fifth report: 23 april 2020 bvca feedback on feedback on … · additional funding for early stage...

1

BVCA feedback on impact of COVID-19 on the UK private equity and venture capital industry

Fifth report: 23 April 2020

2

Impact of COVID-19 on the UK private equity & venture capital industryThe British Private Equity and Venture Capital Association (“BVCA”) is the industry body for the private equity and venture capital (“PE/VC”) industry in the UK. With a membership of over 770 firms, the BVCA represents the vast majority of all UK-based firms, as well as their investors and professional advisers.

Key policy issues we have prioritised this week:

1 Finance for VC-backed, early stage companies – new Future Fund facility

Problem: The specialist sources of capital for early-stage funding are increasingly limited and these companies do not meet the criteria of regular commercial lenders. We welcomed the announcement of the Future Fund but are concerned that early stage businesses with smaller investors (such as angels, EIS and VCT investors), will not benefit from the scheme.

Action: We remain committed to working with the government and the British Business Bank on the details of the programme to ensure that this funding reaches those most affected in this vital part of the UK’s economy.

CBILS and CLBILS – resolution of state aid issues

Problem: A large number of successful UK businesses with strong prospects of being able to repay any government-backed loans are technically considered to be an “undertaking in difficulty” under the definition being applied as part of the EU state aid rules.

Action: We are working with HMT, the BBB and our European counterparts on this issue. We believe the European Commission could amend the Temporary Framework so there is an appropriate application of the “undertaking in difficulty” test for businesses that are funded primarily by debt, are investing heavily to grow and are otherwise performing well (save for the current crisis).

2

3

Other areas of importance

The BVCA remains engaged on a range of other Covid-19 issues affecting the industry, including the following:

• The moratorium on the filing of winding up petitions by creditors would help businesses and we urge that this change now be fast tracked. We also welcome the more recent announcement in respect of commercial tenants.

• The suspension of the wrongful trading rules is positive. If there is scope to issue guidance for directors and amend legislation in respect of directors’ duties, that would provide crucial further support.

• We welcomed the extension of the Job Retention Scheme to June and will continue to monitor its implementation and whether further extensions are required, and what the scheme should look like as we transition out of the lockdown.

• We have been in dialogue with the CBI on other measures to support businesses’ cash flows including rent holidays for affected businesses and the impact on landlords. For some businesses this is a priority issue and further relief will be needed. We note the announcement on 23 April.

• An extension of business rates relief to all businesses unable to operate because of government restrictions is needed.

• Faster approvals of EIS/VCT funding and faster payments of R&D tax credits, as well as the relaxation of state aid rules on EIS/VCT schemes, is necessary for innovative businesses across the UK.

4

Highlights of BVCA survey 20-22 April 2020

of portfolio companies had been denied access to Government support schemes on the basis of state aid rules around “corporate groups”

6613%

66 companies backed by survey respondents1,400+

of portfolio companies did not qualify due to the internal policies of the individual lenders6665%

portfolio companies had successfully accessed CBILS6619

expect the new CLBILS package to address the cashflow issues of their portfolio companies either fully or partially6655%

respondents expect all or some of their portfolio companies to benefit from the Future Fund6622

of respondents are expecting to inject more money into their portfolio companies6661%

of respondents’ portfolio companies have furloughed staff on average6658%

5

Results of BVCA survey 20-22 April 2020

Respondents • 56 firms responded to the survey representing 17% of the population of the private equity and venture capital firms surveyed.

• The majority of the firms have funds with less than £500 million AUM (68%).

• The 56 firms operate in different parts of the UK market, with 31 in mid-market, 19 in growth capital and 19 in venture capital.

• The firms have investments in 1,408 companies (either minority or majority stakes).

• A wide range of sectors continue to be affected, particularly life sciences and deep tech, in addition to the primary sectors affected which include the travel, leisure and hospitality sectors.

About BVCAOver the past five years (2014-2018), BVCA members have invested over £38 billion into 2,800 UK companies nationwide.

