Procurement of Fund Management Services for North East Mezzanine and Loan Fund

Overview

The North East Fund seeks to appoint a professional, FCA authorised fund management organisation to deliver an SME investment fund which will make predominantly debt-based investments in revenue-generating SMEs based in the North East of England. The fund will address the persistent market gap in the provision of relatively small amounts of growth finance for SMEs in the North East of England, including unsecured loans and mezzanine / quasi-equity investment. In so doing, it will help to unlock regional growth, build confidence in the SME business base and ensure the region is a great place to start-up and scale-up a business. The Fund has the working title of "Later Stage / Mezzanine Fund" but its final name will be agreed with the appointed fund manager. TNEFL expects to make an initial commitment of investment capital to the Fund of £35m, which will be invested over an Initial Investment Period of c.5 years - equating to an average annual investment by the Fund of £7m during its first five years of operation. This quantum of investment, and the Fund's investment policy is consistent with and will address the funding gaps identified by a market evaluation exercise which was undertaken during the first half of 2024. In a significant development compared to previous regional investment funds, the profile of this Fund has been developed with a view to facilitating a more 'patient capital' approach to investment - by making provision for the initial 5 year investment period to be followed by further periods of new (and follow-on) investments which can potentially extend to a further 10 years. This period of up to 15 years in which the Fund can make both new and portfolio investments will be followed by a Realisation Period of up to 10 years, giving a potential contract duration of 25 years in total. This will enable the manager to provide support over a longer period than previous funds, which should be beneficial for the Fund's investee companies and should also help to maximise the financial returns to the Fund, particularly in relation to mezzanine or quasi-equity investments as it will allow for a longer holding period of share options or warrants, which should give a greater prospect of achieving additional upside liquidity from those instruments. Although the fund is required to be deployed predominantly via amortizing debt instruments (which must comprise 80% of the Fund's investment by value), it also has the scope to take equity positions where appropriate in companies with high growth potential and thereby to target a good number of potential high-cash-multiple / equity returns. The Fund is also required to complete a number of smaller loans, of an average value of £70k. This will enable the Fund to help those SMEs which are seeking to achieve more modest organic growth and are not suited to equity investment but which require a loan (perhaps with a short capital repayment holiday) to help them take-on new contracts and bridge the gap between delivering them and receiving payment from new customers. The Fund's returns, and potentially other sources of capital which may be available to TNEFL (for example, from the regional legacy funds overseen by NEA2F) will be used to facilitate the extension of the Fund's investment activity after the initial investment capital commitment of £35m is fully invested.