Taxpayer losses from Invest NI scheme '˜likely to exceed projected £29m'

An investor who more than six years ago warned Invest NI's chief executive about problems with its investment funds, has said that he believes the losses to taxpayers from a £129 million finance scheme will be even greater than the almost £30 million projected by auditors.

Monday, 2nd October 2017, 10:06 am
Updated Wednesday, 4th October 2017, 3:48 pm
Invest NIs headquarters in Belfast city centre

Last week the Audit Office reported that Invest NI’s Access to Finance scheme is on course to make a massive loss of public money, while private investors on the same scheme will make £44 million in profit.

Invest NI has defended the scheme, which began in 2009 to make loans to small and medium businesses refused credit by banks.

It argues that it always knew that it would lose some of the money invested in the scheme due to the “inherently high risk” of where it was investing.

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However, the Audit Office’s critical report found that the agency did not have an adequate means of determining whether investments which had lost money had been economically beneficial in some other way.

In 2011, US-based investor David Kirk wrote a 36-page report and sent it to Invest NI chief executive Alastair Hamilton, warning him that Invest NI’s investment funds were so ineffective that they were actually harming the economy.

Mr Kirk also identified a key issue – the subordination of public money, which means in practice that private investors can not only get their money back, but make a profit while taxpayers lose their investment – in his report, an issue which the Audit Office identified in its report last week because £55 million of the Access to Finance fund is in that high-risk category.

Mr Kirk, a former vice president of AOL and senior vice president of Cisco Systems who is now retired, said in 2011 he had “made his last investment in Northern Ireland” after becoming disillusioned at the local investment scene – much of which he attributed to Invest NI.

Reacting to the Audit Office findings, he told the News Letter: “Immediately, I’d say that the losses are understated ... fair market value calculations are mostly accounting formulae to project book value and take no account of failure rate or risk.”

Another source with knowledge of Invest NI’s investments under the scheme also told the News Letter that the losses are likely to be considerably greater than those of the £28.8 million figure projected by the Audit Office.

When asked a series of questions about the situation – one of which requested details of how many of the firms in which the funds have invested are even still trading – a spokeswoman for Invest NI told the News Letter that they had answered several questions from this newspaper about the Audit Office report and would not be providing responses.

The spokeswoman for the publicly funded agency said that it had “nothing further to add” and would not be answering any further questions relating to the report.

Frustrated by what he had seen when he invested or tried to invest in Northern Ireland, Belfast-born Silicon Valley tech executive David Kirk voluntarily wrote a 36-page report with recommendations based on his decades in senior positions at some of the world’s largest technology companies.

The report, for which he said he was not paid by anyone, presents a blistering analysis of the “mediocrity” which he said pervades Northern Ireland’s business development agency, Invest NI, and how a fear among local businesses about criticising Invest NI led both the agency and Stormont ministers to have a false sense of its achievements.

In the report, Mr Kirk wrote: “I’d hope that someone somewhere may read this and ask ‘why isn’t Invest NI asking these questions?’ or ‘why are we getting such a different perspective?’

“I fear this will just be another report that gets buried.”

Going back to the start of public funding for investments in business in Northern Ireland, he said that in 1995 the then department, DETI, had said that there was a lack of venture capital funds for early stage companies and correctly decided that government intervention was needed to stimulate the market.

But Mr Kirk added: “Today, because it is still stimulating that market, one would conclude, by definition, that the intervention failed.”

He went on: “Whilst the intervention has indeed stimulated something in the investment ecosystem, the impact has been minimal at best and detrimental at worst.

“In other words, the nature of the intervention is now causing the ongoing failure.”

Identifying a series of problems with the Invest NI strategy – including the ‘subordination of funds’ which in some cases led to private investors walking away with all the money, while taxpayers bore all the losses – Mr Kirk said: “Pumping public money into a flawed investment ecosystem, without fixing the problems caused by intervention, is merely perpetuating the failure.”

He went on: “The unintended consequences of subordination are: Invest NI are supporting, through public money, fund managers that have lost money had they been measured by real-world commercial standards.

“This failure to perform, not only loses public money, but depresses the already fragile startup ecosystem it was intended to stimulate. By subsidising returns to Crescent Capital [a fund which lost Invest NI the entire £7 million it invested while private investors made money] that flow through to private investors, it creates an unfair competitive hurdle to other, private venture capital funds to attract limited partnership investment. In effect, this has become a government support semi-monopoly.”

His first recommendation was “do not subordinate public money” and he specifically singled out the E-Synergy programme for criticism.

Last week’s Audit Office report revealed that Invest NI gave that company a contract to manage some of its funds, despite it being the most expensive firm to bid for the contract. Then, after Invest NI become unhappy with the company’s actions and attempted to terminate the contract, there was a costly legal battle and taxpayers had to pay the company to walk away earlier this year.

Mr Kirk told the News Letter that he had met Alastair Hamilton to discuss the issues raised in his 2011 report.

He said that he had found both Invest NI’s chief executive and its then head of access to capital, Helen Kirkpatrick, in “aggressive denial”.

His report – which was sent directly to Mr Hamilton – said that there was a critical dearth of relevant talent within Invest NI.

Writing about Northern Ireland venture capital fund managers, to whom Invest NI often sub-contracts the running of its investments, he claimed that they “are almost exclusively chartered accountants that have no – or at best very little – experience in current technology, marketing or sales, startups, or indeed, today’s business operations”.

The tech veteran said that shortcoming was exacerbated by “little or no relevant startup or business operations experience in Invest NI staff, consultants or ‘qualified’ mentors, which perpetuates mediocrity”.

He went on to say: “There is insufficient relevant experience within the staff of Invest NI to understand the questions to ask, let alone to evaluate the answers.

“Bar one individual, I have met no-one that really understands startups or early business development.”

The San Fransisco-based investor also said that “merited or not, there is a real perception that it is not wise to speak out against or criticise Invest NI.

“The damaging consequence of this perception is that feedback and satisfaction surveys rarely reflect the real sentiment in the community. As a result, Invest NI, DETI and ministers are seduced into a false sense of achievement that belies the real sentiment.”

He proposed the creation of an investment ecosystem ombudsman “to overcome the fear of Invest NI reprisals”.