Hints of problems in how some of the Access to Finance funds were operating emerged in 2014 when Invest NI and one of the fund managers sued and counter-sued each other in the High Court.
The costly dispute for taxpayers related to one of the earliest funds in the project, the Northern Ireland Spin Out Funds (NISPO).
Although some details of the dispute were known at the time, the Audit Office report contains more details of what went on behind the scenes.
It reveals that the firm in question, E-Synergy, had been chosen by Invest NI despite having submitted the highest cost bid of all the tenders submitted.
According to the report, Invest NI said it had made the decision on the basis that it was “the most economically advantageous proposal, taking account of the qualitative, technical and sustainable aspects of its bid”.
In the early stages, Invest NI complained that the fund was not making enough investments and was in breach of its contract for that reason. This was followed by an escalation in investment activity by the firm.
Three years later, in October 2014, Invest NI sought to withhold fees from the firm due to other concerns. The firm sued, and then Invest NI issued legal proceedings in an attempt to have the contract terminated.
After “mediation”, Invest NI restarted the payment of fees and auditors noted that “its ability to legally withhold these was never proven”.
The two sides reached a mutual agreement which saw E-Synergy “voluntarily resign from the contract” after Invest NI agreed to pay a settlement fee of £450,000 – having already paid the company £2.75 million in fees. Invest NI incurred legal fees of £240,000 in trying to extricate itself from the contract.
Earlier this year the BBC reported that although one of the NISPO investments, Path XL, was sold to multinational company Philips, other firms in the portfolio are no longer trading.
Invest NI said that the September 2016 valuation of what was once a £9 million fund was £5.4m.
In 2013, the then enterprise minister Arlene Foster – who was responsible for Invest NI – hailed the NISPO fund and increased the total Access to Finance funding, saying of the two funds managed by E-Synergy – which Invest NI subsequently tried to ditch – that “it is clear there is a lot of demand for support so I am pleased to announce that Invest Northern Ireland will be providing a further £2 million in each of these funds”.
Auditors also appear to implicitly question the basis on which Invest NI set up the entire project in the first place – what it said was the need for such public sector funding because banks were not lending to large numbers of otherwise sound businesses.
The Audit Office said that two major reviews of economic policy in 2008 and 2009 “attributed the historically low levels of local venture capital activity to low demand from businesses” but that “despite this, Invest NI considered that strong evidence existed of market failure in the supply of finance, and set about developing its access to finance strategy”.
Auditors highlighted that an earlier fund, Crescent Capital I, saw taxpayers put in £7 million and private investors put in the same figure.
The fund’s end return was £13 million – all of which went to the private investors.
Auditors said that £55 million of Invest NI’s investment in the Access to Finance funds were under similar conditions, with a higher risk of not being recouped.