Independent Evaluation of the London Co-Investment Fund (LCIF)

Description

Background on the London Co-investment Fund The London Co-investment Fund ("LCIF") was established by Funding London and Capital Enterprise and the Mayor of London with the aim of investing £23m in London-based, seed stage companies in the Science, Digital and Technology sectors. The LCIF defines seed stage as very early stage companies where the proof of concept stage has been successfully concluded. The LCIF is financed by £25m provided by the Mayor of London and the London Economic Action Partnership and £1.7m from Funding London and is managed by Funding London. The LCIF is a co-investment fund and operates by contracting with early stage investors including venture capital funds and angel syndicates. Its 14 co-investment partners were procured through an open and competitive process. The selection criteria consisted of: • Knowledge of, focus on and track record of investing in the Science, Digital and Technology sectors; • Deal volume and pipeline; and • Investment approach. Since its launch in December 2014 the LCIF has invested £18.7m in 121 London-based, high-growth, early stage technology companies through its co-investment partners. LCIF investment has helped raise an aggregate of over £130m in total investment commitments. Objectives The aims of the LCIF are as follows: 1. To invest £23m into high-growth early stage Science, Digital and Technology businesses in London during its investment period; 2. To achieve a target across the fund of £2.9 of private sector investment for every £1 invested by LCIF; 3. To generate approx. 2,653 jobs over the life of the fund as a result of the investments being made; and 4. To maximise returns from exits to enable further investment in later years. Background and Context The LCIF was designed to meet the growth capital needs of small businesses in the strategically important Science, Technology and Digital sector as they emerge from London's leading public and privately funded accelerators, incubators and support programmes. Funding London and Capital Enterprise believe that this is where funding for London's SMEs is most difficult to find. The body of evidence which supports public sector intervention to address the finance gap in SME growth capital is vast. A report authored by SQW and Middlesex University published in November 2013 and specifically commissioned at the time that LCIF was set-up states that there is a significant structural equity finance gap facing SME's in London - specifically for those seeking to raise risk capital between £250,000 and £2m. Rationale for Intervention In November 2013, the LEAP committed to assessing the scale and nature of a SME finance gap in London and utilise up to £25m Growing Places Fund monies to address it. This followed a Mayoral Manifesto Commitment to launch a new £35 million revolving fund to provide low-cost debt to SMEs. Following the LEAP steer, the GLA commissioned some independent research into SME Finance in London. Carried out by Middlesex University and SQW, this found a substantial funding gap including an annual equity gap of around £350m rising to around £1.8 Billion by 2016. The research also identified five suitable areas for intervention (the Science, Technology and Digital sector being three of the five areas) with the recommendation that the £250k-£2m equity gap should be the highest priority for any potential London SME access to finance scheme. The Co-investment Fund Model 1. The co-investment fund model offers significant advantages to other alternatives. Specifically, the model allows for the efficient deployment of investments into target businesses through competitively selected partners in the early stage investments arena. This is achieved as follows: a. The fund selects and contracts only with early stage investors with the strongest track records of investing, market knowledge and focus, and return on capital; b. The fund leverages the investment expertise of each partner by co-investing on the basis of their investment and due diligence process. In other words, the fund does not carry out a separate evaluation of the potential investee company, but rather the fund's team ensures that: 1) the potential investee companies qualify for the objectives of the fund; 2) that the due diligence carried out by the partner is sufficiently robust (as defined contractually with each partner); and 3) that the terms of investment offered to the fund are the same as the other investors; 2. The above process avoids the need to establish a complex Limited Liability Partnership (LLP) structure that is customary for VC funds. This approach also avoids the need for complicated investment approval panels. The co-investment partners receive an amount to a maximum of 2.5% of the funds invested to cover a proportion of their costs. This makes the fund cost effective; 3. The LCIF has established an in-house investment executive team who carry out the required legal due diligence and checks to ensure that the fund gets the same investment terms as those of the private sector partners. This team is also essential in the performance of the day to day portfolio monitoring activities on behalf of the LCIF and in safeguarding the LCIF's interest in relation to negotiations for exits down the line; 4. There is strong alignment of interests between the fund and the partners given that 1) the partners benefit by ensuring that funding rounds for investees can be completed successfully; 2) the LCIF deploys the funds where they are most needed whilst ensuring investments are made on a commercial basis; and 3) both parties achieve diversification of risk. The fund also ensures that money is being deployed according to the agreed strategy and that the fund targets can be met (e.g., jobs, leverage) through six monthly reviews of partner activity; 5. A very significant advantage from the investee company point of view is that the process allows for investments to complete quickly (within two weeks from receipt of investment agreement); and 6. Although the fund relies on the co-investment partners to provided active support to the investee companies, the fund will seek where appropriate the right to appoint a non-executive to the board of the SMEs and in all cases have observer status and the same rights to information as the partners, so to protect, both, the investment and ensure support to the SME. Evaluation Study The LCIF is approaching the end of its investment period of 31 March 2019. After this date, the fund will cease to invest in new companies and therefore, we can begin to measure the impacts against the specified objectives above. Scope of Work We seek to commission an independent and suitably qualified organisation to carry out an evaluation study of the London Co-investment Fund. The objectives of the study are as follows: • Undertake a fund level performance appraisal, including an analysis of outcomes, returns to investment and an assessment of the management and governance of the funds. • Assess the firm level impacts, including on turnover, productivity and employment. Employment growth will be assessed in the context of the funds enabling additional performance improvements within a business. There is also a need to understand the additional benefits brought by the funds so investigation and estimation of additionality/deadweight and displacement can be undertaken (using HM Treasury Green Book guidelines). • Assess finance market outcomes, in particular the extent to which the creation of these funds has increased the supply of finance, levering in additional investment as opposed to simply acting to crowd out other finance. • Consider local economy impacts, reflecting any wider regenerative benefits of the London Co-Investment Fund to the London economy, including that on diversity and inclusion. • Evaluate the position of the London Co-Investment Fund to repay the initial Capital and the advisability of making London Co-Investment Fund an evergreen fund. We would expect fieldwork to be carried out in respect of: • The analysis of data on performance at the fund level; • The analysis of investments made by the LCIF; • Surveys of companies to add to the data held by fund managers and data contained in monitoring reports and evaluations of the various funds; and • Interviews with the respective fund managers, the GLA and London LEAP and local authorities/agencies and with other interested parties and stakeholders including those in the financial sector, and with some investee companies. Evaluation criteria would include: - Demonstration of a strong understanding of seed stage technology investment landscape in London; - Familiarity with venture capital investment processes, outcomes and impact; - Strong credentials and track record of having conducted similar evaluations and reports for public funding organisations; - Immediate availability to conduct the evaluation and provide a final report before December 2018; - Price Evidence may be requested in the form of final reports on previous such assignments. Shortlisted parties may be invited to discuss their proposal with the evaluation panel. Funding London Funding London is the trading name of SME Wholesale Finance (London) Ltd.. The company's long term mission is to support London-based small businesses that experience difficulties raising finance either due to the small amounts of investment being sought or the early stage nature of the business. Funding London delivers its mission through the design, establishment and operation of funds that are aligned with the Mayor's strategy for London. Since its establishment in 2004 by the then Mayor of London, Funding London has invested directly over £50m in 600 small and early stage businesses and generated more than £300m of co-investment into London's businesses via its loan and equity funds. This has helped support the London economy by creation or safeguarding of over 3,900 jobs. More information on our activities is available on our website www.fundinglondon.co.uk. More information on Funding London can be found at www.fundinglondon.co.uk Information on LCIF is available at https://lcif.co