BVCA feedback on impact of COVID-19 on the UK private equity and venture capital industry

2 April 2020

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Impact of COVID-19 on the UK private equity & venture capital industryThis paper summarises the feedback we provided up until 2 April. We recognise that new proposals have since been announced and we will carefully analyse these, gather further feedback from members and continue our engagement with the Government.

The British Private Equity and Venture Capital Association (“BVCA”) is the industry body for the private equity and venture capital (“PE/VC”) industry in the UK. With a membership of over 770 firms, the BVCA represents the vast majority of all UK-based firms, as well as their investors and professional advisers.

• Over the past five years (2014-2018), BVCA members have invested over £38 billion into 2,800 UK companies nationwide.

• Our members currently back 4,330 companies across the world, employing close to 1.6 million people on a full-time equivalent basis.

• 843,000 people are employed in the UK and 87% of UK businesses are SMEs.

Below, we outline the results of a recent member survey to assess the impact of COVID-19 and make recommendations that will support PE/VC businesses.

PE/VC firms’ feedback – survey closed 2 April Recommendations - Continuation of measures to support businesses – large or small

• Feedback provided by 66 private equity and venture capital firms mostly managing or advising UK mid-market, growth capital and venture capital funds with Assets Under Management of less than £500 million.

• A wide range of sectors is now affected, including manufacturing, life sciences and deep tech. The travel, leisure and events sectors were the first to be affected.

• The introduction of new facilities is needed to support liquidity as our members have not been able to access the current Government funding schemes.

• Government funding:

– Introduction of a £500m British Business Bank (BBB) funding facility designed for the needs of innovative early stage companies in sectors such as digital/tech, biotech and life sciences. This is in addition to the BBB Coronavirus Business Interruption Loan Scheme (CBILS) as early stage companies are not eligible for this.

– SMEs backed by PE/VC funds must be eligible for CBILS. Some delivery banks are denying SMEs access to funding simply because they are owned by a PE/VC fund and turnover for all unrelated companies in a PE/VC portfolio is being aggregated when considering the £45m criteria.

– The funding gap for the 9,600 companies between (i) the Covid Corporate Finance Facility and (ii) the Term Funding Scheme for SMEs and the BBB CBILS, needs to be addressed through a new working capital loan guarantee scheme.

• Wrongful trading: We believe the suspension of the legislation is helpful. If there is scope to issue guidance for directors• Tax payment deferrals and the Job Retention Scheme have been

considered helpful.

• All schemes require greater clarity of criteria, simplification of processes and speed of execution, especially where payroll needs bridging until the Job Retention Scheme becomes active in May.

and amend legislation in respect of directors’ duties, that would provide further support.

• Other government support measures: We welcome deferrals of tax payments and would recommend extending business rates relief to all businesses that are now closed because of COVID-19 restrictions. The Job Retention Scheme is timely and needs to be easily accessible with payments made as soon as possible.

• VC schemes: Faster approvals of EIS/VCT funding and faster payments of R&D tax credits. Relaxation of state aid rules on EIS/VCT schemes.

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Results of BVCA survey closed 2 April 2020• 66 firms responded to the survey representing 19% of the population of

PE/VC firms surveyed.

• The majority of the firms have funds with less than £500m AUM (58%).

£25m - £50m

Up to £25m

£50m - £100m

£100m - £250m

£250m - £500m

£500m - £1bn

£1bn - £5bn

Over £5bn

• The 66 firms operate in different parts of the UK market, with 30 in the mid-market, 27 in growth capital and 18 in venture capital.

• A wide range of sectors is now affected, including manufacturing, life sciences and deep tech. The travel, leisure and events sectors were the first to be affected.

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• The majority of portfolio companies have tried to access CBILS.

Results of BVCA survey closed 2 April 2020

0

20%

40%

60%

80%

100%

Coronavirus Business Interruption

Loan Scheme(British Business Bank)

Term Funding Scheme / TFSME (Bank of England)

Covid Corporate Financing Facility (Bank of England)

• However the majority did not succeed in accessing this government funding.

– Only five portfolio companies of respondents have been able to successfully access the existing business support schemes from both the Bank of England and the British Business Bank.

