reserves the right to impose a closing deadline at a later date but will provide at least two months notice of this to those who have met with the team before 30 June. A similar process is likely to be established in April 2009 and again in April 2010.

Q10. When will I be informed if my bid has been successful?

The exact timing for the bid assessment process will depend to some extent on the volume of bids received. We hope to be able to inform bidders that they have been short listed approximately twelve weeks after the bid has been received.

Q11. What will happen if I don't manage to raise the private capital within the six month deadline? What if I manage to raise more than I planned?

If a bidder does not raise sufficient private capital within the six months we will withdraw our offer of funding and move on to the next reserve bid. If the undershoot is by a very small margin there may be scope to rebalance the bid, but this will depend on the significance of the gap and should not be relied upon. It is open to any fund to raise more than the bid amount of private capital but the government contribution will not increase to match this.

Q12. Are there be any sectors of the economy that do not qualify for investment from an ECF?

ECFs will not be permitted to invest in the following sensitive sectors for which the guidelines on state aid and risk capital do not apply:

• synthetic fibres and yarns
• motor vehicles
• shipbuilding
• steel – ECSC products
• steel – non-ECSC products
• coal
• transport
• the production of agricultural and fisheries products listed in Annex I referred to in Article 32 of the EC Treaty.

Q13. How many funds does the government expect to support?

We anticipate we will support two, three or four funds in any ECF round.

Q14. There are a number of bidding variables. Are they weighted?

The assessment criteria are set out in the draft bidding guidance. They fall into three broad categories; prerequisite, primary and secondary. The categories reflect the broad weighting for assessment in the pathfinder round. 

Q15. Will the cheapest bid in terms of management fee, carried interest or (highest) government profit share win?

We will make a value for money assessment rather than simply going for the cheapest bid. It is therefore in the interests of bidders to bid competitively and also to provide a solid rationale for the values suggested.

Q16. Will ECFs have to invest in UK based SMEs?

As stated in the bidding guidance, we intend that an ECF may only invest in an SME where the purpose of the relevant investment is, or the application of the proceeds of such investment by the relevant company or undertaking shall be, predominantly related to or for the benefit of the economy of the UK. In effect this will mean that most investments will need to be in UK based SMEs or to fund the UK operations of SMEs.

Q17. Can an ECF have overseas investors?

Yes. Applications should provide details of target investor groups with applicants demonstrating that the proposed ECF will raise capital from investors who would not otherwise have invested. The location of these investors need not be in the United Kingdom.

Q18. Can an investor also be the Fund Manager/General Partner in the standard ECF model?

We welcome material General Partner investment within a fund. Such an investment can demonstrate a close alignment of investor and manager interests, but it will be for bidders to demonstrate that any potential conflicts of interest can be overcome. For example, the legal agreements will have to contain provisions to prevent the General Partner taking action as a Limited Partner that would be detrimental to the legitimate interests of other LPs.