Examination of Witnesses (Question Numbers
20-39)
DEPARTMENT FOR
BUSINESS, INNOVATION
AND SKILLS
AND CAPITAL
FOR ENTERPRISE
LIMITED
13 JANUARY 2010
Q20 Chairman: It is in the Report.
Mr Fraser: There are of course
some different distributions of enterprises of this sort and there
is a concentration in some regions. One also has to bear in mind
that there are some specific regional funds operated by the RDAs
in the North of England which are complementary to this activity.
This not the entire picture of the availability of this sort of
venture capital.
Q21 Chairman: Mr Earley, how can
you justify the cumulative costs of managing these funds? When
we look at paragraph 2.16 "While cumulative costs will continue
to rise, final proportionate costs are not yet known". A
scheme which started in 2000 and here we are at the beginning
of 2010 and we read that cumulative costs will continue to rise
and the final proportionate costs are still not known.
Mr Earley: The final proportion
will only become clear as the funds mature, when we know all the
money spent on fees, all the returns, all the money that has been
invested.
Q22 Nigel Griffiths: I suppose the
good news first is set out on page six that four out of five of
the businesses reported that the initial funding made it easier
for them to obtain additional finance, nearly one third reported
that they would have been unable to obtain finance without support
from the funds and between one fifth and a quarter say they would
not have gone ahead with their planned activity in the absence
of finance from the Department's funds. Do you have an assessment
of the impact of these venture funds in ameliorating any adverse
problems arising in companies out of the recession and getting
investment into companies?
Mr Fraser: We have begun the evaluation
process and we have done the initial interim evaluation on the
first schemes. They are beginning to give us some results on the
economic benefits which are coming from the schemes. For example,
the figure of an average of seven new jobs per company of those
companies invested in by the schemes, given that they are small
companies, is not inconsiderable. Forty-two per cent of these
companies report that they have started or increased exports.
Of the total number of companies invested in, 70% are still invested
and are surviving companies, so those are all indications of the
benefits that the schemes are beginning to or have given. In the
online appendix three to the NAO Report there were some case studies
which gave a bit more individual detail on some companies for
the benefits that have derived.
Q23 Nigel Griffiths: You have explained
to the Chairman and the Committee why it has taken some time to
evaluate the impact of the funds. Has the Department been monitoring
the investments from the beginning?
Mr Earley: Yes, we have been monitoring
very closely all the investment programmes. We meet at least twice
a year with each manager. We get portfolio reports on a quarterly
and six-monthly basis, audited reports annually and we keep in
very close touch with all the managers so we can address any issues
of performance with the managers and keep a close eye on the performance
of investments.
Q24 Nigel Griffiths: Point 13 on
page eight makes the concerns of the NAO very clear about keeping
information confidential. I can realise why you might not want
to discuss the performance of individual companies, but I am not
convinced there is a reason why you cannot give the performance
of the portfolio.
Mr Fraser: Indeed, on this point,
this is one of the areas where we have sought to improve transparency
and there is now a new system on the website for reporting performance
on the CFEL website.
Mr Earley: It is a recommendation
we have accepted from the National Audit Office and we are now
publishing aggregate data in a way which provides as much information
as we think we can provide without compromising commercial confidentiality.
Q25 Nigel Griffiths: I must say that
I would have found it helpful to have a memo to that effect for
the Committee today. I do not know whether you are able to pick
one of these funds and tell us how that looks.
Mr Earley: The data we are publishing
does not go down to fund level; it breaks down the investment
programme across funds, by regions, by sector and makes comparisons
with industry data.
Q26 Nigel Griffiths: So it is very
close to one of the tables in the Report on sector.
Mr Earley: Yes.
Q27 Nigel Griffiths: Why does it not
go into what the return on the high technology fund looks like?
Mr Earley: The return to Government,
the valuation of the Government's investment, is in the public
domain.
Q28 Nigel Griffiths: No, how the
fund is performing really.