– No portfolio companies have yet accessed the Term Funding Scheme.

• Our members who completed the survey estimate the following number of companies are not covered by any of the schemes:

– CBILS - 905

– TFSME – 973

– CCFF – 979

• The total number of companies not covered by these schemes is likely to be more than estimated, given the number of respondents to the survey.

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Results of BVCA survey closed 2 April 2020

Respondents suggested a range of changes to CBILS:

• Clarification that PE-backed companies should not be excluded on the basis of the EU definition of an SME. This point is covered in our recommendations below.

• Personal guarantees should not be required and banks should to be less sensitive on debt prioritisation where a company already has balance sheet debt.

• Revolving credit facilities are more appropriate for unquantified short term needs (as opposed to long term senior debt), but these are only offered by three of the 40 approved lenders.

• The addition of new delivery partners e.g. debt funds.

• The following challenges have been identified by portfolio companies when accessing government funding.

0

20%

40%

60%

80%

100%

Lack of information and clarity about them

Our companies are venture-backed and do not have a history of debt in the capital structure, making them ineligible

Our companies are venture-backed and the schemes do not apply to loss-making companies

Our companies are venture-backed and require an equity solution, not a debt solution

Banks have advised they view our portfolio companies in aggregate, making our portfolio companies ineligible

Banks are asking for personal guarantees

Previous lending records relating to companies have made them ineligible

Our companies' debt would be deemed below investment grade by ratings agencies

Other

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Results of BVCA survey closed 2 April 2020• The introduction of new facilities and measures is needed to

support liquidity• All the recommended measures are considered important and in many

cases, essential, to our members.

• The level of importance placed on the recommended measures will vary from firm to firm depending on their investment activities. e.g. the VC-tax advantaged schemes will be less relevant to some firms.

Other feedback received in respect of current financing facilities.

• Approval of the deferral of interest payments from lenders is a key challenge.

• Some portfolio companies have encountered issues receiving covenant waivers and rescheduling of debt.

• It is expected that more lenders will be approached for covenant waivers by portfolio companies later in the year.

0

20%

40%

60%

80%

100%

0 (not needed) 1 2 3 4 5 (essential)

The introduction of a £500m British Business

Bank (BBB) funding facility designed for the

needs of innovative early stage companies

A loan guarantee programme covering up to 90% of the risk for additional loans

made to medium-sized companies

The Covid Corporate Financing Facility to be opened to leveraged

businesses

VC-tax advantaged schemes – faster

approvals including relaxation of state-aid

rules

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Results of BVCA survey closed 2 April 2020• The effectiveness of the following Government measures in helping to

manage firms’ response to Covid-19 is set out below. • The challenges with the funding schemes have been highlighted above. Tax

payment deferrals and the Job Retention Scheme have been considered helpful. Further support on the wrongful trading legislation is covered in our recommendations below.

• All schemes require greater clarity of criteria, simplification of processes and speed of execution, especially where payroll needs bridging until the Job Retention Scheme becomes active in May.

• Around 620 portfolio companies within the survey (of 66 firms) have decided to furlough some or all of their staff. Some portfolio companies have yet to furlough their staff and are considering options, including redundancy measures.

0

20%

40%

60%

80%

100%

1 (least effective) 2 3 4 5 (most effective)

Government coronavirus finance packages (CCFF, TFSME, CBILS)

Tax payment deferrals

Job retention scheme

Amendments to wrongful trading

legislation

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• Companies urgently need government intervention to support liquidity and cash flow challenges for otherwise sound businesses. The devastating impact of the COVID-19 virus on individuals and the economy has increased sharply. The economic stresses which began in the travel, leisure and events sectors have spread rapidly to the rest of the real economy.

• Public announcements and signalling on any further measures should be made as soon as possible whilst the underlying legislation is developed.

1. Government funding • For the recent funding announcements to be helpful, the cash will need to be deployed quickly for businesses to continue their operations.

• Additional funding for early stage companies is urgently required.

– We are recommending the Introduction of a £500m British Business Bank (BBB) funding facility designed for the needs of innovative early stage companies in sectors such as digital/tech, biotech and life sciences. This is in addition to the BBB CBILS as early stage companies will not benefit from this as they do not meet banks’ eligibility criteria.

