Why is Invest NI writing off millions in favour of private investors?
04 July 2011
After a series of Assembly Questions to the DETI Minister, TUV Leader Jim Allister MLA has questioned why Invest NI is writing off millions of public money as a ‘subordinated investor’ in venture capital projects, whereas 3rd party investors and the venture capital fund managers are deriving excellent returns or fees at the taxpayers’ expense.
Mr Allister explained, “Much of this practice goes back to DETI pouring £7m into a venture capital project called ‘Crescent Capital 1’, which it ended up writing off while the private investors, who also invested £7m, got back £13.27m – an impressive return of 7.8% pa - and the fund managers collected £3.6m. The fund operated from 1995 to 2007. The reason why the taxpayer got back nothing is because DETI’s £7m was ‘subordinated’ (i.e. made secondary to and only entitled to any return after the private investors had made their profit). So, the public hand out was always likely to be a write off. Confirmation of the public loss and the private gain in Crescent Capital 1 is confirmed in this Question and Answer:
To ask the Minister of Enterprise, Trade and Investment, pursuant to AQW 352/11-15, (i) how much her Department invested in the Crescent Capital I fund as venture capital; (ii) how much on the fund's closure was (a) distributed to private investors; and (b) returned her Department; and (iii) how much Crescent Capital received in management fees.
Answer:
(i) Crescent Capital 1 was established in 1995 with £7m provided in the form of a loan, subordinated to private investors.
(ii)(a) On the closure of the Fund, the limited partners received £13.27m. The private investors received a return of 7.8% pa over the life of the Fund.
(b) The DETI investment was written off. Nothing was returned to DETI.
(iii) Crescent Capital received fees of £3.6m over the twelve year life of the Fund. This was paid out of the £14m fund.
“A 100% return for private investors but a zero return for the taxpayer is monstrous, supplemented by the enrichment of the fund operators by £3.6m in fees.
“I have now established that the matter did not end with ‘Crescent Capital 1’ Fund, but that a successor Venture Capital project, ‘Crescent Capital II’ Fund was established in 2004, again with Invest NI as a subordinated investor. The taxpayer has put up 33% (£7.5m) of the £22.5m fund, with little prospect of return, because, again, the private investors are guaranteed their return and the fund managers their fees (already paid £619,000 in fiscal year 2009 and £544,000 in 2010, according to the audited accounts) before the taxpayer ever gets anything.
“Confirmation of the £7.5m subordinated investment in Crescent II is found in this Q & A:
To ask the Minister of Enterprise, Trade and Investment (i) to detail the cost to the public purse of Invest NI's subordinated investor policy in each of the last five years, including funds closed in the last five years but where the investment was made by Invest NI or the Industrial Development Board prior to this five year period; and (ii) how investments which show no return are shown in their accounts;
Answer:
The Crescent Capital II investment fund is the only active fund in which Invest NI has a subordinated investment.
Crescent Capital II was set up in March 2004. It is a £22.5 million fund and Invest NI is a 33% investor alongside a number of private investors. The initial cost to Invest NI was therefore £7.5m.
Invest NI invested £4.875m in Crescent Capital II in the last 5 years as follows:
£’000
2007 -
2008 1,500
2009 750
2010 2,250
2011 375
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4,875
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When the Crescent Capital II investment fund is closed, returns will be made to the investor and if a shortfall is realised, the cost of Invest NI’s investment will be reported.
Each year, Invest NI reports a ‘fair value’ assessment of its investments in its published Annual Report and Accounts.
“I should also point out that several private sector investors in this fund are nothing of the sort – indeed funds appear to come from several other public bodies such as UUTech and Queen’s University, as well as the European Investment Fund – all of whom will have preference in having their loans repaid (in effect financed by Invest NI).
“I note that Invest NI now intends to hand over another £10m into the recently announced ‘Development Fund’ on a wholly subordinated basis. Again, on past performance, we can expect this to be another write off of public money, with only private investors ever likely to see a return. Confirmation of this approach is found in this Q & A:
To ask the Minister of Enterprise, Trade and Investment (i) how much Invest NI intends to allocate to the (a) Co-Investment Fund; and (b) Development Fund in the 2011-15 period; and (ii) whether it intends to be a subordinated investment partner in these funds.
Answer:
(a) The proposed £7.2m Co-investment Fund, is an example of public and private investment on a pari passu (equal terms) basis ie no subordination. Invest NI intends to allocate £4.5m to the Co-investment fund in the period 2011-2015.
(b) The proposed £30m Development Fund must raise £20m of private sector with a maximum of £10m (33%) of its funding from Invest NI. The Invest NI contribution will be on a subordinated basis, that is the private sector investors will receive a return on their investment ahead of the public sector. This subordination of public sector funding was considered necessary in order to secure the required level of private sector funding. Invest NI intends to allocate £5m to the Development Fund between 2011-2015.
“I must seriously question this cavalier approach to the use of public money. On the experience of Crescent Capital funds it is a ‘win win’ for the private investor and fund managers and a ‘lose lose’ for the taxpayer. Why should public money be used to deliver above market returns to private investors, even speculators? The millions pumped in from the public purse provides a very generous cushion against loss and on the evidence of Crescent I rich pickings. Is this really what Invest NI should be about?
“I am disappointed that under devolution there has been no change to this spendthrift policy.”
