GOVERNMENT AIMS FOR £1 BILLION VENTURE CAPITAL FUND TO INVEST IN THE BUSINESSES OF THE FUTURE

Looking at past experiments, there is an adverse selection problem among SBIC managers. VCs with the best track records and reputation do not need to resort to government funding. Venture capitalists who do seek government licenses probably do so because they lack private market alternatives. This pattern suggests that SBIC funds, on average, may be managed by the least qualified venture capitalists in the industry.

GOVERNMENT AIMS FOR £1 BILLION VENTURE CAPITAL FUND TO INVEST IN THE
BUSINESSES OF THE FUTURE


News Release issued by the Government News Network on 29 June 2009


The Department for Business, Innovation and Skills, with the Department of
Energy and Climate Change and the Department of Health, will invest £150
million alongside private sector investment on an equal basis known as
pari-passu.


It is the Government's belief that this could leverage enough private
investment to build a fund of up to £1 billion over the next 10 years.The
UK Innovation Investment Fund forms part of the Government's strategy for
Building Britain's Future.

Gordon Brown said:


"This fund will help build Britain's future by investing in key sectors. It
will provide crucial support for our most promising start-ups and existing
small companies just when they need it most. Venture capital finance is the
lifeblood of innovation and crucial to ensuring the commercialisation of
the discoveries coming out of our research base. The fund will boost future
UK competitiveness."


Lord Mandelson, Secretary of State for Business, added:


"In our New Industry New Jobs strategy we identified access to venture
capital as one of the critical factors in developing innovative new
companies in Britain. The UK Innovation Investment Fund will be a shot in
the arm for the British venture capital industry. It is also a challenge to
UK venture capitalists to follow the Government's lead in backing British
entrepreneurs in building exciting new companies, investing in new
technologies and creating jobs."


Science and Innovation Minister Lord Drayson, who has been a champion for
the fund, added:


"We must safeguard the Government's record investment in the science and
research base over the past decade. We cannot afford to lose out on the
wealth this investment can yield and we will need this wealth to continue
our sustained investment in research."


Richard Pelly, Chief Executive of the European Investment Fund (EIF), said:


"EIF has been working together with the UK Government, the BVCA and
other significant players in the Venture Capital sector in the preparation
of this welcome new initiative, and is delighted to support its launch
today.


"At a difficult time for the VC industry the UK Innovation Investment Fund
will underpin a next round of critically important fundraising for Fund
Managers, and EIF looks forward to continuing to contribute its extensive
experience to the development of this process."


The UK Innovation Investment Fund will operate on a Fund of Funds structure
which means it will not invest directly in companies, but rather invest in
a small number of specialist technology funds that have the expertise and
track record to invest directly in companies. The fund will provide a cost
effective solution that provides a market return to both private sector
investors and HM Government.


The Prime Minister is today publishing a plan for Building Britain's
Future. It is a radical vision for a fairer, stronger and more prosperous
society. Public service entitlements will for the first time be guaranteed
to parents, patients and communities. New measures, such as the UK
Innovation Fund, will also drive economic growth and create jobs.


· The Innovation Investment Fund is part of the Government's plans for
Building Britain's Future. For more details, visit:
www.hmg.gov.uk/buildingbritainsfuture


· All the indicators suggest that the total amount of venture capital
invested in early stage technology companies will be significantly reduced
in 2009. The UK Innovation Investment Fund will be one of the largest ever
technology funds in Europe.


· There are about 1,093 venture capital backed technology companies in the
UK employing over 40,000 highly skilled people.


· Venture capital backed companies significantly out perform other
companies


Ø UK employment increased by 6% compared to a national average of 1%


Ø Sales grew by 12% pa compared to 5% for FTSE Mid-250 companies


Ø Increased R&D expenditure of 12% compared to 1% pa


Ø Value of exports from the UK increased by 14% compared with 4% nationally


Ø 69% of venture backed companies introduced new products or services


· Household names such as Google, Vodafone, E-Bay, SKYPE, Amazon, Microsoft
and Apple were backed at an early stage by venture capital.


· Fund Structure:


A Fund of Funds structure proved most attractive to institutional
investors, as it creates a portfolio approach that spreads the investment
risk across a number of different technology fund management teams. The
Government will seek to appoint an experienced Fund of Funds manager with a
proven track record in technology investment. They will be regulated by the
Financial Services Authority (FSA), and will require the necessary
authorisations to operate in the UK.


The Fund of Funds approach also enables the Government to support the
growth of the market without distorting or competing with existing fund
managers and ensures that the Fund complements existing public sector
interventions such as Enterprise Capital Funds, RDA European Development VC
Funds as well as tax measures.


This is not a novel approach and builds upon the previous UK High
Technology Fund structure that was announced in 1998. This was £125 million
"fund of funds" and invested in a number of specialised technology funds
such as Advent, Amadeus, MTI and Scottish Equity Partners. The Government
provided a cornerstone investment of £20 million which the Fund Manager was
able to leverage an additional £105 million from the European Investment
Fund, UK pension funds and a French bank.

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