by Barrie Hensby, chief executive, NEL Fund Managers
NEL Fund Managers Limited has been part of the regional business community for over two decades, and we’re proud of the positive difference that our work has made to the commercial activities and job creation at hundreds of firms right across the North East.
Incorporated in 1989 as Northern Enterprise Limited, the company was originally set up as a fund management company at the regional level, as amazingly there weren’t any at the time.
Initially, we managed loan funds, but in 1993, we established its first equity fund, the First HSBC Enterprise Fund for the North East.
In those days, corporate social responsibility was very much in evidence in the North East, and there was a ground swell of support from within the region in support of this HSBC initiative with investments being received from the likes of Newcastle Breweries, Vaux Breweries, Northern Electric, and three of the four local authority superannuation funds.
I think it is fair to say that a lot of the corporates which invested didn’t really expect to see anything significant back – indeed, there were a couple of occasions when we returned cash to investors, they were taken by surprise, and didn’t really know what to do with it.
I did offer to find an alternative use for it, but they soon changed their minds!
Most equity funds of this type have a 10-year life – investing for the first five years, and then divesting for next five.
For a new fund manager like NEL, the problem was raising a second fund to keep the investment team together without a track record on which to base our fundraising work, at the same time as the first fund came to fruition and thus developed that track record.
Luckily in 1998, HSBC were approached by the European Investment Bank which was keen to move into small and medium enterprise (SME) equity finance and saw HSBC’s independent network of fund managers across England and Wales as the ideal vehicle, and the Second HSBC Fund was thus launched in 1999.
The turn of the millennium created new opportunities for NEL and propelled us forward with considerable momentum into the new decade.
The Northern Development Company was a founder shareholder of NEL, and this shareholding subsequently transferred to regional development agency One North East.
NEL had worked with the NDC throughout the nineties to establish a regional loan fund, and this came into being in 2000, providing ‘quasi-equity’ – unsecured loans or preference shares – through the North East Investment Fund (NEIF).
One North East then supported this concept again in 2001 with a second fund, as Barclays Bank entered with funding support through NEIF2, NEIF3 and NEIF3B.
At the same time, there was a recognition by the Government that universities had a great store of fantastic technology that wasn’t being exploited enough.
This was in the era of the great Internet bubble, the biotechnology industry having already had its heyday by then, and so for the first, and only time, NEL launched a specialist fund – the North East Seed Capital Fund.
However, whilst supporting early stage technology is fantastically interesting and rewarding, it is also, alas, very difficult to do consistently well, with the lengthy timescales involved with these investments being a particular issue.
At the national level, investment returns from technology have been very disappointing and if you are focussed on investment returns, as NEL is, this is not an area that is going to attract investment capital.
NEL therefore remains a generalist investor, mitigating risk across different industrial sectors and investment stages.
Throughout most of the “noughties” we had three funds investing in parallel, which were a mix of equity and quasi-equity funds.
Most of its funds have been limited in investment size to £250,000, but during this period co-investment between three funds allowed NEL to provide up to £750,000.
However, NEL limited its investment to £500,000, and this was woefully short of the ever-increasing equity gap, which by then had increased to £2m.
Although the “noughties” was a good decade for management buy-outs (MBOs) because credit was cheap and plentiful, the rash lending of the banks squeezed-out generalist equity investors particularly in the later stage, more developed company market, forcing them into higher-risk start-up and early stage propositions.
NEL was therefore very keen to continue with quasi-equity funds which were predominantly debt and popular with SMEs.
In 2004 and then 2006 NEL launched with the assistance of ONE, two further quasi-equity funds (North East Investment Funds 3 & 3B).
Being relatively large funds, these allowed NEL to recruit more staff and invest in its IT system.
This has proved to be invaluable and gave us the basis for subsequently winning three major contracts in just over two years – the £20m Finance for Business North East Growth Fund, the £48m Finance Yorkshire Equity & Mezzanine Fund (with North Star Ventures), and the £50m Invest NI Growth Loan Fund in Northern Ireland (with Braveheart plc and Clarendon Fund Managers).
Whilst not abandoning equity finance altogether, NEL has developed considerable skill and knowledge in quasi-equity finance, and what the future holds for us will very much depend on market conditions (ie, what SMEs want) and what our customers – the investors – see as the most attractive investment opportunities.
The regional economy has changed out of all recognition since we were first established all those years ago, but NEL has everything in place to meet the investment capital needs of modern North East companies and aims to be part of helping as many of them as we can realise their potential in the years to come.