The Cardiff Capital Region has revealed plans for a £100m innovation investment fund to support the expansion and job creation plans of firms across the region, as well as attracting inward investment.
While at an early stage, the fund could receive a contribution of around £45m from the region’s £1.3bn City Deal which is reaching its first five-year gateway review and which over its 20-year life aims to create 20,000 new jobs and leverage four times additional investment.
The fund, in keeping with the strategy of the City Deal, would be evergreen with investments being recycled back into the fund on maturity. Investments could range from £3m to £10m.
While any fund would need final approval from the cabinet of the Cardiff Capital Region, made up of the 10 local authority leaders, professional advisory firm KPMG has been appointed to scope a potential fund, following an initial report on an investment fund for the region from Prof Dylan Jones-Evans.
Frank Holmes, a founding partner of Cardiff-based corporate advisory firm Gambit and who chairs the Economic Growth Partnership (EGP) for the city region, which supports the cabinet in assessing City Deal projects and helped to shape the wider economic plan, said any fund would be put out to competitive tender to secure a fund manager. They would then source or provide the match funding to take it to £100m with a focus on scaling-up established firms rather than on start-ups.
Mr Holmes, who also sits on the City Deal’s investment panel, said any fund would also look to leverage significant co-investment on each deal made, including from the likes of the Development Bank of Wales.
Continuation of the City Deal for the region is expected to be confirmed by its funders in the 海角视频 and Welsh governments later this month at its first five-year gateway review. Technically any of the 10 local authorities could decide to opt out, but that is not expected.
Mr Holmes said the fund could be debt, equity, or like the 海角视频 Government’s now fully invested £1bn Future Fund, a convertible loan instrument so providing recipient firms the option to turn debt into an agreed equity stake for the City Deal.
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Mr Holmes said of the fund: “It’s in the design phase, so what we’re looking at here is its purpose and objectives with a criteria of being evergreen. However, the focus I think is going to be more on scaling-up, rather than start-up. It’s about helping those companies that are involved in our sector strengths, like compound semiconductors, energy, the environment and medtech.
“However, it would not just be about the incumbents. The real success of our clusters will be when companies from outside the region want to join them (indigenous firms). That’s when the ecosystem really gathers strength and momentum. So, we are prepared to look at companies wanting to come in and need scale-up capital to enable them to take products to market and improve their innovation capability. So, it’s very much innovation led in the scale-up space.”
But is there a need for a specific City Deal fund, with the Development Bank of Wales having last month secured £270m of additional capital from the Welsh Government and other funders, such as LDC and the Business Growth Fund, looking to increase equity deal flow into Welsh firms?
Mr Holmes said: “Clearly, those companies that will have come to us will probably already have had funding from somewhere else. However, it’s not funding from us in isolation, but with other parties. We’re looking to put sums of money in which are definitely higher than the levels that the Development Bank of Wales currently plays at.
“It’s that particular area of capital that Wales does struggle with. Good companies will always find money, don’t get me wrong, but we’re trying to build clusters here and we’re trying to enable them to create an environment of collaboration. I guess I benefit from the fact that I do know what’s out there (Gambit role) in the market. So, if we can help grow our clusters that has got to be a positive. We want to make sure that any invested money goes as far as it possibly can.
“In the context of a starting place for a fund, our ambition is to have £100m where we’re probably looking to invest £45m of our own money (City Deal). We are in discussions and talking to other sources for the other £55m. We’re talking to placement agents, pension funds, family offices and sovereign funds. Is it going to be convertible loans, equity, debt or a combination of all three? That’s still very much up in the air.”
However, Mr Holmes said he personally liked the convertible loan model. He added: “The reason I like the idea is because they sometimes get over the issue amongst Welsh company owners of dilution. It also enables us and them (firms) to fund that scale-up scenario, which will probably lead to an equity round because you can only put so much debt into any business.
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“So at that point, there’s a conversion opportunity and a payback opportunity. These are the sort of metrics that we’re looking at and we are working with KPMG on getting our prospectus ready.
“However, the objective of any fund has to be about increasing productivity, bringing new disruptive products and services to market, and hopefully, getting some more of our companies listed on the Stock Exchange, as well as creating jobs and leveraging as much funding from other sources as possible.”
Mr Holmes said he has held talks with the Development Bank of Wales, which is wholly-owned by the Welsh Government, over the possibility of a City Deal fund. He said: “They see this as an opportunity to collaborate and co-invest alongside us, so it is not a competitive situation but another source of funding that is aimed at building up our sectors of strength within our region.”
With a new state aid rule regime outside of the EU yet to be clarified by the Westminster Government, it is not yet clear whether the British Business Bank, the publicly-owned economic development bank of the 海角视频 Government, could be a match funder for any City Deal innovation investment fund.
On scale of investments Mr Holmes said: “With a £100m fund we would be looking at a range of £3m to £10m.”
