HM Treasury will be investing £1 billion with fund managers that lend to UK businesses with a turnover under £500m. This guide sets out the process by which banks and investment fund managers can pitch to HM Treasury for investment.
On 29 November 2011 the Chancellor announced that the Government would make available up to £1 billion for lending to SMEs and mid-sized business in the UK, through alternative lending channels. The £1bn will be invested in a number of tranches over a period of two to three years.
For the first tranche (with an expected closing in Summer 2012), HM Treasury invited prospective fund managers to submit their proposals for consideration by publishing its Request for Proposals (11-page / 156KB PDF). It gave managers only three weeks to submit a response. Although managers are no longer able to apply for this tranche it is likely that in the coming months HM Treasury will publish a similar document for the second tranche. Based on the timeline for the first tranche, managers considering applying for the second would be advised to start preparing well in advance of the announcement.
The Treasury will make investments of between £25 million and £250m in any one fund and such investments could be made into existing funds or funds yet to be established. The manager will need to source at least 50% of commitments from other sources prior to the fund’s closing date, whether from internal capital or from third party investors. The investment mandate of the fund must include (but not necessarily be limited to) lending directly to businesses in the UK.
Response to Treasury
The Treasury requires applicants to provide information on:
The background of the manager
- ownership and governance structure of the manager as well as details of remuneration, governance and risk management policies
The fund structure
- the structure should reflect market standards and be acceptable for investment by the Treasury, most likely through the use of an English limited partnership. Information provided should include a tax analysis
- the Treasury has a preference for investing into existing funds to avoid the risk that the manager will not be able to source the required level of investment from other investors
- might contain provision of a parallel investment vehicle. The fund manager should consider whether a parallel investment vehicle is needed.
- for a fund yet to be established information should include comfort that the Government investment is permitted under the terms of any other funds already managed by the manager and that the manager would be able to admit private investors at the same time or before admitting the Treasury
- including a description of how the objectives of the fund will be met with a preference for loan terms between two and 10 years, preferably setting out a strategy that is not focussed on particular sectors
- it may be useful for the manager to include examples of the expected deal pipeline
- including details of how the manager is expecting to source deals
- including details of certain fund terms such as drawdown arrangements, key man provisions, conflicts of interest and how an advisory board would operate
- including a demonstration that the manager is capable of dealing with the increased monitoring and reporting requirements (including in relation to ethical standards) likely to be required by the Treasury
- including a demonstration that the key personnel have enough available time to engage with the proposed fund;
- including a description of arrangements to ensure retention of key personnel which would include carried interest allocation and, if appropriate, vesting for individual executives
- including details of current and previous funds under management
- including a track record in previous roles where the management team is new
- including terms such as the commitment of the management team and the investment period, together with other terms that are normally included in a fund term sheet
- appealing to cornerstone public sector investors such as the Treasury is often helped by including specialised terms such as time-based minimum capital deployment levels and involvement of independent individuals on the investment committee
- to include details of management fees and carried interest including details of escrow and clawback arrangements
- the Treasury is also likely to consider the position on transaction fee sharing and how abort costs are to be funded
For more information please contact: Daniel Greenaway or Ian Warner.