Our members currently back 4,330 companies across the world, employing close to 1.6 million people on a full-time equivalent basis.

843,000 people are employed in the UK and 87% of UK businesses are SMEs.

£25m -£50m

Up to £25m

£50m -£100m

£100m - £250m£250m - £500m

£500m - £1bn

£1bn - £5bn

Over £5bn

assets under management

6

Portfolio companies denied access to support schemes


• A total of 187 companies had been denied access to government schemes from the sample of 46 VC/PE firms. 13% of these portfolio companies had been denied on the basis of rules around “corporate groups” under CBILS; 14% had been denied access due to the “undertakings in difficulty” rules under state aid, and 7% were denied due a combination of issues connected to state aid rules. We should note that the criteria on groups under CBILS has now changed.

• 65% of the portfolio companies did not qualify due to the internal policies of the individual lenders. We were also told some firms were waiting to hear back and some did not apply as they were aware of the grouping point.

• Across the entire sample (56 PE/VC firms) 19 portfolio companies had successfully accessed CBILS, and at least 2 others were awaiting approval. One portfolio company is this sample successfully accessed the CCFF scheme and no companies had accessed the Term Funding Scheme.

• From the survey sample (56 firms), an estimated £597 million of financial support would be needed across the sample’s portfolios to ensure businesses can survive the crisis. The true figure is likely to be significantly higher.0

30

60

90

120

150

Company treated under state aid

rules as part of a corporate group, so over £45m CBILS

threshold

Company classed as an “undertaking in difficulty” under

state aid rules

A combination of the above two reasons/state aid

rules generally

Company does not qualify on banks’ commercial terms or under internal policies, without

reference to state aid rules

no.

of p

ortf

olio

com

pan

ies

7

Expectations on new scheme accessibility

Will CLBILS address portfolio company cash flow issues?


0

20%

40%

60%

80%

100%

Yes Partly No

Will your portfolio companies benefit from the Future Fund?

0

20%

40%

60%

80%

100%

Yes, as we meet the

eligibility criteria listed above

and can match the government

commitment

Some of our companies

will benefit but others may not

due to the criteria and the matching

requirement

N/AUnclear, further information is

required on how to access the fund through

the British Business Bank

No, as we are not in a position

to match the government

position

• On CLBILS, most respondents believed that the scheme would help, either fully or partially, to address the cashflow issues of their portfolio companies.

• The majority of respondents who did not believe CLBILS would be helpful noted that the reasons for this were due to the either the turnover size or life-cycle stage of the portfolio companies in which they invest. Many said that CBILS or the Future Fund would be more relevant.

• On the Future Fund, 22 firms responded that this would be relevant to at least some of their portfolio. A further 7 said it was unclear and that more information is required on how to access the scheme.

• A number of respondents noted that the Future Fund was likely inaccessible for VCTs due to the matched funding criteria.

8


Furloughing vs. redundancies

Are you also considering redundancies?

0

20%

40%

60%

80%

100%

Yes, due to immediate

short-term cash shortages

Yes, due to changed economic

circumstances after the

lockdown period

Yes, if the furlough period is not extended

beyond June 2020

OtherNo

• 36% of respondents said their portfolio companies are considering making redundancies if the furlough period is not extended beyond June 2020.

• 25% would make redundancies due to changed economic circumstances after the lockdown period

• 12.5% would make redundancies due to immediate short-term cash shortages.

• On average, 58% of companies within the respondents’ portfolio companies had already furloughed employees.

9


Insolvency concerns

How important are the following potential changes to the UK insolvency regime?

0

20%

40%

60%

80%

100%

Legislative changes relating to directors’ duties and wrongful

trading

Further Government guidance on directors’

duties and wrongful trading

A moratorium on winding up petitions

Not important Important Very important

100%

Furtherinformation

Recommendations for Government to support PE/VC backed businesses nationwide

Government funding ...... 11

Insolvency reform and wrongful trading ...... 13

Government announcements to assist businesses’ cash flows ...... 14

VC tax-advantaged schemes ...... 15

11

Recommendations for Government to support PE/VC backed businesses nationwide• Companies urgently need government intervention to support liquidity and cash flow challenges for otherwise sound businesses. The devastating impact of the

COVID-19 virus continues to affect individuals and the economy. For the recent funding announcements to be helpful, the cash will need to be deployed quickly for businesses to continue their operations.

