Policy paper

Broadband Investment Fund: request for proposals

Updated 22 July 2016

1. Purpose of the request

1.1. HM Treasury (HMT) is considering investing, on arm’s length commercial terms alongside the private sector, in businesses or projects operating in (and around, which would include support industries relating to) the UK broadband sector. HMT is considering providing up to 50% of the total funds invested in this way (the Fund).

1.2. HMT is seeking proposals from prospective fund managers (‘Manager(s)’) active in this sector. Key individuals in the selected Manager must have a proven track record that demonstrates their suitability to manage a fund in this sector.

1.3. Managers will be responsible for sourcing the private sector investment.

1.4. This document sets out HMT’s Request for Proposals (RFP) providing potential Managers with the necessary information to decide whether to submit a proposal to HMT and to ensure that any response is in accordance with HMT’s requirements.

1.5. The Infrastructure and Projects Authority (IPA) is managing the delivery of the Fund on behalf of HMT.

2. About HMT and the IPA

2.1. HMT is the government’s economic and finance ministry, maintaining control over public spending, setting the direction of the UK’s economic policy and working to achieve strong and sustainable economic growth.

2.2. HMT is responsible for:

• public spending: including departmental spending, public sector pay and pensions, annually managed expenditure (AME) and welfare policy, and capital investment
• financial services policy: including banking and financial services regulation, financial stability, and ensuring competitiveness in the City
• strategic oversight of the UK tax system: including direct, indirect, business, property, personal tax, and corporation tax
• the delivery of infrastructure projects across the public sector and facilitating private sector investment into UK infrastructure
• ensuring the economy is growing sustainably

2.3. The IPA is part of, and reports jointly to, HMT and the Cabinet Office. It was formed in January 2016 by the merger of Infrastructure UK (part of HMT) with the Major Projects Authority (part of Cabinet Office). The IPA provides expertise in infrastructure and the financing, delivery and assurance of major projects, to support more effective management and delivery across government.

3. Background and policy objectives

3.1. On 16 March 2016, the Chancellor of the Exchequer announced that the government would, in partnership with the private sector, establish a new Broadband Investment Fund. The aim is to support the growth of the ultrafast broadband industry, particularly alternative ultrafast broadband network developers, by providing greater access to finance on a commercial basis.

3.2. Supporting the market to deliver ultrafast broadband (roughly defined as providing speeds greater than 100 mbps) to as many premises as possible is a government manifesto commitment and the Fund is a key element in delivering this. The main policy objective, therefore, is to increase the amount of capital invested in the sector, particularly (but not exclusively) more “debt-like” capital that would enable faster expansion of ultrafast broadband networks. Funds that do not focus on “debt-like” investments will also be considered but HMT has a preference for a majority of the Fund being focused on debt or “debt-like” investments.

3.3. HMT will consider a variety of structures and investment mandates as proposed by applicants with the aim of selecting a proposal that has the best prospect of meeting the government’s aims and policy objectives. In terms of structure, this could include government becoming a cornerstone investor in a new fund focused exclusively on the sector, or structures that involve government investing in a “side-car” to a fund with a broader investment mandate. This could also include more than one fund, each focusing on different parts of the capital structure (for example a debt focused fund and an equity focused one). All applicants should construe the requests in this RFP for information relating to “Funds” and “Managers” as requests for information relating to the specific structure or structures being proposed and should provide the information relating to such structure/s which most closely corresponds to the information requested in relation to Funds and Managers in this RFP.

3.4. HMT will also consider structures with more than one tranche, where different tranches have different risk and return profiles, and could invest in any or all of them (for example, in a senior capital tranche within a fund or a more junior “first loss” tranche, if that sort of structure is proposed). It will be important, however, that if HMT does invest it has additional, private sector capital invested alongside it, pari passu, in any tranche it invests in and that, in aggregate, HMT makes up no more than 50% of the total capital, and cannot exercise any control over the Funds or investments. In such a structure, HMT must have the option to invest in any tranche (even if the Manager is proposing HMT invests in a particular tranche).

3.5. The Fund is intended to complement other government programmes rather than duplicating or competing with them. These programmes include the UK Guarantee Scheme, which is available for certain UK greenfield infrastructure projects, and the Superfast Broadband Programme, operated by Broadband Delivery UK, part of the Department for Culture, Media and Sport.

3.6. While the precise timetable is yet to be determined by HMT, the target is to select a Manager by Autumn 2016 and for Funds to be closed and in a position to begin investing by the end of the current fiscal year (March 2017). HMT expects to select a single Manager, but reserves the right to select more than one.

4. HMT Investment requirements

4.1. If the process proceeds to completion, HMT will require that HMT funds are only invested in businesses operating in the UK. Funds must be invested in accordance with an agreed investment mandate.

