Lord Drayson launches environmental venture capital fund

Science minister Lord Drayson says that Government must continue to support companies as he launches £125m venture capital fund

By Richard TylerPublished: 6:36PM GMT 26 Jan 2010
LORD Drayson, the science minister and former technology entrepreneur, has said that the economy remains "very fragile" and requires further Government support.
His comments came as he launched a £125m venture capital fund with Hermes Private Equity that will invest in young, fast growth environmental companies.

Lord Drayson said that technology companies expanded more quickly than others as economies recovered from recession and it was critical to ensure that they were not starved of capital.
"As a former science entrepreneur I absolutely know now is the time to invest in UK technology businesses. They are key to future growth and prosperity," he said.
"The really important thing I believe is that action the Government has taken over the last 18 months has ensured that we have come out of this recession with the majority of our growth potential intact."
But he added that while private funding into clean technology companies between 2003 and 2007 had doubled, it had declined significantly in the last two years, creating an "equity gap".
"It was a lack of access to capital that was really hindering their development," he said. "The recovery is very fragile. It underlines the importance of such initiatives as this. It depends on us, the Government, to take action to ensure the recovery is sustained and the UK moves to a more balanced and diversified economy."
Hermes Private Equity will invest the £125m fund over the next three years. It is made up of £50m of public money and £75m from the BT pension fund, which owns Hermes.
Sue Flynn, chief executive of Hermes private equity, said that "a minimum of 50pc" of the fund would be invested in the UK and "a minimum of 50pc will be in the environmental sector", which includes nuclear technology.
The fund could not guarantee that all the public money would back UK companies, she said, because the fund managers that would receive the investment operated pan-European funds.
She added that up to 30pc of the fund – £37m at the first close – would be invested directly. While her team had not made direct investments in companies before, Ms Flynn said "it was a natural extension" of Hermes' services. "We have built up a team to do that" she said.
Hermes will invest in around 10 fund managers out of the 50 that Hermes had identified as active in the clean technology or generalist investment space and that met the investment criteria of the fund.
Ms Flynn said Hermes had agreed "a very competitive fee" with the Government that would see management fees paid to cover its costs and a bonus based on the performance of the fund. "If our investors do well we do well," she said.
Lord Drayson said that contracts signed with Hermes protected the 10 year fund – one of two within the Government's £325m UK Innovation Investment Fund initiative, from the influence of a change of government.
"When ever we have an election coming people ask that question and that's why it's important to have the fund set up with a legally binding contract. This is now launched," he said.
He added that unlike previously Government-backed venture funds, Hermes has been told to invest in environmental companies that will maximise the returns for investors, rather than meet other objectives like job creation.
"It is to provide a return in the top quartile for its investors," Lord Drayson said. "Learning from some of the multiple objectives set on previous funds and [talking to institutional investors] the feedback was don't muddy this. We think this is a fantastic investment opportunity. It's that lack of political agenda that shows the understanding that we have."
He added that the fund had been structured so that large companies could invest alongside Hermes in promising new technology. "When I was doing my world tour talking to the CEOs of large corporations in Japan and the US they wanted a structure that allowed them to invest alongside the funds," he said.