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Institutional Investor Profile: David Quysner, Chairman, Capital for Enterprise Board30/01/2008. Source: AltAssets. 
David Quysner on early stage investing, on the shortage of early stage venture capital in the UK and on how the government's Capital for Enterprise Board is acting as a fund of funds to help close the venture capital industry's equity gap.  The Capital for Enterprise Board advises the UK government on its financial interventions in the SME sector. There is a debt 'product', the Small Firms Loan Guarantee scheme, which in the past 25 years has helped banks make more than £4bn of lending to small businesses. On the equity side, the most recent initiative is the Enterprise Capital Funds programme. ECFs are designed to attract managers and with them private sector capital into the equity gap by offering cornerstone funding from government, coupled with unusually flexible profit-sharing arrangements.
The government will commit up to £25m to an ECF fund, provided that private sector investors contribute at least an additional 50 per cent of this amount. It receives a preferred return on its money (currently 4.5 per cent). Once the capital has been repaid it will share distributions on a basis that is negotiated in advance as being what private investors need to encourage them to invest.
David Quysner has spent more than 30 years in venture capital, initially with 3i and subsequently with life sciences venture capital firm Abingworth, of which he is currently non-executive chairman.
Beside this, Quysner has been a member of the UK government's Treasury Working Party on the Financing of High Technology Companies. He was the chairman of the British Private Equity & Venture Capital Association in 1996/1997. Currently, he is also the non-executive chairman of RCM Technology Trust, a director of several funds in the venture capital space and a trustee of Medical Research Council Technology. He was awarded a CBE in the latest New Year's Honours List.
How do you go about selecting the venture capital firms to receive ECFs?
'We publish guidelines, which provide a range of information for venture capital firms wishing to bid for an ECF. We look at every aspect of a bidder's business plan, with particular emphasis on the strength and experience of the management team; how they aim to target the equity gap; their sources of private sector capital and the financial terms they are proposing. There is a limited amount of money available and this is a competitive process. To give some idea, we had 45 bidders in the first round and had to whittle this down to just five successful bidders.'
Which funds have you committed to so far?
'To date, just over £100m of government money has been committed to six ECFs. The first five were: the £30m IQ Capital Fund which operates across the Cambridge, Oxford and Bristol areas and invests in a range of technology companies; the 21st Century Sustainable Technology Growth Fund, which is a £30m fund focused on companies employing sustainable technology; the £30m Seraphim Capital Fund, which is a generalist co-investment fund that will invest alongside business angels and other private investors; the Amadeus ECF, a £10m fund that will make seed technology investments; and Midlands Enterprise Capital Fund, a £30m generalist fund that will focus on investments in the Midlands region but will also consider UK-wide opportunities.
These bids form the first round, and have now been joined by £30m Dawn Capital Fund, which has an investment focus on the application of technology to traditional industries.
A total of a further £40m has been allocated to two other funds: MMC Ventures' £30m fund dedicated to the UK healthcare, technology and financial services sectors; and Oxford Technology, a £30m fund which will operate out of Oxford targeting early stage companies in the science, engineering and technology sectors.
We are building a portfolio that expects to invest in a wide range of sectors and investment stages across the whole of the UK. This is important if ECFs are to address the equity gap but also to ensure that there is a diversified pool of assets that can generate returns sufficient for the programme to be self-financing over the medium term.
A third round of ECF bidding will shortly be underway. It is expected that up to £100m may be invested in ECFs over the next two years.'
What does the due diligence process involve for granting an ECF?
'Capital for Enterprise is a fund of funds manager which looks at its investments in exactly the same way as any commercial firm. We have experienced fund of funds managers on the team and a board that has high levels of experience in business banking, venture capital and private equity, angel investing and other disciplines.'
What do you look for in a good ECF manager?
'The essentials for an ECF manager are that their fund should address the equity gap and that there should be a management team capable of executing the business plan. The ECFs are chosen on merit and judged against the criteria set out in the bidding guidelines on our website. We will not prefer a bid merely because of its geographical base or sector focus, nor would we expect any fund to choose investments purely on this basis.'
Would you be prepared to award an ECF to a first-time fund?
'Yes, we would. One of the objectives of the ECF scheme is to attract new management into the area. So far, we have chosen two venture capital teams with people who have worked in the venture capital space before, but not together as a team, and we are more than happy to work with new teams of this kind.'
How will the ECFs develop in the future?
'It is still very early days, but my vision would be that over the next three years we will increase the portfolio to £500m. By year four or five we will be beginning to see the effect that ECFs are having on helping to close the equity gap.
I do not believe the equity gap is going to disappear overnight. There are good reasons why people find it difficult to invest small amounts of money in early stage companies. What we hope we can do is to show people that if you structure things appropriately and run your funds professionally then you can make money in this sector.'
How do you think the UK venture capital environment has changed since you entered it?
'In the UK we have struggled to make the kind of returns in venture capital that have been seen in the better firms in the US, but the environment here has changed hugely over the past 20 years. Performance data for early stage technology investment still carries the burden of what has to be described as a learning process. Now we can see more positive returns.'
Do you think in general there is a shortage of venture capital funding in the UK?
'Absolutely. There are people that would say otherwise and if you look at some sectors and regions you will find there are lots of different kinds of money available, but there are also gaps, and I see the role of the ECFs as bridging those gaps.'
What do you think are the biggest issues in private equity at the moment?
'Clearly, private equity has recently had a difficult time, particularly in terms of its public image and the pressure for greater transparency.
The legacy of the sub-prime debacle will inevitably have an adverse impact and the spectacular returns of recent years will be harder to achieve. Having said that, there is a high level of professionalism and skill in the industry and I believe that it will adapt and continue to provide superior performance. On the whole, the prognosis is still pretty good.'
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