– The focus here is on liquidity through short term venture loans, whereas CBILS is focused on funding provided through banks or other senior lenders. For early stage companies, and their backers in VC, there is almost no bank debt involved in the capital structures because they lack a track record to underpin, or collateral to secure, any such lending. Furthermore, our survey shows many examples where such companies have been rejected by banks that are in CBILS.

– We have sent an initial proposal to the Government and the BBB, and are hopeful of arriving at a solution soon.

• Ensure the BBB CBILS can be deployed to PE/VC-backed companies without reference to the EU SME definition.

– Our members have confirmed that the banks’ eligibility criteria means that PE/VC-backed companies that are SMEs cannot access CBILS. This is because the turnover of all portfolio companies held by a PE/VC fund is being aggregated to assess the £45m turnover criteria. We think that the interpretation of the EU state aid rules is having this effect, however this is not an issue in EU countries where our members’ companies have been able to access funding and the state aid requirements have been adjusted.

– We believe that all businesses need to be considered equally and we cannot be at a competitive disadvantage to our European partners. PE/VC funds are not conglomerates and do not operate as typical corporate groups. UK and international law in several areas reflects that portfolio companies of PE/VC funds differ from corporate groups.

– Each portfolio company will operate independently of other companies the fund has invested in. This is recognised in accounting standards where the investments in companies are held at fair value rather than consolidating the results of each company (as conglomerates do). Their tax treatment is also different; funds receive no group tax advantages, such as group relief (for example the surrender of losses or sharing of capital allowance excesses).

– Portfolio company liabilities are entirely separate and liabilities are clearly ring-fenced between portfolio companies. This legal disaggregation reflects commercial reality and the very separate/ different nature of portfolio companies. A fund could invest in businesses as different as online retailers and industrial manufacturers.

Recommendations for Government to support our members’ businesses nationwide

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Recommendations for Government to support our members’ businesses nationwide

1. Government funding • The funding gap for the 9,6001 companies between (i) the Covid Corporate Finance Facility (CCFF) and (ii) the Term Funding Scheme for SMEs and the BBB CBILS, needs to be

addressed through the creation of a new working capital loan guarantee scheme. Initial features of the scheme are set out below:

– A loan guarantee scheme covering up to 90% of the risk for additional loans made to medium-sized companies not able to access either the CBIL or CCFF support schemes. Restrictions linked to state rules have been lifted in EU countries and the EU has approved similar schemes recently.

– Many of these companies have existing lending arrangements, but lenders may be unwilling to extend additional credit facilities for working capital due to the uncertain trading outlook resulting from the lockdown imposed to contain the Covid-19 outbreak. Directly introducing a new lender in a timely manner will however be difficult due to existing complex security arrangements.

– The Government through the Bank of England needs therefore to provide a guarantee to support an additional working capital lending facility if the banks and shareholders are able to agree that one should be put in place and are prepared to assume 10% of the additional risk. This would also apply to companies that do not currently use loans and agree a new loan from a lender.

– The minimum facility size needs to be confirmed and the maximum could be £200m (at the Bank of England’s discretion).

• Whilst we are promoting a loan guarantee scheme, we will, of course, put ourselves behind any arrangement which delivers effective support to the whole economy straightforwardly and at pace. As you consider your options, we ask that any system meets some simple tests:

– Accessibility – straightforward criteria and application / assessment interfaces.

– Supervision – professional support to the Government and its agencies from investment and senior banking professionals to ensure appropriate oversight and monitoring.

– Delivery – simple mechanisms which allow implementation at speed.

1 Approximately 9,600 companies employing 30% of the UK’s private sector workforce are neither eligible for the CBIL nor the CCFF schemes as their turnover exceeds £45m but they are not big enough to be rated as investment grade (BBB-).

