Frequently asked questions

How does the Scottish Co-investment fund (SCF) work and who are the partners?

The SCF works exclusively through its private sector partners. Unlike a standard Venture Capital (VC) Fund or a business angel, the SCF does not find and negotiate investment deals on its own. Instead it forms contractual partnerships with active VC fund managers, business angels and business angel syndicates from the private sector. In these partnerships the private sector finds the opportunity, negotiates the terms of the deal and offers to invest their own equity cash.

If the opportunity needs more money than the partner can provide, the partner can call on SCF to co-invest alongside on equal terms. The partner determines how much the SCF can invest in any new deal; however, the SCF cannot invest more than its partner. Companies approach partners directly and the SCF has no influence on the decision making of the private sector.

The SCF funds are not placed in a limited partnership arrangement with partners. Instead the SCF legally guarantees the agreed funding, with SCF funds only being called down from Scottish Enterprise (SE) once an individual investment has been legally concluded. The partners are paid a flat arrangement fee per investment at completion; this figure is 2.5 per cent of the SCF funds invested, which is typical in syndicated deals.

Once a partner has been awarded partnership status a three year allocation is agreed with SCF. The SCF Executive team reviews the allocations every six months up to the end of a three year period and the performance of the partners is also reviewed annually.

After the three year period, all allocations will be reviewed and a new legal commitment given to the end of the programme. These six month reviews as outlined above will continue for the life of the programme. The SCF may ask partners to meet the Scottish Enterprise Investments (SEi) Advisory Board at the request of the SCF if deemed appropriate.

What rules apply to the SCF?

Rules of SCF include:

The Scottish Co-investment Fund can invest up to a maximum of £1 million in any one individual company; this can be in one tranche or multiple rounds. The total deal size should not exceed £2 million (this will include any debt component in the round).
The investment must be at least matched pound for pound by its partner.
The terms obtained must be without partiality to the partner.
Scottish Enterprise cannot own more than 29.9 per cent of the voting rights of a company. This rule incorporates other investment schemes previously invested by Scottish Enterprise and may be relevant if the company has received additional support us.
Public money cannot account for more than 50 per cent of the total risk capital funding in a deal.

What is the eligibility criteria for the Scottish Co-investment Fund ?

In order to be eligible for investment from the SCF, a company must:

be incorporated;
have less than 250 employees;
have net assets less than £16 million;
be in an approved business sector;
be doing a deal below the set maximum deal size;
be doing a deal which involves the sale of an equity interest;
be taking that investment from an SCF Investment partner; and
be predominantly located in Scotland.

How do you define "predominantly located in Scotland"?

The SCF seeks to define whether the investee's "centre of gravity" lies in Scotland or not. The factors which the SCF will look at include:

Location of main or head office
Location of majority of staff
Country of registration of the operating company
Location of the majority of executive directors

Most of the investments brought to the SCF by its partners will be unequivocally Scottish. If a situation arises where the business has some doubt as whether or not the SCF would view them as being predominantly Scottish-based, the SCF team can give an indicative response to this question.

What business sectors are approved or not approved?

The following business sectors are restricted from SCF investment:

dealing in land commodities, futures, shares, securities and other financial instruments;
banking, insurance, money lending, debt factoring, hire purchase financing and other financial activities;
leasing or letting assets on hire;
providing legal or accountancy services;
property development;
farming, forestry or market gardening;
operating or managing hotels, nursing or residential care homes; and
retail sectors if there is a trade displacement issue with other local businesses.

These sectors are deemed restricted because SEi would only consider an investment in these sectors in exceptional circumstances, where we are satisfied on both:

rationale in terms of market failures; and
contributions in relation to overall economic impacts.

What does "an equity interest" mean?

An equity interest is any type of holding which gives the cash provider a share of the future profits of the company. Deals can be complex, involving various kinds of investment in shares, preference shares, loan stock, convertible loan stock, warrants and option contracts. If these give the cash provider the right to share in future profits, or the proceeds of a future exit, then an equity interest is involved.

Conventional bank debt gives the lender no right to share in future profits or exit proceeds, so therefore, no equity interest is established. However, an equity deal can include conventional loans from a non-equity lender (like a bank), and still be eligible for the SCF.

Occasionally banks will lend substantial unsecured sums and take an equity interest in the form of a warrant. Such a deal would be eligible as an equity deal if the future equity interest is material. Generally, the lender would have to have a right to 10 per cent or more of the company's future value to pass this material test.

How do I approach the SCF for investment?

Companies do not approach the SCF directly as the SCF does not scrutinise deals itself, it simply follows its partners.

The SCF does not search for or negotiate investment deals in its own right, our partner finds the deal, negotiates the terms and if required calls upon the SCF to co-invest with them. Companies looking for investment in their business should find a private sector investor first who is a contracted partner of the SCF. Only after one of our partners have decided to make an investment will the SCF enter proceedings.

