What is the Future Fund?
Directors of innovative, unquoted companies who are finding it hard to raise essential working capital as a result of the coronavirus outbreak will be looking out for announcements regarding the Government’s proposed “Future Fund”. At present, only outline terms have been announced but it appears that the £250 million scheme will provide bridging finance, in the form of convertible loans, of between £125,000 and £5,000,000, to “innovative companies” (not yet defined) who meet certain requirements. These are principally that they raise an equivalent amount from new third-party investors, whether private or institutional, and that they have previously raised at least £250,000 in equity investment from third-party investors in the last 5 years.
Further information about the Fund is expected in May 2020 and among the many details yet to be announced is how the Government expects to manage up to 2,000 separate transactions in a timescale which can actually help struggling companies. What we know so far, though, is that the Government will essentially be piggy-backing on third party investors, since this is a matched funding scheme.
Key information about the Future Fund
The headline terms announced last week include the following key components:
- Unsecured bridging finance alongside other investors, with Future Fund monies to represent no more than 50% of the bridge funding round.
- Available for working capital purposes only (specifically not for repayment of existing borrowings, bonus payments, finder’s fees, etc).
- Automatic conversion of the principal to equity on the company’s next “qualifying” equity funding round, at a discount of no less than 20% to the equity pricing of that round. The discount will be higher if the matching investors negotiate a higher discount. To “qualify” for these purposes, and to trigger conversion, the next funding round must be at least as large in value as the bridging finance round in which the Future Fund participates.
- On conversion of the principal, interest can be repaid in cash or converted but without application of the discount, at the company’s option.
- Repayment in 36 months at most; interest to accrue at a minimum of 8 per cent per annum, not compounded. A higher rate may be payable if the matching investors have negotiated a higher rate. Conversion may apply but the Government goes along with the wishes of the majority of the matching funders.
- Special terms apply for accelerated redemption if an IPO or company sale takes place prior to conversion. Broadly speaking, either conversion at a price discounted from a previous funding round which was not a “qualifying” funding round, or cash redemption at a 100% premium, whichever gives the Future Fund a greater return.
- The Future Fund will take limited warranties and will have limited approval and information rights while it is a creditor and (following conversion) a shareholder.
Funds available under this new scheme are limited, and it remains to be seen how quickly they will be committed. Druces will be monitoring and reporting on further Future Fund announcements as details emerge.
How we can help
We will be assisting our clients with applying for and securing advances under the Future Fund. For further information please speak to your usual Druces contact or: