ECFs that are established and operated by an FSA-authorised fund manager 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. Where an ECF has no FSA-authorised manager, the Government will wish to carry out certain checks in respect of the private investors prior to committing capital to the fund.
ECFs may raise capital from public-sector sources, but the Government will not provide leverage in respect of such capital and will not provide leverage that takes the overall proportion of publicly-sourced capital in the fund above two-thirds. Other venture capital funds (except fund-of-funds vehicles) will not be allowed to invest in an ECF.
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.
(b) Breadth of investor base
In an ECF where the investors are exercising control over the investment decisions of the general partner rather than appointing an independent fund manager to take those decisions,
12 This means that debt instruments with warrants may be used only where there is a realistic prospect that the right to acquire equity will be exercised. An ECF will not therefore be able to provide debt finance „dressed up‟ as quasi-equity by adding rights to acquire equity that it has little or no intention of exercising: such investment would not target an equity gap.
Guidance for Prospective ECF Managers
CfEL will require that the investor base is sufficiently diverse to safeguard the commercial interests of the Government.
In general it is envisaged that no single investor who is connected with or involved in the management of the fund should contribute more than half of the private capital.
(c) Timing and multiple ‘closings’
Successful applicants will be required to achieve „first closing‟ with commitments of private capital to at least the level agreed in their application, within six months of being advised that their application was successful. CfEL 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. In this case, the first closing must be reached within the six months of being advised their application was successful. The level of Government investment in each fund will be fixed at the time the ECF award is made.
Applicants will also be expected to achieve final closing within an agreed period. Six months after first closing may be an appropriate deadline, but applicants may propose and justify alternatives.
(d) No implied Government warranty
Any specific reference to the Government or CfEL in publicity materials relating to an ECF must be approved in advance by CfEL, except where providing only basic factual information that is already in the public domain, e.g. the amount or terms of proposed Government participation in the fund. Under no circumstances should the CfEL or Government agreement to participate be described or interpreted as implying any kind of endorsement, warranty or guarantee of performance by the fund, and any promotional materials issued in relation to the ECF must include a warning to that effect.