According to documents seen by the Financial Times, the UK government's Covid-19 venture capital fund has mostly invested inzombie businesses, leaving it with a significant tail of inactive companies.
At the height of the coronaviruses epidemic, the Future Fund invested in 1,190 companies.
Most of the companies in the Future Fund portfolio had a limited chance of growth, according to the minutes of a June 2021.
There was a warning from Mistry, an experienced early-stage investor with several non- executive positions, that the portfolio was likely to have a significant tail of dormant companies and it would be helpful if this could be signaled in advance.
According to the minutes, the probability of default by companies that received Future Fund convertible debt from the government was 54 percent.
The scheme was open to applications from May 2020 to January 2021. The government relied on the judgement of co- investors.
Not-yet-profitable businesses were the focus of the Future Fund. The fund will help power the growth and innovation we will need as we recover from the crisis, Sunak said in May 2020.
The minutes of the audit committee show that Mistry said the open process for Future Fund applications created "natural adverse selection".
According to the minutes, Mistry said that the scheme attracted companies that wanted to accumulate as much funding as possible because prospects were excellent. Mistry did not reply.
Due to the early stage nature of venture capital investments, write-offs are high, with financial returns driven by a number of high performing outlier companies.
More than half of early-stage investments make a loss according to data published by Horsley Bridge. Sixty percent of returns came from investments.
The government has sought to highlight technology investments by the Future Fund, but it has also attracted attention for backing some odd businesses, including a cannabis products company and a hedonistic party planner.
The three-year convertible loan is debt that the government can convert into equity when a company raises private investment. More than 400 companies have had their loans converted into stock.
It is encouraging that a third of Future Fund companies have gone on to raise further private-sector capital, given that the convertible loans are designed to convert into equity over a three year period.
In cases where businesses are unable to raise new investment, they can be required to repay their Future Fund loans at a premium.
As we came closer to the first maturity in June 2023, the minutes of the audit committee recorded that the probability of default would increase.
At a time when the UK economy appeared more robust than now, these concerns were raised.
The Future Fund was supposed to support businesses that were insolvencies.
The minutes of the audit committee were made public. Some passages were marked for redaction because they could hurt the interests of the bank or its partners. The redacted text was not removed before the document was released.
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