The Audit Office has estimated that taxpayers could recoup about £73 million of the £101 million investment, while private investors in the public-private shared venture are on course to walk away with £121 million for their £77m investment – a £44m profit.
And on top of that, taxpayers will pay almost £25 million in fees to the fund managers.
The revelations come in a report into how business development agency Invest NI has been using public money which was intended to support promising small and medium-sized companies which were unable to access bank loans in the wake of the credit crunch.
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The report paints a picture of private fund managers who had little financial incentive to make prudent investments because performance bonuses were difficult to achieve, but who were incentivised to undertake transactions, such as handing out money, because the fees for those transactions were high.
Invest NI, which since 2009 has been headed by Alastair Hamilton, said it was “too early to estimate value for money” but estimated that the funds will create almost 4,500 jobs.
It also said that by next year firms supported through the loan funds “are expected to have generated up to £175m of gross value added in the economy”.
The Audit Office was more restrained about those figures, saying that an “initial estimation” had suggested that firms supported by the two loan funds could create “between £145 million and £175 million of Gross Value Added by 2018-19” but stressed that the final performance must be judged on “robust evidence” of actual outcomes.
Critiquing how Invest NI had set up the funds, auditors found that “the bonuses achievable are likely to be comparatively small compared to the fixed management fees. Fund managers will also have to achieve a very high performance to receive any of the bonuses available.”
It found that payments were “heavily weighted towards fund management and investment activity. There are relatively small bonuses for achieving financial return targets and no sanctions for not meeting these targets”.
Auditors said that EU state aid rules mean that “bonuses or sanctions cannot be linked to the achievement of wider economic benefit targets” but that despite this “terms of fund manager contracts do permit fund investors to take action, should serious concerns arise over fund manager performance”.
In effect, that means that bonuses for making high-quality investments are very difficult to reach – but lucrative fees are paid regardless of the quality of the investment.
The Audit Office said: “The fee structures provide little incentive for fund managers to deliver strong financial and economic outcomes, and instead focus heavily on the number and value of investments made.
“In overseeing the funds, it is therefore important that Invest NI strikes a balance between ensuring that investment targets are on schedule, whilst not pressurising fund managers to make poor investment decisions.”
Over the project’s lifetime, fund managers will be paid about £24.7 million in fees – a figure which represents more than 13% of the total value of the money invested, although auditors said that this was roughly in line with industry rates.
Auditors also found that the sanctions available for penalising poor performance by fund managers are mainly linked to non-achievement of “activity-based” targets.
The funding was all part of Invest NI’s ‘Access to Finance Strategy’ which began in 2009 and is made up of seven funds which mostly make investments – such as taking shares in a company in return for funds – or making loans. The project will continue until 2024.
Comptroller and Auditor General, Kieran Donnelly, said that the project involved “inherently high-risk investment activity”. He said that although there was “potential for longer term success”, as things stand “sufficient evidence is not yet available to demonstrate that it is delivering value for money”. He said that in future Invest NI “should ensure that fund managers are actively and judiciously managing investments to maximise potential fund returns”.
The report warned Invest NI that it should seek to identify changes in investment levels “including significant spikes in activity” and be in a position to challenge fund managers if it identifies issues such as potential conflicts of interest.
To date, the fund has provided 750 businesses with over £124 million of finance. Invest NI told auditors that the purpose of the funds had never been to simply make money, but to stimulate the economy.
When asked why managers had been incentivised to hand out money, Invest NI told the News Letter: “Fund managers are incentivised to make wise investments through bonus incentive arrangements. The bonuses are only paid at the end of the fund’s life, and once all investments have been recouped.”
It also welcomed the auditors’ comment that the funds are providing an “important source of finance” to small and medium businesses.
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