Invitation to Tender and Tender Specification

Invitation to Tender and Tender Specification

Appointment of a Fund Manager to Deliver the Finance for Business North East Microloan Fund

Tender Reference:OJEU 2014/S 078-136653

Date: 16 April 2014

North East Finance (Holdco) Ltd
Ground Floor
1 St James’ Gate
Newcastle upon Tyne
NE1 4AD

The Finance for Business North East (FBNE) Microloan Fund

Thank you for expressing an interest in North East Finance (Holdco) Limited’s (“NEF”) Contract Notice (OJEU 2014/S 078-136653). You are hereby invited to submit your proposal for the contract in accordance with this Invitation To Tender (“ITT”).

The information set out in this ITT is being made available by NEF on condition that:

-Bidders shall at all times treat the information as confidential

-Bidders shall not disclose, copy, reproduce, distribute or pass the information to any other person at any time or allow any of these things to be done

-Bidders shall not use the information for any purpose other than for the purposes of responding to this ITT.

The purpose of this procurement exercise is to appoint a fund manager (the "Successful Fund Manager") to take over the delivery of NEF’s Microloan Fund (the "Microloan Fund") from the current provider. The successful bidder will have to promote the Microloan Fund, source and evaluate loan applications, make loans and monitor and manage the existing loan book as well as all new loans made following its appointment. The draft Fund Management Agreement (the "Contract") which the Successful Fund Manager will be invited to enter into is annexed to (or otherwise provided together with) this ITT.

North East Finance (Subco) Limited (“NEF Subco”) a wholly owned subsidiary of NEF will enter into the Contract with the Successful Fund Manager. All Microloan Fund loans are (and will continue to be) made by the fund manager as agent of and in the name of NEF Subco.

You are advised to read this Invitation to Tender and the accompanying documents carefully to ensure that you are fully familiar with the requirements of the contract and of the procurement process.

This document sets out the background to the FBNE Microloan Fund and summarises the specification of the Contract and what will be required of the successful bidder which takes over management of the Microloan Fund. The appendices to this document are equally important and so please review them and ensure that you follow the instructions and provide all of the information requested. The appendices are:

Appendix 1 / Important Information and Instructions for Bidders / Page 23
Appendix 2 / Tender Proposal Questionnaire / Page 26
Appendix 3 / Organisation Information Questionnaire / Page 35
Appendix 4 / Eligibility Criteria / Page 43
Appendix 5 / Form of Tender / Page 45

NEF reserves the right at any time to issue further supplementary instructions and updates and amendments to the instructions and information contained in this ITT as it shall in its absolute discretion think fit.

1Background to the FBNE Programme and Summary of the Services Required

1.1NEF is the holding fund manager for the Finance for Business North East (“FBNE”) programme. This was established under (and is sometimes referred to as) the JEREMIE programme. JEREMIE stands for Joint European Resources for Micro to Medium Enterprises, and is a joint initiative between the European Commission and the European Investment Bank Group.

1.2In late 2009, NEF secured a total of £125m of investment capital: £62.5m from the European Investment Bank; £44.25m from the North East European Regional Development Fund Competitiveness Programme 2007-2013 (“ERDF”) and £18.25m from the UK government Department for Business, Innovation and Skills (“BIS”). These funds are to be invested from 2010 to the end of 2014 in micro, small and medium sized companies located in the North East of England.

1.3Early in 2010, NEF launched the following six funds:

Fund / Fund Size / Fund Manager
Proof of Concept / £15m / Northstar Ventures
Technology / £25m / IP Group
Accelerator / £20m / Northstar Ventures
Angel / £7.5m / Rivers Capital Partners
Growth / £20m / NEL Fund Managers
Growth Plus / £20m / FW Capital
Total / £107.5m

1.4In early 2011, NEF appointed Tyne and Wear Enterprise Trust Limited (“Entrust”) to manage a seventh fund, the £5m Microloan Fund – which made its first loans in June 2011.

