After great fanfare, the UK’s Future Fund is opening for business. From Wednesday 20 May 2020 applications can be made via the government’s Gov.uk website.
The Future Fund is a UK Government-backed co-investment scheme delivered by the British Business Bank (summarised in our article of 20 April “The Start-up Liquidity Bridge”). It is aimed at supporting high-growth companies during the COVID-19 pandemic, and beyond.
The Government introduced the Future Fund to plug a gap in coverage for start-up and scale-up companies in its initial package of COVID-19 liquidity schemes, such as the Coronavirus Business Interruption Loan Scheme (CBILS). The funding takes the form of convertible loans ranging from £125,000 to £5 million per company, matching new investment from the private sector. Overall, the scheme has an initial investment kitty of £250 million, meaning a potential aggregate investment of at least £500 million when matched by the private sector.
The loans are convertible into equity in the borrower company. Generally speaking, the terms are fairly neutral between the investors and the company, with a non-compounded interest rate of 8% per annum which is rolled up for payment on maturity or conversion. On a qualifying fundraising that triggers conversion, the loans automatically convert into the most senior class of share in the company at a (fairly normal) 20% discount to the price in that fundraising. But the investor 100% redemption premium (which is effectively a 2x return on investment) is not a common feature of early/growth stage convertible debt rounds and is investor-friendly. There are of course further terms, including other conversion rights and trigger events, which can be found on Gov.uk.
A key feature of the Future Fund is that it is co-investment by the government. So for every £1 invested by the government, there must be at least £1 of new private sector investment made on the same terms. Crucially, companies applying for the Future Fund must have raised £250,000 from private third party investors in the last five years. These conditions are intended to reduce the risk to the Government; it will only invest in companies in which private sector investors have been and are again willing to invest.
There have been complaints in the last month (since the Government released the headline terms of the Future Fund) that the scheme is not compliant with UK’s SEIS or EIS tax-efficient investment schemes, because convertible loans do not qualify for SEIS or EIS treatment. Concerns were raised that, for the scheme to be truly successful at injecting liquidity into the high growth sector, angel investors would need to be attracted via the SEIS/EIS scheme’s tax efficiencies.
However, despite pressure from various groups, co-investing with the Future Fund remains outside SEIS or EIS treatment. Reasons cited for the exclusion of SEIS/EIS compatibility include EU state aid rules, the mitigation of risk to the Government by investing alongside institutional investors and the view that SEIS and EIS already are a de facto sharing of risk between the Government and investors by virtue of the sizeable tax reliefs associated with such investments.
Expectations are that companies applying to the Future Fund alongside securing the requisite private investment could receive funds from the British Business Bank in as little as 14 days. If the fund is successfully rolled out and private investors are willing to act promptly to offer investment, this could be a significant step towards improving all-important liquidity for the UK’s high growth companies. The Chancellor has already announced that the Government is willing to enlarge the Future Fund if demand exceeds the initial £250 million made available.
Get in touch with Nick Atkins or your usual contact in the Stevens & Bolton corporate team if your company is interested in participating in the Future Fund. We can help you determine whether it’s right for your business and, if so, to navigate the application process successfully.
Nick Atkins