UK creates £1 billion innovation fund

As the latest economic stimulus measure, the Innovation Investment Fund has been set up following protracted lobbying by the venture capital and healthcare sectors. Simon Walker, Chief Executive of the British Private Equity and Venture Capital Association, said he is delighted to see a model adopted for which the BVCA has campaigned for more than two years. “I am convinced that this scheme can make a real difference, provided it is implemented with the urgency that it deserves.”

The UK BioIndustry Association (BIA) also welcomed the fund. Clive Dix, the Association’s chair, said it would make a significant contribution to securing the long-term health of the life sciences sector. “[It] provides much needed follow-on investment to early stage companies.”

Dix added it was an “excellent first step” towards delivering an integrated strategy for life sciences. The government is due to announce a full package of measures sometime later this month. Now, the BIA wants to see a rapid implementation of the fund, so it can start investing before the end of the year.

The UK Innovation Investment Fund will not invest in companies, but rather in a small number of specialist technology funds that have the expertise to make direct investments.

The government wants its cornerstone investment to pull in VCs and institutional investors, and is also looking to pharmaceutical companies to put money into the fund.

Richard Barker, Director General of the Association of British Pharmaceutical Industries, acknowledged that many small healthcare companies face a funding crisis, adding, “Meeting this need is an important signal of the government’s intent.”

The Innovation fund has been put together with the support of the European Investment Fund (EIF). Richard Pelly, Chief Executive of the EIF, said, “At a difficult time for the VC industry, the UK Innovation Investment Fund will underpin a next round of critically important fundraising for fund managers.”

Science and Innovation Minister Paul Drayson said the fund will help the UK to capitalise on its public R&D spending.  “We must safeguard the government’s record investment in the science and research base over the past decade. We cannot afford to lose out on the wealth this investment can yield, and we will need this wealth to continue our sustained investment in research.”  

The UK government boasted that the £1 billion fund will be one of the largest technology funds in Europe. Its brief is to invest in growing small businesses, start-ups and spin-outs, in digital and life sciences, cleantech and advanced manufacturing.

That will do little for the bedraggled gang of quoted high-tech companies currently languishing on the Alternative Investment Market in London, unable to access capital in the credit crunch.

A fund of funds structure was chosen as the most attractive to institutional investors, enabling them to take a portfolio approach and spread the investment risk across a number of different technology fund management teams.

The government is to appoint a fund of funds manager with a proven track record in technology investment to lead the fund.

Opting for a fund of funds approach allows the government to support the growth of the market without being accused of distorting, or competing, with existing fund managers. It is also intended to ensure that the Innovation Fund complements existing public sector measures such as Enterprise Capital Funds, Regional Development Agency European Development VC Funds, as well as tax measures.

The model is the UK High Technology Fund, announced in 1998. This £125 million fund of funds invested in a number of specialised technology funds such as Advent, Amadeus, MTI and Scottish Equity Partners. The government provided a cornerstone investment of £20 million, with which the fund manager was able to leverage an additional £105 million from the European Investment Fund, UK pension funds and a French bank.