Business Angel Co Investment Fund
The Business Angel Co Investment Fund has been made possible because of a successful bid to the UK Government's Regional Growth Fund. The CoFund will make £50m available to invest alongside Business Angel networks or syndicates into eligible SMEs.
The CoFund will operate by investing alongside and on the same terms as syndicates. It will not be open to approaches from individual businesses therefore businesses seeking investment should first look for an investment syndicate.
What type of deal will the fund invest in?
Syndicates should be looking for the Angel CoFund to provide equity or quasi-equity investment of between £100,000 and £1m into eligible SMEs. The fund will provide up to 49% (although by preference will be a smaller proportion) of the capital in investment rounds ranging from £200,000 upwards. The size of the investment proposed needs to be significant enough to properly fund the business and to allow for the cost of proper due diligence and legal advice. The investment needs to be a new investment for the Syndicate, rather than supporting an existing investment, which will help to ensure that the Syndicate and the CoFund's objectives are broadly aligned. The CoFund will, to the extent possible, follow the terms of the Syndicate including the structure and price of any investment. Once invested the CoFund will be able to make follow on investments alongside Syndicates in to companies that are already within its portfolio.
In order to meet the conditions of the Regional Growth Fund, certain geographical restrictions apply and at its outset the fund will not invest in companies based in the 25% of most affluent wards (a post code lookup facility to confirm this will be available shortly). Investee companies must also fall within the European Commission SME definition (headcount not exceeding 250, turnover not exceeding € 50 million and balance sheet assets not exceeding € 43 million).
Investee businesses can be from within any industrial sector and whilst it is anticipated that the majority of beneficiaries will be early stage high growth companies, SMEs at any stage of their lifecycle are eligible providing they have the required level of investment from the angel syndicate.
How does the relationship with the syndicate work?
The Angel CoFund is inviting investment proposals from Syndicates where the Syndicate itself has made the decision to invest but is unable to provide the entire equity funding requirement of the investee business.
Syndicates will be responsible for sourcing investments, carrying out appropriate due diligence and producing papers to support the case for investment. These documents will be shared with and used by the Investment Committee of the Angel CoFund to inform their approval of an investment. Syndicates will also need to share details of how they are constituted and be able to sign the necessary commitments, in the form of a Syndicate Agreement, to become a partner of the Angel CoFund.
On completion of any investment the Syndicate will become a Partner of the Angel CoFund, in so doing the Syndicate will agree to provide the Angel CoFund with access to all future investment opportunities that the Syndicate considers (although the Angel CoFund will not be obliged to invest).
In addition to sharing future investment proposals the Syndicate will agree to provide the CoFund with monitoring information relating to the co-investments. This information will include a requirement to make a recommendation in relation to future investment or exit activity.
What makes a Syndicate?
To qualify as a partner each Syndicate must comprise at least three investors (although the counterparty to the Syndicate Agreement may be an individual or organisation) who are investing as part of the Syndicate.
The Angel CoFund will also accept proposals from Syndicates that are supported by a non-investing manager. In such instances the manager or network will need be in a position, either directly or through its constituent investors, to meet the obligations to report on the portfolio company and monitor its performance. Again the manager will be obliged to share all future investment opportunities.
Investment Terms
The fund will, to the extent possible, follow the investment terms proposed by the Syndicate, including the structure and price of any investment and will invest in equity (or equity like instruments) alongside other Syndicate partners. It is anticipated that many investments will be compliant with the Enterprise Investment Scheme (EIS) but this is not a criteria for funding.
In order to ensure that investment objectives are aligned, the Syndicate or its associates must not already have an interest in the investee company prior to the funding round (although it is possible that other investors in the overall round will already be investors in the business). The Angel CoFund may not hold more than 30% of the total equity of the target company immediately following the funding round. Syndicates and other investors may also be required to consider any applicable State Aid restrictions as a result of other investments.
Syndicate Fees and Carried Interest
Where the Angel CoFund chooses to invest, a one off fee of 2.5% of the amount it invests will be payable to the Syndicate manager. This is the same level of fee that is paid to partners of the Scottish Co-Investment fund and is considered reasonable as a payment for the investment monitoring and reporting activities that the syndicate is then required to carry out on behalf of the CoFund.
In addition to the above the Syndicate will be able to collect an arrangement fee from the investee company on the CoFund contribution, and primarily this should be used to pay costs (e.g. legal fees). All fees will have to be transparent in the investment paper and the Investment Committee will be able to reject a proposal if they feel that fees and charges are too high. The CoFund will expect to share in any monitoring or other fees charged to the investee company on the same basis as other syndicate members.
Where a Syndicate manager normally charges a carried interest payment on successful investments to other investors the Angel CoFund will consider supporting this and having it applied to its investment.
The one off fee will be kept under review and some partners may want to accept a reduced fee to be allowed, for example, a larger share of carried interest (a success related payment).
The one off fee will be kept under review and some partners may want to accept a reduced fee to be allowed, for example, a larger share of carried interest (a success related payment).
Monitoring and Reporting
Where the Angel CoFund chooses to invest, a one off fee of 2.5% of the amount it invests will be payable to the Syndicate manager. This is the same level of fee that is paid to partners of the Scottish Co-Investment fund and is considered reasonable as a payment for the investment monitoring and reporting activities that the syndicate is then required to carry out on behalf of the CoFund.
In addition to the above the Syndicate will be able to collect an arrangement fee from the investee company on the CoFund contribution, and primarily this should be used to pay costs (e.g. legal fees). All fees will have to be transparent in the investment paper and the Investment Committee will be able to reject a proposal if they feel that fees and charges are too high. The CoFund will expect to share in any monitoring or other fees charged to the investee company on the same basis as other syndicate members.
Where a Syndicate manager normally charges a carried interest payment on successful investments to other investors the Angel CoFund will consider supporting this and having it applied to its investment.
Subsequent Funding Rounds and New Opportunities
The Angel CoFund is designed to participate in a Syndicate in the same way as any other Business Angel and as such will be able to participate in all future investment rounds for the portfolio company. All follow-on investments will be subject to the approval of the Investment Committee. The Angel CoFund will also be entitled to participate in all new eligible company investments which the Syndicate undertakes.
Assistance with preparing applications for syndicates wanting to approach the Business Angel Co-Investment Fund is available via Yorkshire Association of Business Angels. Please contact us for further information barbara@yaba.org.uk 01423 810149
