Key Project: JEREMIE The North West Fund. 1. To update members on the progress of The North West Fund.

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1 To: From: Subject: Local Management Committee: 13 May 2014 DCLG Key Project: JEREMIE The North West Fund Item No: 2 Purpose of report 1. To update members on the progress of The North West Fund. Recommendation 2. That members note the update and have an opportunity to discuss performance with North West Business Finance at the LMC. Fund Performance Overview 3. Status and Achievements The 155m North West JEREMIE branded as The NW Fund, is operated through NW Business Finance Ltd, a private sector company limited by guarantee. The ERDF funding is under Priorities 1 and 2 and is split into 7 different funds: Fund Type Fund Manager ERDF ( m) Total Fund size ( m) Venture Capital Enterprise Ventures Mezzanine Fund Enterprise Ventures Loans plus FW Capital Micro Loan Fund Currently being tendered Energy & CT investment Partners Environmental Biomedical Spark Impact Digital & Creative AXM Venture Capital Total Includes 4.5m invested by YFM 4. Fund performance Investments against profile The fund up to the 31 st March 2014 has made 266 investments totalling 87.64m. LMC 13 May 14 Item No: 2 Page 1 of 8

2 Table 1: Details investment targets for 2014 and investments to date Investments Total made 2014 % 2014 Achieved against 2014 Actual to Achieved target to date profile Target date VC 7,260 1, ,030 19, Mezzanine (EV) incl Dev Cap % Achieved to Mar 14 4, ,500 5, Mezz Loans (fw) 4,000 1, ,000 3, Loan 7,630 2, ,370 20, E&E 4, ,400 11, Bio-Med 6,694 2, ,671 19, D&C 5,250 1, ,400 8, Micro Fund 1,500 1,500 Total 40,854 8,592 21% 118,871 87,648 74% Q1 of 2014 saw the fund invest 8.59m in 47deals (24 initial & 23 follow on) against a profile of 10.2m. With an already stretching investment target for the year of 40.8m the fund needs to have a very strong Q2 to achieve their profiled target and catch up on the underperformance of the first quarter. 5. Size of the Fund Members had previously been advised that following the return of 4m capital to the Programme a further 10.8m would be repaid once this came off long term deposit in February However at the LMC on 28 November 2013 it was agreed to allow NWBF to retain the 10.8m on the basis of their current performance and for the position to be reviewed during 2014/15. NWBF have now notified the GDT that they have returned the 10.8m of match-funding to EIB. As the fund was established as a co-finance fund the GDT is now seeking repayment of the 10.8m ERDF plus interest as this funding is no longer matched at the holding fund level. 6. Merseyside/RONW Split The Merseyside investment rate reported at the end of March 14 has dropped from 28% to 27%. LMC 13 May 14 Item No: 2 Page 2 of 8

3 Investment Split by Amount Invested ( ) RONW Merseyside Total Merseyside % by amount % change from last quarter EV VC 14,555,596 4,860,031 19,415,627 25% 0% Mezz (EV) 2,450,000 2,950,000 5,400,00 55% 0% FW loans 16,747,400 3,740,000 20,487,400 18% -2% FW Mezz Loans 3,200, ,200,000 0% 0% CTIP 10,595,780 1,300,000 11,895,780 11% 0% Spark 10,340,262 8,830,441 19,170,703 46% -3% AXM 5,796,175 2,283,062 8,079,237 28% +2% Totals 63,685,212 23,963,534 87,648,747 27% -1% Investment Split by Number of Investments. RONW Merseyside Total Merseyside % % change from last Month EV VC % -2% Mezz (EV) % 0% FW loans % 0% FW Mezz Loans % 0% CTIP % 0% Spark % -1% AXM % -2% Totals % -2% The Merseyside target continues to be a major issue. The investment rate has declined since the previous quarter which was mainly due to a reduction in investments in the biomedical fund from 49% to 46%. NWBF continue to track Merseyside investments which individual fund managers are completing and it remains a central discussion in the IAP and board meetings. However all the funds with the exception of the biomedical fund have expressed their concern over the target and their ability to meet this by December Due to the 40% Merseyside allocation being ring-fenced LMC 13 May 14 Item No: 2 Page 3 of 8

