Conclusions and recommendations
1. Despite investing taxpayers' money in venture
capital funds for almost ten years, the Department failed to establish
a basic set of economic and financial objectives vital for setting
clear direction for this set of funds.
As a priority the Department should set clear, prioritised objectives
for the programme as a whole and the individual funds including,
in particular, the intended economic benefits for businesses.
It should then set targets for measuring their success.
2. This was a new and risky programme but
it was eight years before the Department even began to evaluate
the impact of these funds. The Department
should, within the next two years, be in a position to demonstrate
whether value for money is being achieved. In doing so, it should
assess both the past and likely future financial performance of
the funds and the economic impact secured. It should also evaluate
the impact of the investment on individual businesses, including
whether limits on the amounts that can be invested have reduced
the likelihood of significant successes.
3. The early funds were structured in a way
that meant the taxpayer bore a disproportionate share of the risk
compared to private sector investors, and hence greater losses.
When developing new funds the Department, building on the improvements
made to the design of more recent funds, should avoid structures
which give preference to the interests of private investors and
leave the taxpayer with substantial risks.
4. We are concerned that the Department and
Capital for Enterprise Limited do not have a grip on the cumulative
fund management fees incurred by these funds, and by paying fees
regardless of performance, have been prepared to reward failure.
The large number of funds plus the small size of individual investments
are likely to have increased the costs. For the future, the Department
should reduce the number of funds to focus its investments on
those areas most likely to yield benefits to the taxpayer. Where
there is evidence of poor performance by fund managers, Capital
for Enterprise Limited should take prompt action to reduce fees.
5. Despite investing taxpayers' money in funds,
the Department has accepted restrictive confidentiality clauses
and until late 2009, there was scant information in the public
domain about the performance of the funds.
Capital for Enterprise Limited has recently published some aggregated
data about the funds. It needs to build on this by providing a
clear up-to-date picture of where investments have been made and
of how the funds have performed, including the extent of any successes
and write-offs. For future funds, the Department should avoid
entering into confidentiality agreements which restrict its ability
to be transparent about fund performance.
6. There is a risk that the current pattern
of investment, concentrated in London and the South East, reinforces
inequalities between regional economies.
The geographical distribution of investment activity for the national
funds tends to coincide with where fund managers are located.
Capital for Enterprise Limited should make fund managers aware
of the Department's remit to reduce inequalities between regional
economies to avoid the risk that promising businesses in the regions
are overlooked. Capital for Enterprises Limited should also publish
data on the regional distribution of funds and fund managers.
7. The Department lacks a clear picture of
how its national programme of venture capital funds fits alongside
other venture capital funds established and managed by Regional
Development Agencies. The Department and
Regional Development Agencies should collate information on the
aims, objectives, and amounts invested in the various publicly-supported
venture capital funds. The Department should use this information,
working with other relevant public bodies, to ensure that funds
complement each other, that any potential duplication of effort
is avoided, and that common objectives are pursued efficiently.
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