In-depth: The Government’s new Future Fund

Eligible companies may be unable to access other schemes due to being pre-revenue or pre-profit and will usually be reliant on equity investment.

Recipients must be:
- Unlisted
- Registered in the UK
- Have previously raised a minimum of £250,000 capital
- Have a substantial UK economic presence
- Be able to at least match the loan amount with a private investment (there is no cap on the amount the matched investor may loan to the company.

The fund will issue convertible loans at a minimum amount per company of £125,000 with a maximum of £5 million. As with CBILS, the Future Fund is being administered in partnership with the British Business Bank (BBB).

The government and BBB are still working on establishing the details of how the Future Fund will operate and how companies will have to apply. It is intended that the fund will be launched for applications in May and will initially run until the end of September. While the expected headline terms have been published, the government notes that full and final details, such as full eligibility criteria, will be published shortly.

Loans issued through the fund will have a maximum term of three years and will be automatically converted into equity at the time of the company’s next qualifying funding round, at a minimum discount rate of 20 per cent (higher if a higher rate is agreed with matched investors). Loans will have a minimum 8 percent interest rate, or again higher, depending on what is agreed with the matched investors.

The loans are to be used strictly for working capital purposes and cannot be used by the recipient company to repay borrowing, make dividends or bonus payments to staff, management, shareholder or consultants or to pay any advisory or payment fees or bonuses to external advisors. While the terms appear to be aimed at ensuring companies survive the impact of coronavirus, they also leave open the opportunity for innovative companies to continue with growth or expansion plans.

As with other government partnership schemes with the BBB, the Future Fund aims to ensure that an element of the British business sector emerges intact from the coronavirus crisis. In this instance, the sector being the world of UK start-ups and small, entrepreneurial, innovative,high-growth companies. It has already been confirmed that similar schemes, such as the CBILS, can be used to fund growth opportunities including acquisitions.

Among the most significant points in the Future Fund key terms concerns the issue of the funding automatically converting into equity at a minimum conversion discount of 20 per cent at the company’s next qualifying funding round, providing that is within 36 months of the loan. If a qualifying funding round doesn’t occur before the maturation of the loan, the government retains the option to convert into equity at a 20 per cent discount to the price set in the company’s most recent funding round.

As it appears that any company’s option to repay loans prior to them being converted into equity will be limited, this raises potentially challenging implications for companies who take on this government support. It appears likely that the government will therefore amass small equity interests in a significant number of businesses. This will potentially open the door to private investors taking still larger shares in these businesses by buying out government-owned stakes in later funding rounds.

The government has also outlined another option for it to eventually divest its interests in any companies further down the line, writing in the headline terms that it reserves the right to transfer loans to an institutional investor looking to acquire a portfolio of its interests in at least 10 companies acquired through the Future Fund. The government also states that it will be entitled to transfer any shares it acquires without restriction within government and to entities owned by central government departments.

As Jack Clipsham, Partner and Head of Corporate Finance at Kreston Reeves, has noted, the Future Fund may prove an expensive option for small businesses. However, it appears likely that it will offer considerable opportunities for entrepreneurs seeking to invest in or acquire small, innovative UK companies in the next couple of years.

Another element of the Future Fund that has drawn attention is the government’s use of the term “innovative companies” in the headline terms. Aside from the basic eligibility terms of being UK-domiciled, having previously raised at least £250,000 in capital raising and having a substantial economic presence, the government is yet to provide guidance on what this means.

It remains to be seen which companies will be deemed “innovative”, but some reports have suggested that the government is seeking to put itself in a strong position in terms of being able to recoup its investment, or turn a profit, when it comes to offload its investments. In addition to providing funding aid for companies, then, it is possible the government is using a venture capital model. The focus on “innovative companies”, therefore, has been interpreted by some as a sign that the government is seeking to invest more wisely in valuable firms, having learned the mistakes of propping up “zombie companies” by taking equity stakes during previous financial crises.

Overall, the Future Fund announcement seems to be an exciting one, both for businesses looking to the short term and to investors looking to the opportunities of the post-coronavirus marketplace. Entrepreneurial investors, therefore, along with the government, will be hoping that the right companies receive funding and are able to utilise it productively to survive and perhaps even thrive during the current crisis.

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