Patience pays: Catherine Lewis La Torre on taking the long view

Catherine Lewis La Torre

As the EIF’s role supporting UK venture hangs in the balance, Catherine Lewis La Torre, the new head of British Patient Capital, lays out her vision for creating a late-stage venture ecosystem on home soil.

What exactly is the British Business Bank’s patient capital initiative and how did you come to be appointed as chief executive?

I was originally brought on board to head British Business Investments (BBI), which, at the time, was the only commercial division of the British Business Bank. BBI is focused on lending strategies, from private debt funds, to supporting challenger banks and working with asset finance providers.

But then the British Business Bank embarked on its Patient Capital Review. That review identified that once venture-backed businesses get to a scale-up stage, it can be very hard to find home-grown investors that will write the big checks required.

We already had quite a small-scale commercial VC programme within BBI, called VC Catalyst. But the response from government, from our shareholder, to this review, was significant. An extra £2.5bn (€2.8bn) was awarded to support that later-stage funding gap and as part of the implementation of that, we set up a new commercial subsidiary called British Patient Capital (BPC). When it was time to go out and look for a CEO to head that business, I threw my hat in the ring. And to cut a long story short, I was installed as CEO of BPC, as well as BBI, in October last year.

How challenging will it be to cover both roles?

We already had a number of patient programmes within BBI. We have a managed funds programme, where we invest with external funds of funds managers; and we have a regional angels programme, where we work alongside business angels to support the pipeline of opportunities for VC and growth capital managers. So, there was a logic to having me oversee both businesses.

Across the two divisions we are now looking after about £6bn of capital. It’s a pretty substantial investment operation.

What is British Patient Capital’s remit?

In terms of overall numbers, we are looking to invest between £300m and £350m annually in funds with patient capital strategies. We define that as venture capital and growth capital.

But it’s important to make a distinction between private equity growth and later-stage venture growth. We are very much focused on the venture space.

We already have a seed portfolio, the VC Catalyst programme that has been investing since 2013 and that we transferred over from BBI. But because of the additional capital we are now able to really accelerate that programme.

Our financial year runs from April to March, the government year, and it looks like we are on track to hit that £330m target. The plans is to do the same again next year.

One of the main differences between VC Catalyst and BPC is that VC Catalyst was typically writing smaller checks and was often the last investor in, to help the fund reach critical mass for closing. With BPC, we can be cornerstone investors, write bigger checks and engage earlier with GPs.

That’s a role that the EIF has traditionally played and is still playing in many cases. We can now fulfil that role.

How patient is patient? Is there a particular investment horizon that funds need to be targeting?

The longer the better. But it really depends on what the company needs. We will continue to invest in traditional fixed-life funds – so, the standard ten plus one-year extension – but we are also looking at listed evergreen structures which may be better suited to companies that require capital beyond the life of a typical fund.

A good example is Draper Esprit, which was our first evergreen investment. We made a £30m cornerstone investment as part of their public market fundraise. We’ll be looking to do more of that in future.

What we are really trying to engineer is a patient capital ecosystem, so that at each stage in a company’s journey, whatever cheque size they need, there’s going to be somewhere in the UK where they can go and knock on doors and raise
that capital.

Right now, you get to a certain level and if you are an ambitious fast-growing company and you need a big investment, you are more likely to get on a plane and go to the Middle East, Far East or US. Wouldn’t it be great if you could get on a train to Edinburgh, or get a taxi from Shoreditch to the City, to raise that capital here? Eventually that’s what we want to make happen.

Can you talk a bit more about your managed funds programme?

The managed funds programme does something a little bit different. First of all, we are saying we can’t do all of this by ourselves. We need other professional fund of funds managers in this space investing in similar types of opportunity.

The managed funds programme is about identifying experienced fund of funds managers already operating across Europe, or globally, and working with them to launch a patient capital mandate.

We will provide a significant investment, but they will use their own rolodex of investors to go out and raise the rest of the capital.

We launched that programme in May last year and it has £500m allocated. We have two potential partners in due diligence and we would hope to select our first manager by the end of this financial year. With our cornerstone investment, those funds of funds will go out and raise between £250m and £400m each.

Do you have an expectation as to how much the funds you invest with should be deploying in the UK?

There is an expectation that a certain amount of capital will end up invested in UK businesses.

The way we usually frame it is, if we represent 30 per cent of a fund, we would expect that that fund invests around 30 per cent back into the UK.

