21st April 2020
This article was last updated on 21 April at 09:45.
The Government has announced (20 April) the launch of a Future Fund (FF) of £250 million, which will provide loans ranging from £125,000 to £5 million, subject to at least an equal match in funding from private investors (on whom there is no investment cap). The scheme will be delivered in partnership with the British Business Bank and is ‘advertised’ as providing support to innovative/high growth companies.
The FF is scheduled to be launched in May and will initially remain open until the end of September.
Unlike the term loans offered by CBILS, the FF will advance convertible loans which will appeal to start-up and scaling companies that have negative EBITDA. Such businesses are typically unsuccessful in applying for commercial loans because they lack the results to meet loan covenants, are not considered viable businesses by traditional lenders or have assets to pledge as security.
To date only limited guidance and eligibility criteria has been announced. In addition, the Government has published its expectation of the ‘Headline Terms’ of a FF investment which are here. We expect several more announcements will be made in the coming weeks so please revisit this article frequently – we will update it as further details are released.
To be eligible for the loan, the business must:
- Be a UK registered company
- Not be listed
- Have a substantial economic presence in the UK
- Have previously raised at least £250,000 in cumulative equity funds from third party investors, in the last five years
- Where part of a group, only the parent company may apply (subject to meeting the other criteria)
Full eligibility criteria is anticipated to be published in the near future. It is expected these will focus on criteria surrounding the innovative/R&D qualities and SME size of the business.
Summary of loan terms
The loans (referred to a bridge funding in the Headline Terms) will have a maximum term of three years and carry a non-compounding interest rate of 8%, which accrues to the maturity date. The loans will be unsecured and the Government’s loan amount shall be no more than 50% of the loan funding being provided to the company (with the balance being provided by matched investors).
The minimum government loan is £125,000 and the maximum is £5 million. Accordingly, an eligible company will need to secure at least £125,000 of bridge finance from private investors in order to qualify for government support under the FF scheme.
On maturity, companies will have the option to either repay the loan at a premium of 100% of the principal advanced or convert at a discount rate of 20% to the agreed share price in the last funding round. Accrued interest converts undiscounted.
Should a qualifying funding round* occur before maturity, the loans automatically convert to equity at a minimum discount rate of 20% of the round’s share price (accrued interest can be repaid on election).
In the event of a sale or IPO, the loan will either convert to equity at a discount of 20% to the share price of the most recent non-qualifying funding round or can be repaid in full at a premium of 100% to the original principal advanced. The Government also reserves the right to enforce repayment.
On conversion the loan shall convert in to the most senior class of shares in the company subject to a conversion ‘uplift’ protection mechanism whereby if a further founding round occurs within six months of the original funding event and the further funding round results in a more senior share class arising then the FF lenders have the right to convert their shares in to the (now) more senior share class. Similarly, should the company issue further convertible loan instruments on more favoured terms, those terms shall be assumed by the FF lenders. The FF loans shall also not be subordinated unless the new debt is bona fide senior indebtedness and the lender is not an existing shareholder or a matched investor.
The total loan proceeds (both government and matched) must be used solely for working capital purposes and not to pay bonuses, dividends or settle other debts. Furthermore, the Government loan must not be applied in paying any advisory or placement fees or bonuses to external advisors. There will be limited decision-making rights attached to the loans either pre or post conversion as well as limited warranties and covenants.
Broadly, the Government retains the right to transfer its loans or any resulting shares.
Application and other considerations
The fund will be launched in May 2020, with details on the application process to be released in due course. As with the CBILS scheme, companies should be prepared to undergo a commercial fundraising process which will likely include due diligence, an interrogation of business plans and review of financial models.
By matching investment advanced by third parties, the Government has effectively relied upon the fundraising process to provide appropriate company valuations. No comment is made on the terms to be applied by those investors whose funding is being matched. Businesses should therefore remain conscious of their valuation expectations and carefully consider whether these terms are appropriate, paying attention to earn out clauses, performance criteria, covenants and conversion rights.
*A qualifying round is defined as a raise of equity capital equal to least the aggregate amount of the bridge funding advanced. Any other rounds are non-qualifying.