Locked on to targets

Locked on to targets

Andrew Mitchell answers BQ's questions on the effects of the £125m Finance for Business North East Fund on ambitious companies in the region.

BQ: Three years into running the £125m Finance for Business North East Fund, how effective would you say it is in giving companies of the region, and the region’s economy, some uplift? Clearly, one programme can only achieve so much, and our focus is very much on the smaller end of the market, albeit with strong emphasis on companies with high growth potential. Even so, with some £60m from the FFB funds committed to regional businesses so far (in 30 months of operation) and some £65m brought in as private sector co-investment (much of it from regional business “angels”), we have seen approaching £150m already invested in some of our most exciting companies as a result of the JEREMIE programme. We are also on track to meet our targets in jobs created, not to mention the collateral benefits to our professional services community created by the boost to dealmaking in the region.

BQ: How successful would you say the fund has been during 2012? We have already invested over £20m this year and expect a year-end number of around £25m – very much on a par with 2011. Overall, the FFB funds have continued to progress in line with targets set, at a time of continued economic uncertainty, reduced business confidence and, not least, the continued absence of bank lending for many sectors within the SME space.

BQ: Can you give some indication of the range of sectors benefiting? We have invested across the eligible range, with IT and software in front, closely followed by manufacturing (£20m so far). Companies in the health and creative sectors have also received substantial investment.

BQ: How have enquiries changed since the launch? There was a strong ‘bow wave’ of deals in early 2010, when the FFB programme opened for business; however, we have been delighted to see a strong and sustained pipeline of high quality deals in the region and, overall, applications are up in 2012 versus 2011.

BQ: What proportion of enquiries result in investment? That varies hugely across the suite of funds. The high end equity funds (such as IP Group’s Technology Fund and North Star’s Accelerator Fund) tend to receive many more propositions for each transaction they do (typically one completed deal for every 10 applications), because they are very much looking for deals with greatest potential (the next Sage if you like), whereas the micro-loan and Proof of Concept Funds, dealing with very early stage businesses, where amounts for each investment are relatively modest, are looking for a broader spread of deals, so the ‘hit rate’ for applicants is around 1:3.

BQ: Have you had a burst of Microloan Fund applications as a result of redundant public sector individuals wishing to set up businesses? Recent research has shown that over the next three years or so, the ratio of opportunity entrepreneurs to ‘necessity’ entrepreneurs, across the UK, will shift from around 60:40 to 30:70 and much of that change will be driven by job losses in the public sector. Many cuts announced in the North East have still to take effect so we certainly expect a continued rise in the number of ‘necessity’ entrepreneurs in the region. The micro-loan fund will do its best to support the best of these.

BQ: Has the standard of business plan accompanying any such applications been high in the main, or has there been a need for many to review and resubmit? Again, there is a wide variation across the different funds. Entrepreneurs and businesses seeking larger amounts of money (into six figures) tend to have consulted professional advisers, so the business plans tend to be at a more advanced stage. Certainly, we have seen no dropoff in the quality of deals, and those of our investment managers who operate across the UK for example (such as IP Group) confirm this. However, at the lower end (under £100k) our fund managers are routinely involved in working with applicants to enhance their strategies and refine their business models. It’s an integral part of the investment manager’s job in the SME sector. Sometimes, too, a business may just not be ready for external investment, with the responsibilities (as well as opportunities) that come with the money.

BQ: A key aim of the fund was to attract employers from outside the region into the North East. Is this being achieved? In 2010 definitely, yes. Some 20% of applications then came from outside our region. With the emergence of similar funds in the North West and Yorkshire, and the very activist stance of the Scottish Government north of the Border, that number has fallen back to around 10%. However, our fund managers remain keen to engage businesses from outside the North East that are willing to re-locate where that makes commercial sense for the business. I don’t doubt, either, that we have stemmed the flow of young entrepreneurs heading south to find intelligent investment capital. Now that is available here on our own doorstep.

BQ: How firmly on track is the fund to achieve all the aims visualised for it at the outset? Absolutely on track. It is too early to tell what the long term investment returns to legacy will be, but in terms of putting the cash to use, we are right where we need to be as we move into the second half of the investment life of the programme. Getting there will take hard work by all concerned (not least by the region’s entrepreneurs who are the real point of all of this).

BQ: What sectors do you think might particularly stand to succeed with bids during 2013? As ever, it is hard to forecast this with any accuracy, especially as the economic situation is so volatile. But I am confident firms working in some of the region’s manufacturing ‘hot spots’ will continue to do well.

BQ: Are there any sectors or types of companies from which bids have been comparatively rare, but which you think should be making a pitch? Sometimes people assume our fund managers are only interested in high-tech businesses. That couldn’t be further from the truth. With one or two exceptions (where we have to follow the EU rules) we are interested in ambitious companies with growth potential from across the board. There are some tremendously innovative firms in the manufacturing and service sectors in this region and we are keen to talk to them.

BQ: Are there any common mistakes made with initial applications which, by avoidance, could lead to faster processing and perhaps greater chances of early and favourable consideration? Well, inevitably, whatever it is people want to do with the investment they need will take twice as long, and cost twice as much as they think! So, one of the key things is to be realistic on timeframes and cost, and to be honest about the risks of whatever development you have in mind.

BQ: For how much longer does the fund run? The fund can invest right up to the end of December 2014. Once the money has been invested, the managers will then be focussing on the equally important task of maximising returns on the investment through loan redemptions, trade sales and, hopefully, the odd IPO, and that will take us through to 2020. We need to pay back our own investors (the European Investment Bank in particular) then maximize the legacy returns for the region.

BQ: What job satisfaction do you and your staff get in fielding applications? I think everyone involved with the FFB programme is an enthusiast with a real passion for investing in exciting young businesses and working with entrepreneurs from across the North East. Many of our investment managers could earn far more working in the private equity business, doing larger leveraged deals in established companies. But – like me – they want to work with early-stage companies.

Andrew Mitchell is chief executive of North East Finance (Holdco) Ltd.