Posted on Sunday 13 October 2013 by Ulster Business
Danny McCaughan, Niall Olden and Jayne Brady from Kernel Capital joined William McCulla of Invest NI and Julie-Ann O'Hare from Bank of Ireland to launch Kernel's fund.
The two new funds of up to £30m each – with up to £15m of public funding per fund – will be managed by Northern Ireland debutant Kernel Capital (with the backing of its long term partner Bank of Ireland) and experienced player in the local market Crescent Capital.
The funds are designed to help SMEs in Northern Ireland to accelerate their growth and form the final part of Invest NI's suite of funds, which aim to help bridge a gap in finance no longer available because of the reduction in the number of private investors and banks willing to lend.
They will target investments in the range of £450,000 to £2m, where there is a perceived market failure in Northern Ireland and the rest of the UK. It is a range where there have been no investments for the past two years since Crescent Capital wound down its second fund.
The launch of two funds in the same space is something of a departure for the agency and potentially creates some competition for investment for the first time.
Their launch also offers a scale not seen here before, although INI argues that there has not been sufficient demand in the marketplace in the past to justify it at the level these funds will be operating at.
The development funds have each been set the target of building a portfolio of 20 companies over a five year period (four a year).
Like previous Invest NI funds, the Development Funds are subordinated – meaning it takes any loss before private investors. It is an approach that has drawn criticism in the past as previous funds have offered little return on investment, but the agency sees it as its job to get the funds into the marketplace to help companies grow.
Both fund managers are understood to have raised significantly more private sector investment than the £15m first close level required under the tender and Invest NI is confident both managers will achieve funds of around £30m as many investors don't commit to VC funds until they are up and running.
The agency is also seeking to move things on by asking the fund managers to do more syndication with funds outside of Northern Ireland, therefore bringing more money in.
The launch means there is now £140m of debt and equity investment available to businesses across Invest NI's Access to Finance portfolio of funds.
Enterprise Minister Arlene Foster said: "These funds are part of a major Access to Finance initiative established by Invest NI to help to boost private sector growth, ensuring that companies with high growth potential are not held back because they cannot access finance.
"Both funds are equity based and will operate for ten years. Investments will support local innovative companies that have the potential to grow in global markets. They are valuable additions to the existing sources of funding for businesses in Northern Ireland."
The Minister said that at the end of the last financial year over £20m of investments had been made by the Access to Finance funds, helping over 180 businesses.
CBI Northern Ireland Chairman Ian Coulter welcomed the two new equity funds, saying: "In the context of a heavily constrained finance market, this is a most welcome development. A key part of the CBI's 'Getting Growth Finance Going' report published in June last year was a recommendation for the introduction, for the first time, of two parallel funds to stimulate the development capital market for local businesses so as to aid expansion and growth.
"I am confident that these funds will have a significant impact on high growth companies, and be a valuable addition to the existing programme of financial support."
Ulster Business spoke with the managers of the new funds to hear about their plans.
Kernel Capital is keen that its first fund in Northern Ireland is not its last.
Having won a Development Fund tender, the Cork-headquartered fund manager is this month setting up an office in Belfast and establishing a full time team of four people based in Northern Ireland.
Founded in 1999, Kernel Capital is one of Ireland's largest and most active venture capital funds with a portfolio of investee companies across, technology, life science and general industry and over €170m under management spread across multiple Funds.
While it has six portfolio companies with commercial activities in Northern Ireland and partner Danny McCaughan lives in the province, the new Bank of Ireland Kernel Capital Growth Fund (NI) represents the first time it has had a mandate to invest here.
"It is a ten year fund and we don't want it to be a one time fund. We have metrics we've committed to achieving but the real success of this fund will be if we can raise further private sector money for a further fund in about four years' time. Then you get a rolling sequence of funds and bring more funding into Northern Ireland that is more and more private sector weighted," said Niall Olden, Kernel's Managing Partner.
"The bottom line is that we see this as a commercial opportunity and we can only sell it to our private investor base as a commercial opportunity. To raise repeat funds it has to be a commercial success."
Kernel's team in Cork will be active in investments and Olden believes the management expertise it brings in helping companies grow will prove attractive.
"We're new so we automatically bring something fresh. It is always good for the industry for new people to come in," he said.
"We currently have a portfolio of about 70 companies and there are 300 directors or C level people in Kernel Capital companies. That's quite a wide base of knowledge. We tap into that network which gives us a level of scale and reach that allows us to build relationships with other VC funds in the EU and US, with intermediaries, with acquirers. That's what we'll look to bring to this fund as well."
Olden is confident there are enough high quality companies in Northern Ireland to ensure a strong deal flow of investable companies from a range of sectors.
"If you have intelligent people and you have the capital, you will create the deal flow," he explained.
"It's not as though we're passive to the deal flow. It is the job of VCs and early stage funders to go out and create deals. Make deals happen that wouldn't have otherwise. Find parties that might not have thought about VC as being a potential boost to their business and persuade them it is."
