Thursday, December 10, 2009

Do We Have the Right Managers for the UK Innovation Investment Fund?

The UK government yesterday announced that Hermes Private Equity and the European Investment Fund (EIF) had been selected to manage the technology-focused UK Innovation Investment Fund (IIF).

Science & Innovation Minister Lord Drayson reckons the 15-year IIF will grow to £1 billion within 18 months, making it the largest technology-focused fund in Europe and helping close the VC funding gap between the UK and the US. Thus far, we're about a third of the way there: the chosen managers have raised an additional £175m (mostly from UK institutions) to supplement the government's cornerstone £150m, making the fund worth £325m.

It's the EIF that we're interested in, since they'll take £100 million of the UK government's money in a £200 million technology fund-of-funds, covering life sciences, digital/ICT and advanced manufacturing. Hermes is slated to manage a £125 million low-carbon and cleantech fund-of-funds (which will receive the UK's remaining £50m).

So how much will UK biopharma companies see? The EIF choice is interesting given its clear European remit: EIF is a public-private partnership whose shareholders include the European Investment Bank, the European Commission, and various European banks (including the UK's Barclays). It already manages about €3 billion. Will £100 million from the UK government really make much difference--and more critically, will it trickle through to actually be invested in the UK?

Yes, says Drayson. For one thing, he and his team have stipulated (while trying to keep political interference to a minimum) that at least £25 million of the government's contribution must go to life sciences. According to his team, "EIF have indicated that it will be more than that," and they've also indicated that nearly all the £200 million will go into UK companies.

We should hope so. After all, why should UK money simply go into a European pot (which the UK is already contributing to, indirectly)? EIF has already signed individual biotech-supporting agreements with national institutions in other countries. In November it agreed to put €26.7 million into a co-investment fund with Sweden's Karolinska Development AB. A few years back it put €10.4 million into Danish VC Nordic Biotech's venture fund.

There's presumably nothing to stop UK venture funds from securing similar deals directly, although Drayson didn't answer our question as to why those hadn't yet appeared. He did say, though, that the IIF "is complementary to work done by university funds and other organizations" in the UK. The IIF is special, he continued, because of its (predicted) size and long-term structure, ideally suited to life sciences investments. That, he infers, should be enough to avoid an overall skew towards, say, cleantech which, with the ongoing Copenhagen Summit and all, is particularly fashionable right now.

UK biotechs, then, should in theory start to see a freer flow of venture capital by early 2010. It will be longer, however, before they begin to benefit from another pillar of the government's innovation-stimulation package: a flat 10% rate of corporation tax on profits generated from UK-rooted biopharma patents, confirmed in the UK chancellor's pre-budget report also announced yesterday. That won't come into effect until 2013.

Still, "we expect to see companies re-locating their IP to the UK in order to benefit from this," Drayson told IN VIVO Blog. The reduced rate (down from 28% and which will apply to UK-domiciled patents across all sectors) is apparently "very competitive" with the US rate (although it doesn't quite match Belgium's 6.8%).

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