On the time horizon for investments to be repaid or exited he anticipates between three to five years.
Part of the City Deal has been ringfenced to support the rail electrification of the Core Valleys Lines into Cardiff. That left nearly £500m in a wider investment fund to back projects, many with a regional dimension like £38.5m to support a new foundry for IQE and the production of compound semiconductors as part of the region’s wider CSConnected hi-tech cluster.
There is also a £10m Challenge Fund where bids can be made for projects aligned to the City Deal’s wider economic priorities.
A new commercial site and premises fund is expected to come through over the next three to four months, with a focus on supporting the development of much needed new or refurbished industrial space across the region.
The City Deal is also looking to leverage more 海角视频 Government backing for the region through its Strength and Places Fund, which last year committed more than £40m to the CSConnected cluster. The City Deal is supporting new bids around creative and cyber for fresh investment from the 海角视频 Government.
On the evolution of the city region and the City Deal, Mr Holmes said: “I am three years into this role, as are most of the board and the investment panel, and it has become quite clear that we are maturing and in the scale-up phase.
“The easiest thing in the world would have been to put £495m into a load of infrastructure projects and measurably argued how we got our money back. So, we really want this money to go as far as possible and benefit generations beyond the 20 years. It is very much a precursor to becoming a region in its own right and having its own identity. So, we are thinking beyond the City Deal with these objectives on jobs, leverage and GVA uplift. It is also about how we create projects or bring them into the region, and which we can fund, as opposed to waiting for them to knock on our door. So that is the change and shift in mindset at the moment.”
Anthony Hunt, chair of the Cardiff Capital Region cabinet and leader of Torfaen council, said that despite political difference, the 10 authority leaders had bought into driving regional benefits based on collaboration with little in the way of narrow parochialism.
The Welsh Government, through so called Corporate Joint Committees (CJC), has backed the creation of four regions in Wales to take on key economic functions.
On the development of the Cardiff Capital Region, Mr Hunt said: “I have always been of the view that devolution shouldn’t stop at Cardiff Bay.
“There are things that we can do better on a regional basis, just as there are things we can do better on a local basis, as well as those on a national level. However, we have to work in partnership in that respect. I think we view this not just as a City Deal, but a new way of working regionally for the future. So, I would argue that we are well placed to take on those reins.”
Last year former Welsh Government minister Alun Davies called for a specific development agency for the Valleys.
Mr Hunt said: “As a Valleys authority leader I would be very sceptical of anything that starts to break down that region and turns it into a parochial thing, For too long we had the scars of valley against valley, or valley against M4 corridor.”
There is yet to be clarity on the shape of the Shared Prosperity Fund to replace EU structural funding from the 海角视频 Government. However, it is expected the Westminster government will seek to administer its funding element in Wales, and not the Welsh Government, and look to regions and local authorities to bid in.
On a role for the Cardiff Capital Region within the Shared Prosperity Fund, Mr Hunt said: “We are very anxious to hear the details behind it, but we are certainly very alert to working with both 海角视频 and Welsh governments to take best advantage of that money for the region.”
On any parochialism among the 10 authorities, he said: “I am surprised how little that comes in at a leadership level. I think we as
leaders have all built into the concept of a region that we win or lose together. There is definitely a consciousness that you can hit the targets, but miss the point. We want to build a region that doesn’t just advantage its already thriving parts but reaches all.”
On whether the new CJCs need statutory powers, he said: “Through the CJCs we are showing that we want to work in a direction of a more permanent regional way of working. Whether it is statutory or collaborative I think it matters less than the mindset and working relationships we create.
“That obviously involves breaking the mould as this isn’t the usual way of doing things. It will involve people being uncomfortable as they are effectively substituting hard power for influence. I think in return for that we get the scale and the ambition of the regional project that can deliver far more than the old approach of retaining that power within us as any one of the 10 authorities.”
He added: “We are trying to break the mould a little and I recognise it does raise eyebrows sometimes from politicians who are having to exchange that hard power for influence.”
On the leaders’ relationship with the EGP chaired by Mr Holmes, he said: “There was a danger of the business community being excluded from the conversation, or having the opposite extreme of an overly cosy relationship.
“I think we have built a relationship where Frank and the EGP do challenge and push back and ask questions, as we do of them, but it is done in a constructive way.”
Mr Holmes: “I have never known that sense of collaboration and that willingness to have a common cause. Working together has allowed us as business people to be able to help the leaders and the joint cabinet in putting together this industrial plan and economic investment framework.
“We could have inherited £800m of projects, but when we sat down as a board we rejected all of them because they didn’t stack up with the business plan that was missing.
“So we got the data that produced the plan and with that we now know where the investments need to go.
“It is all about putting money into places where we know we will get our money back and that is where we are at... it’s a privilege to be part of this journey.”