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CHAPTER FIVE INVESTMENT PERFORMANCE - LOAN FUNDS

5.1 This chapter of the report provides information on the management and performance of the various VCLFs that are supported by ERDF funding. The analysis covers the rates of investment and cash resources, the types of investment, fund financial performance and demand issues, and also the expected legacy, if appropriate.

Rates of Investment of Funds

5.2 The table below shows the rate of ERDF investment of the various loan funds compared to the total ERDF commitment. It is likely that the whole of PSYBT will be committed. Commitments are lower in absolute terms at Micro Credit East but the amounts involved are small.

Table 5.1 - Rate of investment of ERDF loan funds (£'000)

5.3 WSLF allocates its investments to the local authorities in its area of operation. Each local authority is given an investment target. When our fieldwork was carried out, the latest information showed that, in most cases the targets have been met. However, the targets require an increasing rate of investment until the end of the current programming period and it will be a challenge for WSLF to maintain this rate of investment. Updated information suggests that the increasing rate of investment is not being met.

5.4 WSRF has a lower total amount available to invest and is meeting its targets. In discussion with the fund, we were told that the number of investment enquiries had dropped in the beginning of 2006, but the ERFD element is fully committed

5.5 In respect of SoSLS, the rate of investment has been slower than planned and some ERDF funds have been de-committed as mentioned elsewhere in this report. In discussions with SE Dumfries and Galloway, it was suggested that there was a need to publicise the scheme better in order to attract applications. At the time of our fieldwork, we understood that it was planned to de-commit further funds before the end of the programming period. We are told there was a further de-commitment in February 2007.

5.6 The table below shows the cash position of the larger funds which are administered through separate companies. The published accounts of the funds show the gross cash holdings, together with any bank loans.

Table 5.2 - Cash resources of loan funds (£'000)

Source: Fund managers, and CSES analysis of published accounts

5.7 Both WSLF and the SEBSED ( SoSLS) have substantial cash holdings. The holdings, net of bank loans, are at a level where it would not be unreasonable to expect the funds to continue to invest without further public funding from the next ERDF round. It should be borne in mind that the objective of setting up VCLFs, as suggested by the European Commission, is to create sustainable funds. We return to this issue later in the report. DSL, who administers WSRF, has a much smaller net cash position and the company is able to maintain operations through grant assistance from its stakeholders. The cash positions shown in the above table were updated for the final version of this report and show no material difference from the position a year earlier.

Sectoral Analysis of Investments

5.8 We now consider the sectoral analysis of investments by the respective VCLFs. The funds have different investment objectives and this is reflected in the sectoral breakdown of their investments to date.

5.9 For WSLF, there is a wide sectoral spread of investments. The percentage breakdown of numbers of investments is shown in the fund profile in annex E, but the most common sectors are as follows ¹⁶:

Table 5.3 - WSLF sectoral analysis of investments (larger sectors only)

Source: WSLF. Note that there is a more complete sectoral analysis in annex E on WSLF

5.10 A similar analysis for WSRF shows the following position:

Table 5.4 - WSRF sectoral analysis of investments (larger sectors only)

S ource: DSL. Note that there is a more complete sectoral analysis in appendix F dealing with DSL

5.11 In respect of SoSLS, a small scale survey carried out as part of a recent evaluation showed that 75% of companies surveyed were in the following sectors:

• Manufacturing (44%) including: food, textiles and IT related manufacturing
• Childcare (19%)
• Business services (12%).

Non-Performing Loans

5.12 We now summarise information on the financial performance of the various funds. The most important issue in the performance of the loan funds is the rate of write-off from non-performing loans, i.e. bad debts. This rate of write-off is a critical determinant of the overall cost of the fund.

5.13 It would be possible for the funds to improve their financial performance by only taking on better-quality loans, but it should be remembered that the funds seek to act as a lender of last resort. In previous work that CSES carried out for the European Commission, it was not uncommon to see write-off rates of 15% on such loans. However, much depends on the investment policies of each fund and the level of financial controls and reporting mechanisms and processes.

Table 5.5 - Fund financial performance

Summary:

The principal findings of this chapter are that:

• The loan funds are generally meeting their investment targets and are on track to being fully committed by the end of the programming period, although substantial commitments will have to be made during the last two years up to 31 ^st December 2008. In the South of Scotland there has been some decommitment which has reduced targets.
• With the exception of DSL, the loan funds have substantial cash balances which should enable them to continue to function without further assistance for the foreseeable future.
• The level of non-performing loans is in line with expectations and with other funds elsewhere, although much depends on the risk profile the funds are willing to take.
• There is a wide sectoral spread of investments - the funds do not concentrate on particular sectors.

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