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Recommendations for Government to support our members’ businesses nationwide

1. Government funding • The Covid-19 Corporate Finance Facility cannot be used by leveraged PE-backed businesses:

– The notice published by the Bank of England on 18 March is explicit that the CCFF will not be available to ‘leveraged investment vehicles’. The minimum issuer ratings specified in the notice (short term credit rating of A-3 / P-3 / F-3 as at 1 March 2020) are consistent with BBB-/Baa3, the lowest investment grade rating. So, it seems that the CCFF is not intended to be available to support PE/VC funded companies, whose capital structure (as is often the case) involves (or implies) a sub-investment grade rating. 

– We are aware that the separately announced Term Funding Scheme may be intended to assist businesses that are sub-investment grade, but our understanding is that that is pointed at SMEs and so will not be available for larger, sub-investment grade PE deals.

• Our members are having conversations with their lenders to address covenant concerns and upcoming interest and capital repayments. A flexible approach will be required by banks with waivers offered to address covenant breaches.

• We are also speaking to audit firms about the impact on audit opinions.

– Many portfolio companies with secured lending require an audit within 120 days of the year end otherwise it is a covenant breach.

– For December year ends, directors and auditors are being put in a difficult position as there is no central economic base case on which to build the going concern analysis that is required when preparing financial statements and auditing them.

– The FCA has given listed companies a two month extension and a similar position is required for private companies.

• We are also collating recommendations for the life sciences and biotech sectors to discuss with the Office for Life Sciences.

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2. Wrongful trading • We believe the suspension of the wrongful trading legislation is helpful. If there is scope to issue guidance for directors and amend legislation in respect of directors’ duties, that would provide

further support. This is an important area for directors to navigate in the current crisis and BVCA members are conscious about their responsibilities as directors on the boards of their portfolio companies. Discussions with creditors, especially lenders, are also ongoing.

• The following measures have been recommended to the Insolvency Service and we are keen to discuss these further with BEIS:

– Specific legislative amendments to the wrongful trading and directors’ duties provisions; and

– Publication of government guidance for directors.

• The timings of interventions are crucial and our members (alongside other businesses) need urgent support. We feel that Government guidance for directors could be published more rapidly than legislative changes and by signalling the Government’s direction of travel in respect of its support measures and intention to introduce legislation, directors would be provided with a reasonable level of comfort when making decisions.

– We have suggested some draft guidance for the Government to consider further and this has been shared.

• We would be pleased to arrange a call with you or to share more specific legislative proposals if this is something you are willing to consider.

Recommendations for Government to support our members’ businesses nationwide

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3. Government announcements, including the Job Retention Scheme • The biggest priority is how to cover employee costs and we, along with other business groups, welcome the Job Retention Scheme. This scheme is timely and will enable businesses to keep

people in employment and will aid and accelerate the recovery (when it comes). The scheme needs to be easily accessible and payments need to be made as soon as possible to assist companies that are dealing with cash flow challenges.

• From a tax perspective, the deferral of income tax and VAT payments are welcome. Overpayments from payments on account should also be repaid quickly.

• Pragmatic approach for individuals and corporates that are now in different locations from a residency perspective. Australia has issued helpful guidance2.

• Faster payments of R&D tax credits which support the viability of businesses claiming them.

• Extend business rates relief to all businesses unable to operate because of government restrictions.

4. VC tax-advantaged schemes • Innovation must continue to be supported during this crisis3.

• Faster approvals for SEIS/EIS/VCT transactions as early-stage businesses will need an urgent transfusion of cash.

• The VCT Association has provided detailed feedback on the state aid rules that need to be relaxed. The existing VCT rules are preventing firms from providing essential and immediate additional investment to businesses in their portfolios where they no longer meet the qualifying criteria. No additional costs would fall on the Exchequer as the relief has already been received, and this injection of capital would entirely be from private sector investors.

2 https://www.ato.gov.au/Individuals/Dealing-with-disasters/In-detail/Specific-disasters/COVID-19/?page=2#Internationalbusinesses

3 A recent BVCA report highlighted the huge impact of venture capital and angel finance on start-ups and the wider economy. Conducted by Oxford Economics, The Innovation Nation shows that employees at companies backed by angel investment and venture capital are 60% more productive than the total UK private sector average, and, once supply-chain impact is factored in, these businesses contribute a total of £37.7 billion of GDP to the UK economy and account for 570,000 jobs.

Recommendations for Government to support our members’ businesses nationwide

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