1.5Due to circumstances unconnected to the Microloan Fund, Entrust will cease to manage the fund around (or prior to) the end of June 2014, at which point the current fund management contract will terminate. The inability of Entrust to continue to manage the fund has resulted in NEF’s requirement to appoint a new fund manager, which is the purpose of this ITT.

1.6Due to high levels of demand, the Microloan Fund and Accelerator Funds received additional capital allocations of £500k and £5m, respectively. As such, £118m of NEF’s initial £125m of investment capital has been committed to the seven funds. The balance of £7m is expected to be made available to the six funds listed in the above table for follow-on investments in promising portfolio companies.

1.7NEF has been offered an additional £17.5m of grant funding for investment in 2015: £10m from the ERDF by the Department for Communities and Local Government and £7.5m from the Government’s Regional Growth Fund by BIS. The £7.5m Regional Growth Fund grant was secured by the North East Local Enterprise Partnership in collaboration with NEF.

1.8The services required, to which the Contract to be entered into pursuant to this ITT will relate, are:

• To lend the un-invested balance of the £5.5m currently committed to the Microloan Fund. (It is expected that this balance will be c. £1.5m at the point when the Contract will start);
• To lend a further £1m which will be committed to the Microloan Fund from the 2015 extension funds.
• To lend the full amount (approx. £2.5m) in the period from the start of the contract (estimated July 2014) to the end of 2015. No loans can be advanced after 31/12/15, and the full amount should be disbursed by early-to-mid December 2015 at the latest.
• To lend only to SMEs based in the North East of England – comprising Northumberland, Tyne & Wear, CountyDurham and the TeesValley.
• To lend the funds so as to maximise the positive economic outcomes, including the creation of new jobs and the safeguarding of existing jobs.
• To lend the c.£2.5m to approximately 210 separate businesses – i.e. to lend on average c.£12k per business (unless otherwise agreed by NEF).
• To actively monitor, manage and maximise returns from the existing Microloan Fund portfolio of c. 240 SMEs, and to do the same in respect of all new borrowers added to the portfolio by the Successful Fund Manager.
• To manage the fund from appointment until fully wound-up prior to the end of the Contract term on 31 December 2019, unless terminated earlier in accordance with the Contract or unless the Contract term is extended by up to a maximum of one year by agreement between NEF and the Successful Fund Manager.

1.9A number of members of staff of the incumbentMicroloan Fund manager have spent the majority of their working time delivering the FBNE Microloan Fund. Due to the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), they may be entitled to continue to be employed by the successful bidder for this contract and may wish to be so. Further information regarding the current team involved in delivering the FBNE Microloan Fund contract is set out at section 8, below.

2Profile of the FBNE Microloan Fund to Date

2.1The FBNE programme was established in 2009 with the support of the Regional Development Agency (One North East) and the European Regional Development Fund, because its aims and objectives were (and remain) consistent with the North East’s Regional Economic Strategy and the North East ERDF Operational Programme.

2.2These aims include increasing Gross Value Added per head in the region to 90% of the UK average, in a sustainable manner, by 2015. The approach to achieving this includes:

• increasing business density by creating 3000 new businesses, of which 15% are in disadvantaged areas;
• thecreation/safeguarding of 28,500jobs of which at least 10% are in disadvantaged areas;
• improving the survival rates of new businesses; and
• increasing the growth rate and profitability of existing SMEs.

2.3NEF’s funds contribute to these activities by providing finance to help support business and job creation and growth. The Microloan Funditself has helped to create over 165 new businesses to date and provided funding to over 130 existing businesses.

2.4The Regional Development Agency wanted the FBNE programme to include a microloan fund for its social as well as economic benefits. By lending to people classed as disadvantaged (due, for example, to being unemployed, disabled or resident in a deprived area), it helps to tackle social exclusion and welfare dependency by enabling the economically inactive to create their own business. At the time when the FBNE Microloan Fund was established, the funding available to Community Development Finance Institutions and other providers to this market had reduced significantly and so the FBNE Microloan Fund helped to ensure that some provision remained for this market segment.

