Questions over the use of Government's funds
The Department of Finance has announced a new investment fund of £100m to support private sector investment. The fund is from the public sector budget using a Financial Transactions Capital (FTC) allocation approved by the Treasury.
Critical to access to the FTC is an understanding that the funds are essentially repayable by borrowers. Funds are expected to be allocated either as loans or equity. The fund will be managed by CBRE capital advisers, and as managers they will be obliged to double the initial allocation by adding an equivalent level of other funding from the private sector.
Coincidentally, Invest NI has also announced a new fund for a similar amount, to be operated by Clarendon Fund Managers.
This type of funding starts from the assumption that there are projects for which a major challenge is the raising of investment funds to initiate a business, or trading organisation, that can make a return adequate to repay a loan or can expect to be able to pay dividends to shareholders.
The assumption that the capital will earn a return for the investor (or lender) invites the critical response that the investment fund will be acting as could be expected from a commercial lender or a private sector investor.
The success of the investment fund will depend on the allocation criteria which it applies. The fund will attract applications only if the terms of assistance compare favourably with what might be available from other commercial sources. Expressed the other way round, the fund will need to compete with, or offer more attractive terms than, other commercial sources. This tension lies at core of a debate about the use of funds backed by Government in this marketplace.
Since there is thought to be an inadequate number of private sector providers to meet the potential needs of businesses, many of which are SMEs, does the creation of Government-sponsored funds operating to fine trading margins and more willing to provide funds to less certain projects, fill a gap or does it damage the commercial prospects of existing providers?
The Department of Finance has a clear-cut policy statement: "The fund will be lending … on commercial terms to comply with EU State Aid rules…[It] will be priced in accordance with market rates depending on the perceived risk."
That policy statement is perhaps not as clear-cut as it may appear. The value and strength of an investment fund lies in the prospect that support may be forthcoming for projects that are somewhat more risky than the private sector might like or that the terms of any support might be less costly to users.
The probability is that the risk assessments and the terms of the pricing of the equity or loans will be marginally more favourable to applicants. To an ill-defined degree an investment fund may be able to fine tune a more attractive offer.
Invest NI has tackled similar questions in the range of loan and equity funds under its supervision which have invested over £180m including just over £100m of Invest NI funding. The Audit Office has critically examined the administration of the Invest NI funds whilst accepting that this type of financial device is justified.
To enhance the attractiveness of the Invest NI funds, Invest NI has partially subordinated the search for return on its own funds, to give preference to other private investors, and has also partially offset the management costs of its funds. Similar technical adjustments might also emerge for the CBRE operations as the fund makes its first deals early in 2018.
This lends support to this additional dimension in the search for more business investment.