• Public announcements and signalling on any further measures should be made as soon as possible whilst the underlying legislation is developed.

1. Government funding Additional funding for early stage companies is urgently required

• We welcomed the announcement of the Future Fund as we had recommended a £500m British Business Bank (BBB) funding facility designed for the needs of innovative early stage companies in sectors such as digital/ tech, biotech and life sciences.

• Having reviewed the published headline terms for the scheme and discussions with venture firms, we are concerned that early stage businesses with smaller investors (such as angels, EIS and VCT investors), will not benefit from the scheme. We would also recommend consideration is given to ensuring that smaller companies can access the Fund, perhaps by allocating a proportion.

• We have been informed that businesses backed by the BBB’s Enterprise Capital Funds (ECF) programme could be excluded for the purposes of matched funding. We have requested urgent clarification of this.

• Approximately 450 ECF-backed businesses invest predominantly in knowledge intensive companies. The venture capital funds who co-invest with the ECF offer critical funding to entrepreneurs whilst they are beginning work on early commercialisation of their technologies.

• The matched funding requirements prevent EIS and VCT investors (including business angels) from being involved with the scheme. EIS funding can only be provided by share subscription (including short term advance subscriptions) and VCT convertible loan agreements must be for a minimum term of 5 years and cannot have an annual return of more than 10% (hence incompatible with the maximum 3 year term and 100% redemption premium set out in the draft terms).

• The implication that investment must be pari-passu means a parallel equity investment (EIS qualifying) would not suffice either. Angels may be willing to forgo EIS, but the uncertain nature of the conversion and treatment as debt would also appear to put any prior EIS investment at risk such that any angel investing alongside the Future Fund instrument would risk losing all of their accrued EIS benefits.

• We would recommend that the matched funding definition could be changed so that it relates specifically to a matching amount of funding from the private sector rather than necessarily funding invested in the same instrument as Government.

• We have also provided feedback on other aspects of the headline terms.

12


1. Government funding (cont.)CBILS and CLBILS – state aid issues need to be addressed

• Both loan guarantee schemes have been welcomed by our members including the removal of the ‘grouping’ arrangements which were preventing many venture capital and private equity-backed businesses gaining access to these schemes.

• A large number of successful UK businesses with strong prospects of being able to repay any government-backed loans are technically considered to be an “undertaking in difficulty” (UID) under the definition being applied as part of the EU state aid rules. This means accredited banks, who are tasked with applying state aid rules for the purposes of CBILS and CLBILS, are unable to lend to these companies under the UK schemes. This appears to be a problem in EU countries as well.

• The UID test justifiably aims to prevent government support for otherwise failing businesses, as in normal circumstances this could distort competition within sectors and, more relevantly at the moment, within the EU. It is however relevant to note that the General Block Exemption Regulation (GBER) from which the UID definition is drawn is itself a rare exception to the requirement that any state aid first needs to be notified and approved by the Commission before being put into effect. Given that context, it is not surprising that a very broad definition of UID is used.

• Unfortunately, when applied in the context of the current Covid-19 crisis, this definition is particularly unhelpful and may give rise to unintended consequences. This is because one limb of the test uses an approach to judging whether a business is in difficulty that is unhelpful when applied to growth or leveraged companies, namely whether the company’s accumulated losses are equal to or greater than 50% of its subscribed share capital.

• Early stage and growth companies may be considered UIDs merely because they have borrowed or expended initial share capital to invest and expand, whilst other PE-backed companies are considered UIDs simply due to their performance-focussed management team incentives and financing structures.