2.5The principal features of the £5.5m FBNE Microloan Fund as currently constituted are:

2.5.1its objective is to support the creation of new enterprises and the growth of existing micro and small enterprises across the North East of Englandby lending small amounts of capital to individuals, pre-start enterprisesand existing businesses which are unable to access funds from mainstream lenders.

2.5.2it is intended to stimulate the creation of new jobs and businesses and to help secure jobs by addressing some of the unmet market demand for small amounts of commercial loan funding. All loans will be made to businesses which are, or which (if they are new-starts) have a realistic prospect of being, commercially viable and able to service and repay the loans.

2.5.3it can lend only to businesses which can demonstrate (to the satisfaction of the fund manager) that they have been unable to raise the funding which they require from mainstream lenders and the fund manager must keep documentary evidence of this.

2.5.4all loans must comply with the principle of ‘additionality’ – there must be a demonstrable and genuine economic impact gained from the fund’s investment.

2.5.5its output targets are: 570 new jobs created; 583 jobs safeguarded and 518 SMEs-assisted. It does not have a leverage target but the fund manager is required to monitor and report to NEF all additional funding which borrowers secure as a consequence of receiving a loan from the fund.

2.5.6it makes loans of between £1k and £25k to businesses operating in eligible sectors across the Region. It has the ability in a verylimited number of cases and in exceptional circumstances to lend over £25k and up to £50k,with the consent of NEF. To date, that ability has been used in only one case.

2.5.7the full £5.5m must be loaned by 31 December 2014.

2.5.8it lends both to limited companies and to private individuals operating as sole traders.

2.5.9the loans are unsecured and are structured as capital and interest repayment loans, with interest being charged at 9% above the UK Reference Rate as set by the European Commission from time to time. From its launch in May 2011 until February 2013, the interest rate applied was a margin of 6.5% above the UK Reference Rate.

2.5.10the maximum term of loans is 3 years; the latest loan repayment date was to be 31 December 2017. Due to the re-profiling of loans made to borrowers who were unable to make scheduled repayments in full, theterm of a number of the existing loans will in practice exceed 3 years.

2.5.11loans made to limited companies are supported by personal guarantees given by the company’s directors in appropriate cases. During the first 18 months of the fund’s operation, personal guarantees were not sought but this policy was reviewed and changed in 2013.

2.5.12the fund manager is tasked with maximising repayments and minimising the level of defaults and non-performance within the portfolio, utilising portfolio management and debt recovery techniques and procedures, including enforcementactionsthrough court proceedings when appropriate. Minimum cash return targets are included in the fund management agreement.

2.5.13the fund manager must have a physical presence (i.e. occupypremises) in the North East of England;

2.5.14it has targets which require a specified proportion of the fund to be lent to:

• disadvantaged individuals wishing to start-up in business
• non-disadvantaged individuals wishing to start-up in business
• existing businesses.

2.5.15the average loans size to start-ups is assumed to be between £3.5k to £8k and to existing businesses is assumed to be between £15k and £21k

2.5.16the capital is available for lending only once during the life of the Microloan Fund and cannot be recycled. All loans are completed by the fund manager as agent for, and in the name of, NEF Subco and all payments of interest and capital are made direct by borrowers to the account of NEF Subco.

2.5.17the fund manager of the Microloan Fund cannot lend to a business at the same time as, or within 6 months before or after, one of the other FBNE funds in NEF’s portfolio invests in the same business. This constraint can only be waived on an exceptional basis with prior written consent from NEF.

2.5.18all loans are completed in accordance with EC Regulation No 1998/2006 governing De Minimis state aid, which limits the maximum amount of aid any one enterprise can receive within a three year period to €200k in total.

2.5.19the fund manager of the Microloan Fund cannot lend to any enterprise which would be deemed to be an ‘Undertaking in Difficulty’, within the meaning of Article 1.7 of EC General Block Exemption Regulation No. 800/2008.

2.5.20it cannot invest in enterprises which operate in sectors or undertake activities which are ineligible under the ERDF, EIB and state aid constraints (which are summarised at Appendix 4 of this ITT, and set out in the draft Contract).

