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Iii) Drawdowns

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Loan commitments will be drawn down into an ECF on a „side by side‟ basis from the


Government and the private investors, pro rata to their total loan commitments. It is anticipated that loan commitments from the Government will be drawn down on an „as required‟ basis. CfEL will require at least 10 business days‟ advance notice of any drawdowns, and will expect ECFs to provide monthly indicative forecasts of likely drawdown requirements.


Applicants wishing to raise private capital from individual investors will need to propose arrangements to satisfy the Government that the private capital will be available for drawdown when needed. For example, it may be appropriate for some or all of any commitments arising from individual investors to be placed in an escrow account or drawn down into the ECF at the start of the fund‟s lifetime.


In the event that a limited partner fails to meet a drawdown notice, it will be liable to pay interest and, unless the default is rectified, the defaulting partner will lose their entitlement to


Guidance for Prospective ECF Managers - 19


distributions during the lifetime of the fund. Any distributions to that investor at the end of the lifetime of the fund would be limited. However, the Government does not believe that such punitive provisions should be applied following the death of a limited partner.


Capital that is drawn down into the fund but not yet invested or otherwise expended (e.g. on management fees) must be held on deposit with a major UK clearing bank, except where Government approval has been sought and obtained.


Fund managers may wish to cancel outstanding loan commitments if it becomes clear that they will never be drawn down. In such cases, loans will be treated as having been drawn down and repaid immediately.



(iv) Distribution of returns


When an ECF earns a return from an investment, either from interest or dividend payments from an investee SME or from a realisation, it will not be permitted to recycle those funds for further investment (except where drawn down funds have been used to pay the management fee). An ECF will be expected to make distributions once it has the necessary income or capital gains from realisation of its investments and has met its expenses and liabilities (including fund management fees). The three „tiers‟ of the distribution are summarised in Part 1(iv)(d) above, and are discussed in more detail now.


1. Prioritised return to Government


The prioritised return will be equivalent to interest charged on the balance of outstanding Government loans to the fund, compounded annually. Payment of the prioritised return may be deferred until the fund has generated the necessary cash flow from its investments and has met its existing liabilities.


2. Repayment of capital


Once the Government has received its prioritised return, outstanding loans may then be repaid to the Government and the private investors under the terms specified in the proposal, which will be written into the legal agreements. Loan repayments may be made to the various parties on a pro rata basis, or prospective managers may specify an alternative arrangement that is more generous to the Government. More generous arrangements will be regarded as a positive feature.


Where there are amounts of loan commitment still to be drawn down, repayments will continue in this tier until the Government has been repaid an amount equal to 85 per cent of its total loan commitments (regardless of whether those loan commitments have yet been drawn down). This is necessary to protect the Government from a position in which early profits are distributed to private investors, and the fund subsequently fails to generate sufficient returns to repay future drawdowns.


3. Distribution of profits


Assuming obligations under tiers (1) and (2) above have been met, all further distributions to investors will be divided between the Government and all other parties in a fixed


Guidance for Prospective ECF Managers - 20


profit-sharing ratio.Applicants must specify the Government‟s profit share in their proposals,expressed as a percentage that will apply to all distributions of profit; the remainder will be allocated between the private investors and, where there are carried interest provisions, the fund manager. The Government‟s profit share should be a fixed percentage of profit that remains constant throughout all profit distributions.


In order to maximise their chances of success prospective managers should strive to offer the Government a profit share that is:

competitive, in order to provide the Government with sufficient returns from successfulECFs to cover its losses from ECFs that perform less well; but also

realistic, to demonstrate that their application is viable and achievable. Potentialmanagers should note that, should they prove unable to raise private capital on the terms specified in their application, CfEL would not renegotiate the profit share or other features of the proposal; it would instead expect to withdraw its offer of funding.


In cases where standard carried interest provisions are to be included, profits will be distributed:


(i) first,to the Government and private investors, in line with the profit-sharing ratio,until a certain „hurdle rate‟ has been achieved and distributed. The hurdle rate is to be specified EITHER:


as an amount equal to interest calculated on the daily balances of loans outstanding to the Government and private investors; OR


as being just sufficient to ensure that the private investors have received a certain annualised IRR.


In either case, the level of the hurdle and the basis for calculation should be clearly specified. Prospective managers may choose to provide for a gradual „catch-up‟ for the carried interest recipient from the private investors‟ share; and


(ii) second,any further profits are divided between the Government (in line with its


fixed profit share), the fund manager (in line with the carried interest share), and the other investors (pro rata to their investments in the fund).13


Applicants may specify alternative incentive structures to the standard carried interest provisions if this is more appropriate for their proposals, so long as they can still demonstrate a clear link between fund performance and fund manager remuneration.



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