Details of the fund structure (limited partnership, limited liability partnership or limited company), and the reasons for this choice.
Total amount of funding to be committed to the fund, by (i) private investors and (ii) the Government.
Proposed term of the fund and length of investment period.
Applicants must highlight and explain any areas in which they would wish to alter significantly the terms of the draft partnership agreement.
(b) Investment strategy
Details of the proposed ECF‟s investment strategy. Applicants will need to specify which elements of the strategy are to be written in to the partnership agreement16. Applicants should note that, in assessing proposals, CfEL will have regard only to those elements that can be written into the legal agreements. As a minimum, applicants will need to provide the following details:
o overall approach (sector-specific, generalist, opportunist etc.);
o length of investment period (i.e. the period after which only follow-on investments may be made) and the proportion of total commitments to be retained for follow-on investments and to meet other expenses of the partnership after the end of the investment period;
o target number and value of investments in each year of the fund‟s investment period, and in the mature portfolio;
o target sector(s) for investee companies (if applicable); o target stage(s) of development of investee companies; o target location(s) for investee companies (if applicable) ;
o target funding round sizes for the ECF‟s initial investments, including the likely extent of co-investment or syndication with business angels, venture capital funds and other investor groups. Indicating if any potential co-investment or
16 The draft partnership agreement at http://www.berr.gov.uk/files/file41229.pdf / [ www.capitalforenterprise.gov.uk ] provides an indication of the level of detail the Government would expect (see Schedule 1 of the agreement).
Guidance for Prospective ECF Managers
syndicate partners are in any way connected with the proposed ECF and, if so, how any conflicts of interest will be managed;
o target proportion of total commitments to be retained for investment in follow-on funding rounds; and
o proposed deal structures, including the intended approach to minimising dilution (while remaining within the overall scheme rules).
An analysis of the market in which the ECF is proposing to operate, including an assessment of alternative current and likely future sources of equity capital for the target SMEs, and the extent of unserved demand for such capital.
A description of the proposed level and nature of ongoing mentoring, management support and other assistance that will enhance the performance of investee businesses. This will include an assessment of the likely costs and time commitments involved, and applicants will need to demonstrate that the proposals are feasible given the resources available to the ECF.
An assessment of the specific risks associated with the proposed strategy (i.e. ignoring general venture capital market risks).
(c) Fund operation
Applicants will need to provide details of the decision-making processes, including:
o the nature and extent of due diligence processes to be undertaken before each investment, including the likely scope and costs of any work to be commissioned from outside experts; and
o any other steps designed to reduce the fixed costs of making investment decisions.
Details of drawdown arrangements, including the notice periods that will apply to the private investors and the measures to be put in place to ensure that drawdown commitments are met on time.
(d) Sources of private capital
Applicants should include the following information in their initial proposals and be prepared to supply further supporting evidence if required:
o the target level of privately-sourced capital; o details of the target investor groups; and
o evidence of investor appetite for their proposed ECF.
(e) Terms of public participation
Applicants should provide the following information:
the proposed arrangements for the sharing of capital distributions between the Government and the private investors;
Guidance for Prospective ECF Managers
the proposed arrangements for the sharing of capital drawdowns between the Government and the private investors; and
the Government‟s profit share, specified as a straightforward percentage as described in Part 3 of this Guidance.
Applicants should be prepared to demonstrate why the proposed financial terms represent the least necessary level of Government support to attract private investment into the proposed ECF.
(f) Fee structures
Applicants should set out:
the level, structure and timing of management fees and other remuneration to the fund manager (including carried interest); and
details of any other charges or fees to be charged, either to investors or to investee companies. Applicants are asked to explain whether these fees accrue to the fund or to the fund manager.
(g) Financial projections and budgets
For a limited partnership ECF, or a limited liability partnership ECF that is to be operated by an independent third-party fund manager, applicants will need:
full financial projections for the fund management company. These projections should demonstrate that the fund manager will be generating income that is sufficient to cover the costs of managing the fund, but not excessive; and
full financial projections for the partnership itself, including the financial returns that are expected to accrue to private investors and to the Government. This should include a sensitivity analysis that shows how returns vary on a range of different assumptions about underlying investment performance.
For a limited liability partnership ECF that is operated by its investors, applicants should provide:
a detailed budget showing the projected costs to be incurred by the fund in managing its own affairs, and showing how much of the fund value will be available for investment in portfolio companies; and
financial projections for the partnership, including the financial returns that are expected to accrue to private investors and to the Government. This should include a sensitivity analysis that shows how returns vary on a range of different assumptions about underlying investment performance.
In both cases, spreadsheets underpinning the financial projections, in a format capable of being read by Microsoft Excel, will be required from short listed applicants.