Decision details

Reason for the decision:

The purpose of this action is to bring financial savings to KCC, enable early exit from KCC previous equity investments, provide funds for investment for the benefit of Kent & Medway, and enable companies in receipt of KCC’s previous investment to obtain greater access to additional finance for the next stage of their development, as there are insufficient funds remaining within the DPTI (100% committed) and the KLS (86% committed) to support additional investment. All proceeds from the sale of KCC shares would be re-invested in local companies via the Kent and Medway Business Fund (KMBF).

Background:

The Department for Business, Energy, and Industrial Strategy (BEIS) allocated £55 million from the Government’s Regional Growth Fund to KCC between 2011 and 2014. This funded three RGF schemes covering the whole of Kent and Medway and additional local authority areas:

•        East Kent (Expansion East Kent - £35 million).

•        North Kent, Medway, and Thurrock (Tiger - £14.5 million).

•        West Kent (Escalate - £5.5 million).

These schemes operated from November 2011 to January 2016, offering companies grants, loans, and equity investments.

Since January 2017, KCC has used the recycled RGF loan repayments to enable the Kent and Medway Business Fund (KMBF) to provide loans and equity investments ranging between £50,000-£500,000 to eligible businesses across Kent and Medway. Most funding recipients receive 0% interest loans, with a repayment period of up to 5 years.

Since 2013, KCC effected its purchase of shares through three equity schemes. These are:

·         KCC RGF Bespoke Equity Fund (KRBEF) - £3.9 million has been invested in the unlisted equity of 11 companies located across Kent. These investments were funded from the Expansion East Kent, Tiger and Escalate RGF programmes. £0.4 million has been returned to KCC following a sale of shares. Two companies have failed and £1.2 million has been written-off. A further company is dormant. The shareholding in the 8 remaining companies in the portfolio was valued at £2.0 million as of 31 March 2022.

·         Discovery Park Technology Investment Fund (DPTI) - £5.2 million investment has been made in the unlisted equity of 9 companies located in Discovery Park in East Kent. These investments were funded from the Expansion East Kent programme. One company has failed and the investment of £0.6 million has been written off. The shareholding in the 8 remaining companies in the fund was valued at £5.7 million as of 31 March 2022.

·         Kent Life Science Fund (KLS) - To date KCC has invested £4.3 million in the unlisted equity of 9 companies via the Kent Life Science Fund. These investments are funded from the Kent and Medway Business Fund. One company has failed and the investment of £0.5 million has been written off. The shareholding in remaining 8 companies in the fund was valued at £5.9 million as of 31 March 2022.

KCC is seeking to end the current DPTI and KLS arrangements and replace these with a shareholding in a newly listed UK Investment Trust company (to be listed on the main market of the London Stock Exchange (LSE)). Under this proposal the new Investment Trust company will make an offer to KCC to purchase its shares currently held within the DPTI and KLS equity portfolios in exchange for shares in the new Public Limited company. It has been indicated by those advising on the setting up of the new Investment Trust company a preference for life science companies which runs through the DPTI and KLS portfolios. It should be noted that this entity will be a UK limited liability company: the name ‘trust’ is a used for historical reasons and allows HMRC to award the entity a certain tax status, for example they are subject to Corporation Tax on their income but are not subject to tax on chargeable gains.

Before committing itself to this transaction, KCC will obtain an independent valuation of the shares to be sold. KCC’s commitment will be conditional on the flotation going ahead as planned, and satisfaction that the commercial terms are acceptable considering the evidence that shares in Investment Trust companies usually trade at a discount to the value of their underlying investments. There will be no requirement for KCC to invest further in the shares of this Investment Trust company.

The listing of the new Investment Trust company will allow other investors to purchase shares in the Investment Trust company. The Investment Trust will aim to raise £150 million on flotation, primarily from large UK institutional investors.