The UK represents somewhere between 30 and 40 per cent of the European market in any case. So, we are not asking investors to change their geographical strategy. They should invest where they feel the best opportunities are. But we are investing UK tax payer money, so if we come across a proposal in our screening where we don’t think there is sufficient UK content, then that probably isn’t a fund for us.

You ran a pilot scheme last year focused more on the lower mid-market. Is there really an equity gap in that space?

The pilot that you are referring to is something we did through BBI last year because we noticed that smaller lower mid-market funds, in particular, can prove really difficult to put together. So, we explored whether we should step in.

We ran a £50m pilot programme and we have committed that money to three managers. Those managers have now been moved over and sit with BPC.

We appreciate that there is a certain amount of sensitivity about where we invest our capital. There can be misunderstandings because, obviously some lower mid-market funds are massively oversubscribed. That’s not where we are focused. Our funds are often regionally-based, because we think the regional equity gap is something we should try
to address.

These funds are often focused on minority investments, rather than buyouts. They are strategies that we think are attractive but that haven’t had as much support from the mainstream institutional community as we think they deserve. We want to continue to provide some allocation for those opportunities within BPC going forward.

Are there any other initiatives on the horizon?

We are planning to launch a co-investment programme. We have a good pipeline of fund investments and we have built strong relationships with a number of those GPs.

We have been offered co-investment opportunities from time to time. But we have never had a mandate to move into that area before.

I should stress that we are not looking to be a direct investor. But to have a co-investment pool of capital allows us to support some of the most promising portfolio companies and we are gearing up to do that.

We need to hire the right people and we need to ask whether £2.5bn is enough capital to support both strategies. Those are the things we need to think about right now.

What are your recruitment plans and how do you ultimately see the structure working?

We started with a core team that moved over from BBI, so we didn’t have to go out and hire everyone from scratch. But we do have to build on that core team because we are investing in 14 to 16 transactions annually and we are pretty small at the moment – just nine people altogether.

We are hiring more support at an analyst level. Then we also need to hire at the top, specifically for the co-investment programme, because even though we have people on the team that have done co-investment in the past, myself included, it is not something you can do off the side of your desk.

Without the right resource, you can make some pretty significant mistakes.

Will British Patient Capital back first-time funds?

That is something that the bank does do, but through the venture solutions team and a programme called the Enterprise Capital Fund scheme. That has been up and running for ten years and around £100m is invested annually through that programme.

It is absolutely the case that there may be some managers that have been supported through the ECF programme that are then ready to graduate to a fully commercial programme.

A good example of that is Dawn Capital. We have just supported their latest fund and they are one of the outstanding funds in our portfolio. They have made huge progress since their first ECF fund and have had some incredible exits along the way such as iZettle.

I don’t rule out there being other Dawn Capitals in the ECF portfolio. But it is not going to be the role of BPC specifically to support first time funds.

Our mission is to get capital from ourselves and the investment community into those later stages and that is not where first-time fund managers tend to be focused.

What will British Patient Capital’s role be if the EIF is cut off from UK-focused managers?

We are thinking about that very carefully. In the last Autumn budget, the Chancellor announced that he would be making an additional £200m available for the British Business Bank this year, to help with potential EIF replacement funding. We have a plan as to how that will be invested should it be needed but it is contingent on a deal not being reached.

The EIF has obviously been a very strong supporter of venture across Europe, and big investors in the UK as well.

Operationally, we have very good relationships with people on the team there and it is often the case that we are investing side by side in the same funds.

Obviously, for purely domestic strategies, we will just have to wait and see what happens. But my personal hope is that the EIF will stay involved as major investors in UK venture and growth going forward. They have brought a lot to ecosystem.

You have £2.5bn committed and then the £500m in managed funds. Do you expect to receive additional government money in the future or will British Patient Capital graduate to an independent entity?

The government has been very clear that BPC’s objective is to stimulate the market and hopefully attract other institutional investors into this space by demonstrating that you can achieve success in this area.

Once that has happened, we can exit in terms of investing tax payers’ money. The end goal is that BPC will become a listed vehicle or will be moved into the private sector.

And while £2.5bn is a big number, there is a very big gap to fill. So I think, from day one, we want to be engaging with institutional investors to see whether we could be managing capital on their behalf.

We are open to having those conversations sooner rather than later and would expect to have the first arrangements set up in the not too distant future.