Government ‘Future Fund’
The Government has announced a further COVID-19 support measure, targeted at early-stage or developing companies.
The Coronavirus Business Interruption Loan Scheme (CBILS) is already in place, but this only works for ‘bankable’ businesses and those that have generated and retained profits over the preceding three years. For start-ups or pre-revenue companies in their development phase, bank funding wouldn’t generally be available in ‘normal’ times so CBILS will not help them.
24th April 2020
Mark Neath See profile
For larger companies, and specifically those who have previously (in the past five years) raised a minimum of £250,000 of equity investment from third-party investors, the new Future Fund has been announced.
Unfortunately, there would appear to be nothing for companies which fall between those categories.
The Future Fund is planned to launch in May and to be available initially until September 2020.
It will be available to UK companies who have previously raised a minimum of £250,000 of third-party equity investment.
The funding will be made available in the form of convertible loans of between £125,000 and £5 million. Crucially, any Future Fund loan must be matched by loans from third-party investors. This means that the funding will only be accessible to those companies able to source at least £125,000 from other sources, but for those that can, means the Government will effectively double-up those loans.
Sounds good in principle.
A link from the gov.uk page takes you to a PDF of the Key Terms document which sets out a bit more detail than is in the announcement.
- Maximum loan term is three years.
- Interest will be the higher of 8% and the rate payable to the third-party investors. This is a ‘commercial rate’ for funding a business at this stage in its lifecycle, but it’s certainly not cheap money. The interest is rolled-up and only payable when the loan is settled, so this is beneficial to cash flow.
- Redemption premium of 100%. If the loan is repaid (rather than converted) then the company effectively repays double the original principal amount.
- Conversion. The loan converts to equity in the company in a range of circumstances: if the company chooses not to repay it at maturity; on sale; on an IPO; or on an equity funding round whilst the loan is outstanding.
On conversion, the Government acquires shares in the company at a 20% discount from the most recent funding round.
Whilst the above terms are all usual for a venture capital type investment, they are highly unusual for a Government loan scheme. The conversion rights could result in the UK Government holding equity ownership of a number of developing companies.
Perhaps the Chancellor is hopeful that one of these investments will turn out to be a ‘unicorn’ and the eventual privatisation gains will pay for all of the other COVID-19 support schemes!