KCC believes a new Investment Trust company will be attractive for institutional investors whose mandates preclude them from investing into a private fund structure such as the DPTIF and KLS. The London listing will also offer liquidity, enabling investors to buy and sell shares on the London Stock Exchange. The new company is likely to invest in later stage deals where the market considers there to be considerable value and target a double-digit annual return over the medium term, only paying dividends to preserve HMRC Investment Trust status. Returns will be targeted within a 2–3-year period rather than the 7–10-year period envisaged under the existing DPTI and KLS equity portfolios.

With an increased amount of capital, the Investment Trust company will be able to make further investment available to support the companies whose shares were formerly part of the DPTI and KLS equity portfolios as well as enabling KCC to make full or partial exits earlier than currently envisaged.

Future investments of the Investment Trust company are unlikely to be limited geographically to Kent and Medway. Nor will the company necessarily be restricted to KCC’s ethical investment guidelines, KCC will therefore make it clear that it will only retain a shareholding in the new Investment Trust company for as long these guidelines are followed. While KCC would become as minority shareholder in the Investment Trust company this would be balanced against the benefit of an early financial returns to KCC. All proceeds from the sale of shares to be re-invested in local companies via the Kent and Medway Business Fund (KMBF).

The current KMBF scheme will end on the 31 March 2023, without a new commitment from BEIS KCC will not be able to reinvest the KMBF monies beyond that date. KCC is in negotiation with BEIS either to extend the existing contract or that the funds currently being managed by KCC are endowed to the Council. A separate FED, will cover this.

Other options considered:

Retaining the current DPTI and KLS equity portfolio arrangements would:

·         Continue to commit KCC to spending £0.3 million a year on administration costs for the next 3-5 years;

·         Not offer an opportunity to exit from these investments earlier; and

·         Severely limits the opportunity to make additional investments in the companies in the portfolio.

Selling the current DPTI and KLS equity portfolio shares via an alternative arrangement would:

·                Not offer an opportunity to exit from these investments earlier as the diverse portfolio was unlikely to attract buyers and selling the shares in individual companies would take a longer time that the preferred option.

How does the proposed decision meet the priority actions of Kent County Council’s Strategic Statement Framing the Future: Framing Kent’s Future – Our Council Strategy:

This proposed action is in-line Priority 1: Levelling Up Action 3 as the equity schemes seek to attract national and international investment to businesses in the county.

Financial Implications:

The current annual cost of the administration of the DPTI and KLS equity portfolio is £300,000 drawn from KMBF. The new annual cost under the new arrangements will be zero, releasing KMBF funds for re-investment in local businesses.

KCC is responsible for the recovery of these equity investments, if these funds cannot be recovered, KCC is not responsible for any subsequent bad debt

KCC will not be involved in the day-to-day administration of the Investment Trust. KCC will have no responsibility for the recovery of outstanding investments and will not be responsible for any subsequent bad debts.

Returns from the sale of shares or dividends in the Investment Trust company is expected to be within 1 and 3 years, according to market conditions. All sale proceeds must be returned to the KMBF and cannot be used for other KCC purposes. The current KMBF scheme will end on the 31 March 2023. KCC is currently in negotiation with BEIS concerning an extension of the existing contract or the funds currently being managed by KCC being endowed to the Council. A separate FED will cover this.

KCC Budget Book, the capital entry for the KMBF, row ref 26.

As Cabinet Member for Economic Development, I agree to delegate the authority to the Director of Growth and Communities:

1.    To enter into the relevant contracts and legal agreements required to implement this decision allowing KCC to sell shares in unlisted companies within the Discovery Park Technology Investment Fund (DPTI) and the Kent Life Science Fund (KLS) in exchanged for shares in a new listed Investment Trust company, only when market conditions are favourable and KCC has reviewed the Listing and Prospectus documents.

2.    To enter into the relevant contracts and legal agreements required to close the DPTI and the KLS.

3.    To ensure that the proceeds from the sale of KCC shares in the new listed Investment Company will be re-invested in local companies via the Kent and Medway Business Fund (KMBF).