Mr Earley: We are constrained
in our ability to publish interim data on fund performance by
the legal agreements we enter into when we invest in the funds.
Q29 Nigel Griffiths: Is this standard
in venture capital funds?
Mr Earley: Absolutely standard;
it is a requirement of the other investors in the funds as well
as the fund managers.
Mr Fraser: We would be happy to
provide you with a memo, if you like, on the transparency issues.[1]
Q30 Nigel Griffiths: That would be
helpful. The cumulative management fee costs do look on the very
high side: 36% of the total value of the investment. Am I right
in thinking that all of that cost is met by the Department?
Mr Earley: The cost of managing
the funds is met by all the investors in each fund.
Q31 Nigel Griffiths: So the £46.1
million is shared roughly how? It depends on the fund I assume.
Mr Earley: Across the programme
it is roughly 25%[2]
of the value of the commitments to those funds.
Q32 Nigel Griffiths: So the taxpayers'
contribution to that is £21 or £22 million.
Mr Earley: It will be a quarter
for the Regional Venture Capital Funds.[3]
Q33 Nigel Griffiths: Are you accepting
recommendation 17e that you "... include breakdowns of public
and private sector investment to date"?
Mr Earley: Yes, that is included.
Q34 Nigel Griffiths: What have been
the improvements which have come in the later funds, as touched
on in the Report, to make them more effective? I think the later
ones are the Enterprise Capital Funds and the Aspire Funds.
Mr Earley: The starkest example
is the way that the government investment is structured. In the
early funds, the Regional Venture Capital Funds, the government
investment was subordinated so it absorbed the first share of
any losses in the fund, it was drawn down first. In the later
funds in the current programme, the Enterprise Capital Fund programme,
the Government actually get their return first before the private
investors but take a limited share of the profits to provide a
different sort of incentive for the private investors, one which
better safeguards the government investment.
Q35 Nigel Griffiths: How have you
been able to make that change? Presumably that would have been
desirable early on? Was it the sort of thing which was vetoed
by the likely investors in the early venture capital funds?
Mr Earley: The early programmes
were very innovative; nothing had happened before and there was
considered to be a pressing need to attract private sector investment,
so there were more generous incentives to bring that investment
in. It raised £3 of private investment for every £1
of government investment with a subordination that was there.
In the later funds it is £1 of private investment for £2
of public investment. So the less generous subordination is less
attractive to private investors but does better safeguard the
Government.
Q36 Nigel Griffiths: Among the objectives,
certain of three of the four funds, you have to demonstrate to
investors and the venture capital industry that commercial returns
can be made on an early stage. How are you able to do that when
you are not releasing information because of commercial confidentiality?
Mr Earley: That is a recommendation
which has been accepted and more information is being put in the
public domain. The demonstration effect prior to that was only
to those private investors who were involved in the fund.
Q37 Mr Bacon: You said to Mr Griffiths
that across the funds the public sector was paying about 25% of
the fees. Is that right?
Mr Earley: For the Regional Venture
Capital Funds, the Department's investment accounts for about
25% of the total size of the funds at the outset, at inception,[4]
and the Department pay the same rate of fees as other investors
in those funds.
Q38 Mr Bacon: If you take the total
fees that have been paid, £46 million was the fee for the
Regional Venture Capital Fund. If you take the total fees which
are £73 million, what percentage of that would have been
funded by the private sector and what percentage of that would
have been funded by the public sector? In total.
Mr Earley: It differs for each
programme.
Q39 Mr Bacon: What I am really asking
is: what is the total amount of fees paid for by taxpayers?
Mr Earley: I would have to calculate
that and come back to you on that precise figure.[5]
1 Ev 13 Back
2
Note by witness: The correct figure is 29.7% Back
3
Note by witness: The correct figure is 29.7% Back
4
Note by witness: The correct figure is 29.7% Back
5
Ev 14 Back
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