Keeping the tap running

Keeping the tap running

Alison Cowie talks to Andrew Mitchell, chief executive of The North East Fund Limited, about the recently launched £120m North East Fund, its potential for local SMEs and the broader community, and asks what the future of public sector funding may look like
When the UK voted to exit the EU on June 23, 2016, it threw the future of European funding in the UK – something the North East has undoubtedly benefited from over the years – into considerable doubt.

Questions over what will happen to local investment post-Brexit have continued ever since – with few answers yet provided.

With the investment period of the Finance for Business North East Fund – also known as the JEREMIE programme – drawing to a close, negotiations between the North East project team and the European Investment Bank (EIB) to secure another tranche of funding for the region were well underway when UK voters went to the polls.

As the EIB is a borrower and lender to projects that ‘contribute to EU policy objectives’, the UK’s decision to withdraw from the European Union looked set to derail the negotiations irretrievably. But the North East Local Enterprise Partnership (LEP) and the previous fund’s management – headed by Andrew Mitchell – continued to pursue a deal with the EIB, and on March 23, an agreement was signed by the EIB and The North East Fund Limited (TNEFL) committing £120m into the North East, supported by the Regional Development Fund.

The announcement of the North East Fund sparked a collective sigh of relief among many in the region’s business community as it secures a six-year pipeline of European-sourced funding into the region in the form of equity, debt and mezzanine funding – five years after the UK official leaves the European Union.

With Andrew Mitchell as its chief executive, TNEFL will oversee the management of the new development fund, which will support SMEs across Tyne & Wear, Durham and Northumberland, and is predicted to support more than 600 businesses, create around 3500 jobs and deliver a legacy of up to £80m for further investment over the next decade.

Reflecting on the deal, Andrew says: “This new fund is a feather in the cap for the North East and a vote of confidence in our economic potential.”

The CEO does concede that, after the Referendum result, other avenues for regional funding were explored, including the option of joining the Northern Powerhouse Fund. But it was decided a North East-focused fund was the preferred option.

“[The Northern Powerhouse Fund] is effectively a single common fund for the whole of the Northern region and because Manchester has the largest concentration of small businesses, our concern was that we’d lose some of the capital,” says Andrew.

“We also felt that the most important thing about these sorts of funds – investing in SMEs – is that they’re local. The famous US capitalist John Doerr said ‘early-stage investment is 20 per cent investment decision and 80 per cent mentoring relationship’. You can’t do that if you’re 300, or even 150 miles away. You have to be on the ground.”

One of the definitive factors in the EIB committing to this new investment, Andrew says, was the success of the previous JEREMIE programme.

“Initially, the fund was £125m, but this was extended to £150m – of which the EIB put in almost £70m. It was operated by five fund managers between 2010 and 2016 and supported approximately 900 local companies.

“Crucially, we brought in almost twice as much in private investment – leveraging money from venture capital firms, business angels and banks – with much of this coming from outside the region.

“In total, we believe the fund brought in £400m, of which £150m was from the fund itself while £250m was money brought in from elsewhere.”

The North East Fund has been divided into five separate funds that will be available to a diverse range of SMEs based in the North East LEP area.

Four fund managers will deliver the funds: Northstar Ventures and NEL, which were involved in the previous programme, are joined by Mercia Fund Managers and Maven Capital Partners, two national fund managers with North East-based offices.

“We wanted fund managers that had a clear commercial track record so that we could be confident that they would invest the fund wisely and ensure the initial investment was returned,” says Andrew.

“Locality was also critical. We wanted fund managers who knew the regional venture capital markets and had people on the ground in the North East.”

The Development Capital Fund, managed by Maven Capital Partners, will provide funding packages up to £2m, investing in established SMEs looking to unlock growth.

Mercia Fund Managers will deliver The Venture Fund that will invest up to £1m in any-stage businesses engaged in the innovation of disruptive business models.

NEL Fund Managers will manage The Growth Capital Fund, which backs ambitious businesses with investments of up to £500,000, as well as The Small Loan Fund, which will provide typically advancing loans of between £10,000 and £50,000.

Finally, Northstar Ventures will manage The Innovation Fund that will focus on businesses with strong management teams with scalable opportunities, investing up to £500,000 by way of loans or equity.

In terms of types of businesses who will be able to access the funds, Andrew is clear that almost all regional enterprises, of all sizes, can apply (in accordance with European state rules).

“We want to invest in businesses that have growth potential and ambition. At the small micro-loan end, that might be someone who wants to start a little business and grow it. At the larger end, it might be a manufacturing business or an engineering company that wants to invest in new equipment, new robotics or AI.”

Andrew adds: “There’s also a degree of overlap between the funds – which is deliberate. We want SMEs to be able to go to two or three fund managers to find the best fit; that’s what a company in London would have.”

In addition to the finance, the fund managers are tasked with providing mentoring support to businesses – something that Andrew sees as crucial.

“A young management team may have the technology skills for their business but not the finance, marketing or operations skills.

“The fund managers will support them with these, as well helping them to make connections and contacts with potential customers – another reason why it’s so important that the fund managers are local.”

As for what will happen after the North East Fund’s investment period ends, no one – including Andrew – knows.

“It is possible that the EIB continues to lend into the UK but we can’t predict that,” he says. “There’s going to have to be a lot of calls on capital for the British Government to make.

“As a region, though, it’s important that we become as self-sufficient as possible and to generate as much capital as we can from the JEREMIE programme and the North East Fund and work with local business angels and investors.”

From wherever the source, Andrew is adamant investment in the region’s businesses doesn’t dry up.

“Every economy needs movement and dynamism. It requires constant regeneration, new ideas, new talent, new competitors and new investment,” he says.

“The North East Fund is part of that; we’re not the whole jigsaw, but having intelligent investment capital available for growing businesses is a critical part for the future of the region in terms of developing a more vibrant, more diversified economy.

“For small businesses to grow, they may need two or three rounds of funding to achieve their potential so we have to look long term.

“Silicon Valley has had access to venture capital for 60 years and you can see the benefits of that with the big companies coming through.

“You can’t just turn the taps off and on, and public sector finance helps fills the gap at a very early stage.

“I’ll be very disappointed if this was the last North East-focused [public sector] fund,” says Andrew, “but, ultimately, the message is of hope and that people in our region are already starting to think about continuity and securing the next phase of investment.”