How quickly does the SCF work?

The SCF enters the scene when one of its partners invites it to join in a deal. Early in the process the partner will notify Scottish Enterprise that they are working on an investment to allow us to check that it fits the basic size, sector and location eligibility criteria. We will usually confirm this within a couple of weeks. This is called "Initial Notification".

Once basic eligibility has been confirmed, our partner can work in the knowledge that we will invest if they do, subject to satisfactory legal documentation. The partner will set up the investment deal in the normal way, and will normally agree a closing date - the day when all the investment agreements are signed and the monies are paid.

Before this closing date the partner will notify us that they want the SCF to invest in a business. The process will continue with the partner sending us a detailed memorandum setting out:

the deal terms;
the closing date confirmation;
the other parties to the deal; and
any other deal related information.

Throughout the process the pace of the investment deal is dictated by the business and the partner. On average, it will take us about two to three weeks to complete internal formalities, and we then provide the partner with confirmation that the SCF will proceed, along with the funds for our investment.

Does the SCF lend money as well as make equity investments?

The SCF will invest in whatever type of share, loan stock or convertible preference share that the business agrees with our partner. Equity deals are often complex, and might contain several classes of share, as well as loan stock, convertibles, warrants, preference shares, options and other types of investment. We will invest pro-rata with the partner, and will subsequently acquire its share of whatever the partner negotiates for the investor group.

However, the SCF does not invest in pure debt. The deal must contain a material equity element at its core.

Does the business have to repay SCF cash at some point in the future?

However, the SCF does not invest in pure debt. The deal must contain a material equity element at its core.

The SCF acts as an equity investor in business acting on a fully commercial basis. If the investment package put together by the partner contains an element of debt then the company would have to repay this in accordance with the deal terms.

The balance of our investment would allow us to buy shares in the company; these do not have to be repaid. The SCF can sell these at any given time, subject to any restrictions which might have been agreed in the deal package.

Considering SCF is Scottish Enterprise money, how bureaucratic is it?

As an investment deal comes together, the partner will be responsible for all the negotiations - the SCF does not become involved at this stage. At the end of the deal, the partner will carry out the approval procedures which are reasonably straightforward and only involve the SCF.

Are there any fees involved?

Most private sector investors charge a commitment fee on sums they invest. This fee is paid by the company when sums are drawn down. The SCF usually passes its share of this commitment fee to its partner. The SCF does not charge any other fees.

Does the SCF work with banks and grant bodies?

Investment deals can be quite complex arrangements with many parties from the private and public sector taking part. The SCF is happy working alongside all of these. It is up to the partner or the corporate finance adviser who is working for the company to manage all the parties to a deal so that the transaction proceeds smoothly to a quick completion.

What happens if the deal is committed in tranches?

Many investment deals are negotiated around a headline amount of money, but with a condition that the total sum be invested in stages over a period of time - called tranches or drawdowns.

Tranches are usually released when the business reaches some stated and agreed milestone - for example a level of sales, the completion of a product or the hire of an individual.

When it is looking at deal sizes, the SCF looks at the full headline amount negotiated rather than the value of each tranche. For example, a deal in which £2.1 million was negotiated to be invested in three tranches of £700,000, £700,000 and £700,000, would total £2.1 million and would therefore be above the SCF's upper size limit. We would not be allowed to invest.

What happens if the company requires more money at a later date?

A lot of investment deals are completed in the knowledge that success will create the need for a larger deal in the next twelve to eighteen months. So long as this larger deal is merely an intention, rather than negotiated in detail at the Closing Meeting, the fact that you anticipate doing another larger deal later will not be counted by the SCF when measuring whether your deal fits within the size limits.

SCF can invest at second and later rounds, and fully intends to do so where the investee is performing strongly. In general the SCF will approach the second round much like the first - it will co-invest with the partner on equivalent terms. The procedure is very similar. The overall cap on SCF involvement (up to £1 million in cash value) will remain in force, and we will use all rounds to calculate the total of our investment.

Can the SCF be utilised for more than one company?

Yes, the SCF approaches each investment opportunity as a separate case. The fact that there has already been a previous investment from the SCF in company A will have no special bearing on whether or not the SCF would invest in company B.

Do companies have to invest their own money in order to get SCF investment?

No, the SCF makes no distinction as to whether or not the business is investing alongside; there is also no enquiry into personal assets. However, as a matter of investment practice, the partner may wish to see a commitment from the business that there is the intention to invest their own cash. That discussion, though, is between the company and the partner.

What should a company do if they are interested in the SCF?

In summary, in order to access SCF money the following criteria must be met:

meet SCF’s eligibility criteria
structure a business proposal
ensure that at least one of our partners is committed to investing in the proposal.