2.5.21it cannot make any loans specifically to aid export-related activities, which is deemed to be: where the purpose or amount of the loan is directly linked to the quantities exported, or to the establishment and operation of a distribution network or to other current costs linked to the export activities.

2.5.22it uses standardised procedures and legal documents to minimise costs to borrowers and ensure that the fund can make the volume of loans required to achieve its lending targets.

2.5.23the fund manager may lend to borrowers which have previously received investment from the Microloan Fund but such repeat lending must at no point in time exceed 10% of all borrowers, i.e. no more than 1 in 10 borrowers may be repeat customers.

2.6The performance of the FBNE Microloan Fund from its launch in May 2011 to the end of February 2014, on some key performance metrics, is set out in the following table:

Performance Measures and Outputs / Performance to 28/02/14
Capital Advanced/£ Invested / £3,725,735
Funds Returned to NEF / £1,583,959
No. of loans / investments made / 297
Individuals wishing to start up business / 165
Disadvantaged Individuals wishing to start-up / 110
Non-disadvantaged Individuals wishing to start-up / 55
Existing Sole traders and partnerships / 38
Existing micro and small ltd companies / 94
No. of existing SMEs supported / 132
No. of new businesses created / 165
Total SMEs Assisted / 297
No. of jobs created / 290
No. of jobs safeguarded / 466
No. of jobs forecasted to be created / 650
Private Sector Leverage / £671,744
Total Applications Received / 834

2.7The average loan size is currently c. £12.5k and has consistently been c. £12k throughout the operation of the fund to date. The fund has made loans across the range from £1k to £25k and has to date utilised the ‘exceptional’ ability to lend more than £25k only once – making one loan of £50k.

2.8The incumbent Microloan Fund manager has lent to borrowers based across the North East area. The volume of lending to different parts of the region is broadly in line with what would be expected, based on the relative size of the population and business base. As illustrated in the above table, the fund has also succeeded in addressing demand from the different customer groups which it was to target.

2.9Many of the loans made to individuals starting up businesses have been made to people starting aservice-oriented business, including landscape gardening services, hair dressing, beauty and tattoo salons, cafes, catering and food production, cleaning services etc. The wider portfolio includes businesses across various sectors and of various sizes including engineering and manufacturing businesses, B2B service businesses, software IT and computer services.

2.10Due to the financial crisis of the late 2000s and the reduction in public funding for business support programmes, the supply of capital for small loans had been severely constrained prior to the launch of the fund in May 2011. There was therefore significant pent-up demand which contributed to a rapid initial rate of investment by the fund, which lent £2m in 2011, to 161 companies. The lending profile of the fund to date is shown in the following table:

Period / Capital Loaned / SMEs Assisted / Average
Loan
Size / Cumulative Capital / Cumulative SMEs / Cum
Average
Size
H2 2011 / £2.001m / 161 / £12.43k / £2.001m / 161 / £12.43k
2012 / £952k / 78 / £12.2k / £2.953m / 239 / £12.36k
2013 / £613k / 51 / £12.02k / £3.566m / 290 / £12.3k

2.11The reduction in lending rate has resulted from a combination of factors. As stated above, initial demand was inflated due to the reduction in supply in the period prior to the fund’s launch. During 2012, the fund manager began to apply slightly stricter lending criteria because the emerging level of defaults and arrears and defaults from the loans made in 2011 was higher than anticipated. That contributed to the reduced lending rate, which was also impacted towards the end of 2012 and in 2013 by additional supply of small loans (in particular from the government’s Start Up Loan scheme), as discussed further in the next section.

2.12The Microloan Fund manager must operate a system of adding borrowers to a ‘watch list’ if any scheduled payment has been missed or not made in full. Where the business of a borrower has failed and the company wound up or where there is no realistic prospect of recovering any further payments, loans are written off.

2.13The Microloan Fund’s financial performance, including write-offs and provisions (which reflects the numbers of borrowers on the ‘watch list’) as at the end of February 2014 was as follows: