A pleasant surprise

The UKIIF provided a bright spot amid the UK Chancellor’s widely criticised pre-budget report, writes Toby Mitchenall.

In a UK pre-budget report that drew criticism from those in both the public and private sectors, the government had one piece of news that should be universally welcomed.

Genuine progress has been made on the UK Innovation Investment Fund (UKIIF), the fund of funds initiative designed to mobilise institutional money into UK venture capital.

Having been formally announced by Lord Drayson, the UK’s Minister for Science and Innovation, back in August, the fund has now appointed two private sector fund of funds managers – Hermes and the European Investment Fund – and held a first close with additional private capital.

The government has put up a cornerstone investment of £150 million (€166 million; $244 million), split between the two funds. Institutional investors – understood to be mostly from the UK – have come in with a further £175 million.

It is small step on the way to what is still an ambitious target: an ultimate fund size of £1 billion. The fund, which will have a 15-year life, is intended to hold a final close in 2011.

Hermes’ fund – which has held a first close on £125 million including £50 million of government money – will focus on managers in the low-carbon and clean tech space. EIF, which has currently raised £200 million (including £100 million of public money), will cover digital and ICT, life sciences and advanced manufacturing.

These sums are relatively small compared to the bullish billion pound line drawn in the sand, but they are nonetheless significant. Not only has £175 million of private money been raised for “unfashionable” British venture capital, but it has been achieved in a matter of months in what is still a pretty gusty fundraising headwind.

“Pleasantly surprised” were the words one UK fund of funds veteran, who had decided not to bid for the management contract, used in discussing the progress made.

Of course getting capital to work is just one element of stimulating venture capital activity. Industry participants say that the venture market in UK and Europe will not achieve the same scale and success as is enjoyed in the US without the help of a better developed public market for growth companies. Private equity doyen Sir Ronald Cohen and BVCA chairman Jeremy Hand both reiterated this point earlier in the year.

Furthermore, question marks will continue to be raised over the long-term performance of government-backed venture capital: often seen as “soft money”.

The fact remains, however, that in the getting UKIIF off the ground in a tight timeframe, the government and its appointed fund managers have achieved something tangible and worthwhile. Any capital committed to venture managers and their portfolio companies at this stage of the cycle is gratefully received.