Rules

Size of investments

The Scottish Co-investment Fund (SCF) can invest up to a maximum of £500,000 in any one individual company; this can be in one tranche or multiple rounds. The total deal size should not exceed £2 million and this will include any debt component in the round.

The fund investment must at least be matched with the private sector investment.

The terms obtained must be shared equally with the partner.

Scottish Enterprise (SE) has an overriding rule that it cannot own more than 29.9 per cent of the voting rights of a company. This rule incorporates other investment schemes previously invested by SE and may be relevant if the company has received additional support from us.

The company must be in an eligible sector. These sectors are deemed restricted as SE Investments (SEI) would only consider investment in these sectors in exceptional circumstances and where SEi is satisfied on both rationale in terms of market failure and contributions in relation to overall economic impacts.

Company eligibility

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.
  • Be predominantly located in Scotland.

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;
  • 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 SE is satisfied on both the rationale in terms of market failures and contributions in relation to overall economic impacts.

In cases where there is an element of doubt as to the whether or not a business falls within an eligible or ineligible sector, then the SCF partner who is working with that particular business would advise. If this does not provide a clear answer then the partner can ask for clarification from the SCF Executive Team.

What are the deal size limits?

The SCF has been set up to help fill the gap in finance for smaller, ambitious growth companies. For this reason the SCF can only invest in deals where the total deal size (taking into account all equity, debt, preference shares, convertibles etc) is less than £2 million.

This total will include any investments to be made in kind (for example the conversion of outstanding debts to equity, equity fees being charged by advisers, arrangement fees paid in equity and so on).

The total will also include the full amount of any third party debt arranged as part of the deal. So, a transaction which contained £1.4 million of investor equity and £700,000 of term loans, overdrafts and other finance to be provided by a normal bank would total £2.1 million, and would not be eligible for SCF investment.

Lastly, the total will include the full amount agreed to be invested, independent of any conditions as to tranches or drawdowns. The test is applied to the total deal size - not to the individual tranches of a deal. In the case of tranches, it is normal for a deal to be negotiated at a set amount, with the clear understanding of all parties that continued success is intended to lead to a further funding round, often within less than a year. The SCF's size test will be applied to the total amount agreed in detail at a given point in time. Informal understandings about future rounds will not be counted.

In some cases the borderline between what is agreed and what is merely understood may become unclear. As a general rule, any sum mentioned explicitly in the Subscription Agreement will be counted for the "£2 million" test. The SCF partner may seek prior guidance from the SCF Executive Team as a deal develops on what is and is not within the "£2 million" limit. In general the SCF will try to give clear early guidance to its partners as to whether a deal passes the "£2 million" test.

How do you define "predominantly located in Scotland?"

Location is not an exact science. 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

The SCF seeks to define whether the investee's "centre of gravity" lies in Scotland or not.

In this analysis no single factor is dominant or gives an unequivocal "yes". 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 to whether or not the SCF would view them as being predominantly Scottish based, the SCF Executive Team can give an indicative response to this question.