4 NWBF and the Fund Managers need to ensure that they stop investing in the Rest of the NW when they achieve 60% commitment (new and potential follow-on investments). At the last LMC it was reported by NWBF that when investments made in Halton and Runcorn are included in the Merseyside target the investment rate increases to circa 36% based on the current portfolio. The GDT are looking into this and have asked NWBF to provide information showing the effect that reclassifying these investments as Merseyside would have on both investment and output targets. There is strong support from Merseyside partners to include Halton from the MS ring fence, provided that the EC can be persuaded these will provide an economic benefit to MS and are thus eligible. LMC need to assess the ability of the NWF to achieve 40% investment rate in Merseyside over the remaining period and discuss any measures to be taken. 7. Outputs The table below summarises the total outputs reported to the end of Q compared with their contracted targets. The final 2017 output target has also been included. Cumulative to end of 2014 Actual achieved March 14 Variance end March 14 Contracted target end 2017 Variance to end Dec 2017 Remainder to achieve (number) Outputs Investments % % 391 Business Start up Support % % 70 Private Sector Levered ( m) % % 72 Results Jobs Created 1, % 5,285-85% 4,483 Jobs 1,745 1,362-22% 3,736-64% 2,374 Safeguarded Businesses % % 89 Created Businesses with Improved Performance % % 391 As can be seen from the table above there are variances on all outputs/results with the exception of business start up support to the end March However the greater issue is when you look at the variances LMC 13 May 14 Item No: 2 Page 4 of 8

5 to the end of the project 2015/2017. With 56% of the total funds already invested there remains an uphill struggle to meet the overall contracted targets. Jobs created, businesses with improved performance and private sector leverage are contracted to the end of December Historically these type of results are not always felt on day one but will follow once the investment is being utilised. However achieving 4,483 created jobs in just under 3 years looks very stretching. The number of investments made currently stands at only 40% achieved against total contracted target with as stated previously 56% of the funding invested. The fund has made 266 investments in just over 3 years and has a remaining 391 to make in just over 18 months. With a portion of the remaining funding allocated for follow on and the average investment size continuing to rise it is unlikely that this contracted figure will be met. LMC need to assess the ability of the NWF to achieve their contracted outputs/results over the remaining period and discuss any measures to be taken. 8. Micro Fund The micro fund is still not operational as there have been a number of issues that NWBF have been resolving with the Fund Managers and EIB. DCLG have now received the final documents to review prior to approval. The GDT have now agreed a way forward with NWBF on the changes to the Fund and we expect these to be concluded in the next 2 weeks. 9. NWBF Recruitment Following a recruitment process led by AXON, Mike Kenyon the interim CFO was successful in being appointed as the new permanent CFO. NWBF have also appointed Clare Shaw to fill the project administrator role. Clare previously worked with the NWDA in project support roles and will join NWBF in mid May. It has been agreed that Brenda Smith will take up the IAP lead for the new micro fund in addition to her current digital & creative responsibility. Fund Manager Updates Fund Manager Forecast The target for 2014 is 40.85m. The forecast from the fund managers for the next 3 months shows 58 investments totalling 17.06m. LMC 13 May 14 Item No: 2 Page 5 of 8

