The Scottish Co-investment Fund

13th December 2005

The Scottish Co-investment Fund (SCF) recently benefited from a £500,000 approval by the Highlands and Islands Partnership Programme (HIPP), which administers European funding in the Highlands and Islands.

The SCF is a market driven, highly innovative fund aimed at substantially increasing the risk capital available and therefore the capacity for investment by private sector investors in small, ambitious growth businesses in Scotland (companies with less than 250 employees and net assets of less than £16 million).

The £45 million SCF, part funded by the European Regional Development Fund ERDF), was set up by the Scottish Executive in 2003 and is managed by Scottish Enterprise. It provides equity funding on a co-investment basis with selected private sector partners. Its aims are to stimulate the private sector to operate in parts of the market they are not currently in and support the critical early stage investment market in Scotland.

Unlike a conventional venture capital fund, the SCF does not identify potential investments on its own, but instead works with private sector partners, including venture capitalist fund managers and business angels, who take responsibility for identifying and negotiating investment deals.

The investment decisions are made by the private sector partners who invest their own cash then invite the SCF to co-invest on equal terms, should additional equity funding be required. This means that private sector investors can bring more cash to deals, and spend less time finding that cash. It also means that SCF will share the risk of making an investment.

After the deal is closed the private sector investment partner is responsible for monitoring and control of the investment.

Highlands and Islands Enterprise (HIE) staff from its Growing Businesses group have been working closely with Scottish Enterprise and HIPP to ensure that adequate funding is available for SCF activity in the HIE network area. This latest £500,000 has been added to the overall Fund but will be used specifically for businesses within the Highlands and Islands.

To date, two SCF investments have been concluded in the HIE network area, these were in Aquapharm, based in Argyll and Albanet, based in Ross Shire.

Jeff Foot, head of Business Starts and Growth at HIE, said: "This public sector fund has been used to lever in private sector investment into new and growing businesses who may have previously struggled to secure funds in an increasingly competitive venture capital market.

"Companies with the potential to grow, especially in the Highlands and Islands, have in the past found it difficult to access funding to move them off the bottom rung of the ladder."

Explaining more about the Fund, Jeff added: "Decisions on the type of companies being invested in are left up to the expertise of private sector partners, which means the SCF doesn't displace the private sector but works with the existing formal and informal private equity investors, involving them in the process rather than excluding them."

The SCF can invest up to £500,000 to help fill any gap in finance for deals of up to £2 million.

Since its launch in 2003 it has contributed £12.1 million to 99 deals throughout Scotland. This investment has also levered in private sector contributions of £29.6 million.

Industry sectors eligible for SCF investment include:
* Technology
* Creative businesses
* Electronics
* Manufacturing
* Pharmaceuticals
* Biotechnology

Businesses seeking investment shouldn't approach the Scottish Co-investment Fund directly, but go through one of its private sector partners. In the first instance businesses need to persuade one of the private sector partners to invest their own cash in their project.

It's only after that decision has been made that the SCF would be approached by the private sector partner, who can work in the knowledge that the SCF will invest if they do.

More information on the Scottish Co-Investment Fund and its partners can be found at Scottish Enterprise - Equity

Companies looking for external investment should structure a business proposal that will help persuade the private sector investors that theirs is a viable project to invest in. Occasionally the potential investor will come across an area of weakness in the proposal which needs to be addressed before they can consider the investment. In this situation HIE can help businesses to strengthen their proposal through their Investment Readiness Support Programme.

HIE has funding to deliver the programme, which has been designed to provide financial assistance to companies requiring professional help to improve the quality of their investment propositions. The company will normally use the funding awarded from HIE to engage their own external advisor(s) who will preferably have been identified by the potential investor.

Each eligible company can access a contribution of up to 50 per cent (to a maximum of £10,000) towards the cost of professional services to make business development propositions more 'investment ready'.