• We are working with HMT, the BBB and our European counterparts on this issue. We believe the European Commission could amend the Temporary Framework to modify the application of the UID test so it is appropriate for businesses that are funded primarily by debt, are investing heavily to grow and are otherwise performing well (save for the current crisis). Any changes made to solve this issue do not need to affect the underlying EU state aid framework, rather they could be as time limited and temporary as the Temporary Framework itself.

13

2. Insolvency reform and wrongful trading• A moratorium on the filing of winding up petitions by creditors would help businesses buy crucial time to mitigate the impact of the liquidity crises they are facing. This formed part of the package of

changes to the UK insolvency rules that the Insolvency Service has been consulting on since 2018. We welcome the Business Secretary’s announcements in March that such a measure would be introduced, but urge that this change now be fast tracked. We also welcomed the more recent announcement in respect of commercial tenants.

• We believe the suspension of the wrongful trading legislation is positive. If there is scope to issue guidance for directors and amend legislation in respect of directors’ duties, that would provide crucial further support. This is an important area for directors to navigate in the current crisis and BVCA members are conscious about their responsibilities as directors on the boards of their portfolio companies. Discussions with creditors, especially lenders, are also ongoing.

• The following measures have been recommended to the Insolvency Service and we are keen to discuss these further with BEIS:

– Specific legislative amendments to the wrongful trading and directors’ duties provisions; and

– Publication of government guidance for directors.

• The timings of interventions are crucial and our members (alongside other businesses) need urgent support. We feel that government guidance for directors could be published more rapidly than legislative changes and by signalling the Government’s direction of travel in respect of its support measures and intention to introduce legislation, directors would be provided with a reasonable level of comfort when making decisions.

– We have suggested some draft guidance for the Government to consider further and this has been shared.


14


3. Government announcements to assist businesses’ cash flows• We welcomed the extension of the Job Retention Scheme to June and will continue to monitor its implementation and whether further extensions are required and what the scheme should look like

as we transition out of the lockdown. This scheme is enabling businesses to keep people in employment and will aid and accelerate the recovery (when it comes).

• Business rates relief should be extended to all businesses unable to operate because of government restrictions.

• We have been in dialogue with the CBI on other measures to support businesses’ cash flows including rent holidays for affected businesses and the impact on landlords. For some businesses this is a priority issue and further relief will be needed. We note the announcement on 23 April to protect high street shops and other companies under strain from aggressive rent collection.

• From a tax perspective, the deferral of income tax and VAT payments are welcome, and the feedback received is that members are having productive conversations with HMRC. Overpayments from payments on account should continue to be repaid quickly.

• We also welcomed HMRC’s approach for individuals and corporates that are now in different locations from a residency perspective.

• Faster payments of R&D tax credits will support the viability of businesses claiming them. This is especially relevant for early stage companies in the life sciences and biotech sectors with relatively short cash runways.

15


4. VC tax-advantaged schemes• Innovation must continue to be supported during this crisis. A recent BVCA report highlighted the huge impact of venture capital and angel finance on start-ups and the wider economy. Conducted

by Oxford Economics, The Innovation Nation shows that employees at companies backed by angel investment and venture capital are 60% more productive than the total UK private sector average, and, once supply-chain impact is factored in, these businesses contribute a total of £37.7 billion of GDP to the UK economy and account for 570,000 jobs.

• We would support temporary relaxations of the investment criteria to unlock additional capital from these schemes. The VCT Association has provided detailed feedback on the state aid rules that need to be relaxed. The existing VCT rules are preventing firms from providing essential and immediate additional investment to businesses in their portfolios where they no longer meet the qualifying criteria. No additional costs would fall on the Exchequer as the relief has already been received, and this injection of capital would entirely be from private sector investors.

• Faster approvals for SEIS/EIS/VCT transactions will support early-stage businesses that need an urgent transfusion of cash.

+44(0)20 7492 0400 / [email protected] / www.bvca.co.uk Find us on:

5th Floor EastChancery House53-64 Chancery LaneLondon WC2A 1QS

fifth report: 23 april 2020 bvca feedback on feedback on … · additional funding for early stage...

Documents