Kernel says that if a company is eligible to be a client of Invest NI it will be eligible for its fund. It is targeting companies beyond the early seed funding stage.
"We want companies that are turning over £1m or in clear sight of doing so within 18 months of our investment, maybe with a pipeline of customers. We're not targeting this fund at companies that are deep research companies. We're not looking at companies that are five, sixth, seven years from revenue. We want to see commercial activity. Companies that are moving to a position of financial viability who need an equity investment because there are not going to grow fast enough organically to capitalise on the opportunity they have," added Olden.
"We'd be keen to hear from people who have not considered VC and maybe haven't even considered Invest NI. They maybe existing businesses with tremendous growth potential but it hasn't occurred to them that venture capital could be available."
Despite being a tough fundraising market for VCs internationally, Olden believes it is a "compelling time" to get a fund into the marketplace because there are sensible valuations and respect for what equity investment can do for a company.
Olden is also keen to quash the idea that VCs are only interested in the exit from a company that allows them to make a return on their investment.
"The best source of money a company can get is not VC money or Invest NI money, it is customers' money. We're not exit focused. We don't believe an early stage company should have an exit plan. The simple reason for that is that there is no problem getting your equity out of a successful company – it's the dogs you can't get out of," he said.
"When we invest in a company we want to see the plan to make it a seriously viable and successful business. Don't be telling us about IPOs or trade sales, tell us you're going to get your business turning over a target level of revenue making a level of net profits and then the opportunity to exit will appear. It is really about building successful businesses."
Invest NI's William McCulla with Crescent Capital's Colin Walsh
It has been a long time coming but the team at venture capital fund manager Crescent Capital are confident its third fund will be worth the wait.
Crescent last year fell short of raising private funding that would have allowed it to reach the £22.5m closing level set by Invest NI in the previous iteration of the Development Fund.
But after successfully re-tendering for one of the new £30m funds – which had a lower first close level of £15m, requiring a minimum £7.5m of private investment – Crescent III is all set to start investing, says CEO Colin Walsh.
"This time last summer we were hammering the nails into the last attempt to raise the fund. It was awful because we could see half the money in front of our faces but the other half was impossible to raise under the terms we had. So we all moved on," he said.
"The market was tough. It was hard to sell. The terms of the previous fund weren't any way close to as commercial and attractive as these ones are. They probably weren't too wide of the mark at the time the concept was framed but through the passage of time the goalposts moved."
Focusing on companies who need investment in the range between £500,000 and £2m, Walsh says the work it has put into preparing companies for investment over the past few years won't go to waste.
"There were some very compelling propositions that we groomed in preparation for Fund 3 that we have steered to other places to get funding in the end because we couldn't hold them. But there are others that are still there," he said.
"There are a lot of companies who've been stuck because of the lack of available finance but also because there wasn't the level of confidence to push on and develop their business. We've heard from the banks that they are trying to lend. You take some of that with a pinch of salt, but there has clearly been a reticence on the part of a lot of companies to gear up. A lot of companies were looking to gear down so expansions were put on hold. But I think this has all come together at a good time because there's been a palpable change in confidence in the last three or four months," he added.
"That hasn't yet fed through to orders and growth in business for a lot of people, but they are getting more inquiries, giving more quotes, so their confidence goes up and they decide it might be time to dust off the expansion plans."
While Crescent has become synonymous with successful technology companies such as Andor Technology, Lagan Technologies and APT, Walsh expects to make more investments in firms which operate in more traditional sectors this time around.
"Our focus is the same but our deal flow might end up different. We are generalist investors, although we are perceived as early stage technology investors. But that only came about because through the life of Fund 2 that was the deal flow that presented. We were after a flow of mainstream and industrial opportunities but the banking environment was such that they squeezed out equity providers at that time, so the types of deals we'd done in Fund 1 – for example Balcas – weren't available to us.
That's the reason we ended up with a portfolio tilted toward technology," said Walsh.
"The landscape has now changed again. The banks have retreated so we anticipate there will be more of the mainstream type deals available to us, evidenced by the type of deal flow they are seeing at the Growth Loan Fund."
Having been in the game for 20 years, Crescent is confident its team is well placed to help company founders build better businesses and achieve successful exits.
"There's more of a chance of having more Andors in the next five years than there was of having one when they started," said Walsh.
"The whole ecology has changed. Now there is a whole galaxy of people offering entrepreneurship and business readiness training. Entrepreneurs are a lot more savvy, they are much more commercial and have much more rounded teams. The last four or five years there was no opportunity to IPO a small emerging technology company, but that's turning now as well."
It is also possible that the run of no VC deals above £500,000 in Northern Ireland could come to an end in 2013.
"There are a few deals in the funnel and we are working to get one or two over the line before Christmas. There are do-able deals we could finish before Christmas if there were no major obstacles," he said.
"We haven't agreed final terms, we haven't finished due diligence, but there is potential to do business in this calendar year and we are up for it."