6 The target for Q2 is 10.2m the fund however in order for the fund to be back in line with the forecasts they also need to recover the 1.6m of underperformance from Q1. The fund managers are forecasting 17.06m which would recover the under spend, however the forecast for Q1 of 2014 was 14.2m and the quarter finished with only 8.6m of investments being made. Therefore some caution needs to be taken with the forecast for this quarter. Fund April May June No. No. No. Venture Capital 1,917, , ,725,000 5 Mezzanine 1,000, ,750,000 2 Mezz Loans , ,450,000 3 Loans Plus 700, , ,000 1 Energy Environmental 750, , ,000 2 Bio-Medical 1,670, , ,000 3 Digital and Creative 450, , ,650,000 6 Total 6,487, ,905, ,675, Total Forecast for the next 3 months 17,067, Individual Fund Manager updates Venture Capital - EV Following EV s strong Q performance which left the VC fund 1.3m ahead of profile, Q1 was a quieter month. EV completed 7 deals investing 1.39m compared to the target of 1.82m. However the fund is well ahead of its overall investment profile. They are forecasting a strong Q2 with 4.2m across 14 deals in the pipeline. Their average investment size remains a significant issue. This is currently running at 395k having increased from 382k at the end of The cause for the increase is the amount of follow-on deals being completed. EV is carefully monitoring the follow-on requirements of their existing portfolio companies and actively seeking alternative co-investors to support follow on funding. However, EV is not expecting to be able to divert significant amounts of follow-on to make more initial investments. The outcome of this increasing investment size is that the VC fund will fall well short of its number of investments target which due to the size of this fund will have a significant impact on the NWF meeting its overall target. LMC 13 May 14 Item No: 2 Page 6 of 8

7 Mezzanine EV No new investments were made by the Mezzanine fund during Q1. They are however actively developing 3 strong opportunities totalling 2.75m and have now drawn down 1m from NWBF to cover the deals for April. Loan fund FW Capital The Loan fund produced a good investment performance across Q1, delivering 2.2m of investments across 19 deals. This is ahead of their 2014 investment profile and has helped the fund catch up some of the underperformance from FW have 1.5m of deals identified in their Q2 pipeline forecast. They also have another 3m worth of additional investments they are working on which could complete in June. As outlined previously NWBF continue to express their concern over the average investment size. FW have consistently tried to provide reassurance that they have been putting measures into place to address the issue. Q1 has now started to see the impact of these measures with the average deal size reducing from 175k to 123k. A similar challenge exists for the fund in Merseyside. FW are launching additional Merseyside initiatives which include the launch of a new telemarketing campaign solely for Merseyside. However the fund still has a Merseyside investment rate of 17% and therefore a huge amount of work needs to be undertaken to meet the contracted figures. Loans Plus FW Capital The fund over performed against their Q1 target achieving 3 deals totalling 1.2m. However all 3 deals were follow on investments which obviously has an impact on the number of new investments output. The fund has also struggled to make Merseyside investments and is yet to complete one. 2 of the 4 investments for the next 3 months are Merseyside based companies and they are aware of the need to prioritise Merseyside investments were possible. Energy and Environmental- 350 IP 350IP has had a quiet Q1 with them only investing 236k in 3 follow on deals. They do have 1.17m of deals forecast for Q2 but they will need to be closely monitored to check that the fund does not drop significantly behind their investment targets. There has been no significant shift in the Merseyside investment rate which remains at 11%. They do have a clear set of Merseyside initiatives planned for 2014 however it is expected that this fund will fall well below the required 40%. LMC 13 May 14 Item No: 2 Page 7 of 8

8 Bio-Medical Spark The fund invested 2.27m across 9 deals in Q1 leaving the fund 600k ahead of its investment profile for They have forecast 2.24m across 10 deals for Q2. If these investments are made achieved it leave the fund over 1.1m ahead of their target as at the end of Q2. The Merseyside rate for the fund dropped slightly in Q1 from 49% to 46%. Digital and Creative AXM Despite a slow start the fund invested 1.29m across 6 deals which is exactly on profile for their 2014 investment target. Their investment profile for Q2 is looking healthy with 11 deals totalling 2.65m forecast. However only 2 of the 6 deals were initial investments and they continue to make joint investments with other NWF funds which will have a dilutive on the outputs. The fund has improved their investment rate into Merseyside increasing from 26% at the end of Q to 28% at the end of Q AXM are clearly targeting Merseyside with 6 of the 11 Q2 forecast deals located in this sub region. LMC 13 May 14 Item No: 2 Page 8 of 8