4.2. HMT will provide no more than 50% of the total investment in any Fund (or individual investment).

4.3. Any investment by HMT must be on commercial terms and on terms that are no worse than those enjoyed by any other investor in the Funds (or those invested on the same basis as HMT, if multiple tranches). HMT will expect a “most favoured nation” provision for its benefit.

5. Process and timetable

5.1. HMT is seeking proposals by midday on 29 July 2016.

5.2. HMT has not yet made a final decision on whether or how much to invest in the Fund, and will consider proposals from Managers as to what an optimum investment amount in the Fund would be.

5.3. Upon receipt of proposals, HMT intends to select a shortlist of up to three Managers on which to conduct thorough due diligence. It is the objective of HMT to agree all documentation and announce its preferred Manager(s) by Autumn 2016. The commitment will not be confirmed until any final due diligence is complete, contracts fully agreed and a successful first close is reached. Any commitment of capital by HMT will be on a basis that ensures that HMT is not providing more than 50% of the overall investment in the Fund, but, notwithstanding this, HMT may consider making funds available to begin investing during a fund raising process.

5.4. HMT reserves the right to amend the timetable until such time as binding arrangements are concluded with the preferred Manager(s). HMT reserves the right to suspend or cancel the process at its sole discretion. Any costs or expenses incurred by a bidder will not be reimbursed by HMT and HMT will not be liable in any way to a bidder for costs, expenses or losses incurred by the bidder as a result of any such amendment, suspension or cancellation.

5.5. HMT will be operating an open competition to the following indicative timetable:

Issue RFP	16/06/16
Deadline for receipt of clarification questions	12h00, UK Time on 08/07/2016
Deadline for receipt of Proposals	112h00, UK Time on 29/07/2016
Selection of shortlisted Manager(s) and commencement of detailed due diligence	1 August 2016
In principle selection and announcement of preferred Manager(s)	Late Summer/ Autumn 2016
Final due diligence, negotiations, fund raising	Autumn / Winter 2016/17
Fund Close	No later than end Q1 2017

5.6. Prospective bidders are invited to direct questions to: BIF@IPA.GOV.UK

5.7. Five hard copies of the proposal should be submitted to HMT along with an electronic version.

5.8. All proposals should be delivered to:

Oliver Bradley
Infrastructure and Projects Authority
1 Horse Guards Road
London
SW1A 2HQ

6. Evaluation criteria

HMT intends to select Managers based on the criteria set out in this section below. The criterion set out in 6.1 is a threshold criterion, and managers must satisfy HMT that they meet it in order to be considered. The evaluation criteria set out in sections 6.2 to 6.8 each have an equal weighting. Managers should ensure that their responses clearly address each criterion. The information requested in section 8, below, is the minimum HMT requires to evaluate each of these criteria.

6.1 Authorisation

Any prospective Manager must confirm that it has the necessary authorisation under the Financial Services and Markets Act 2000 with permissions or passports to carry on investment management services in the UK (or explain why it does not require such authorisation)

6.2 Fund structure and sector focus

HMT will consider a range of investment structures, including ones where its investment operates as a “side-car” to an existing fund (or funds) with a wider investment strategy (for example, inter alia, a general UK infrastructure / core-plus fund or a European / international fund). If such a structure is proposed, Managers will need to clearly articulate the investment strategy of the “side-car”, how it will operate, who else might invest in it (e.g. other Limited Partners) and how it fits within their wider fund mandate. HMT will need to be satisfied that any proposed structure is deliverable, will provide sufficient focus on the sector, that sufficient private sector investment is leveraged in, and that its capital can be invested expeditiously. Any proposed structure must be consistent with HMT’s status as the government’s finance and economics department.

6.3 Investment strategy

Managers should demonstrate how their proposed investment criteria are commensurate with the aims, criteria and policy objectives outlined in this RFP. HMT has a preference for a majority of the Fund being focused on “debt-like” investments that will facilitate the expansion of commercially viable ultrafast broadband networks. But consideration will be given to any investment strategy that is viable, consistent with policy objectives and, in the opinion of HMT, likely to be positive for commercial ultrafast broadband provision in the UK. This could include proposals for two (or more) funds with differing strategies, as discussed in section 3.3. In all cases, Managers will need to demonstrate that return expectations for the proposed Fund are sufficiently attractive to commercial investors, relative to the risks being taken. The Fund should be targeting a commercial return.

6.4 Organisation and operations

Managers should demonstrate that they have high standards of reputation and integrity, including by using appropriate and transparent structures in establishing the Fund, and ensuring appropriate ethical standards in the operation of the Fund and selection of private investors (recognising HMT’s status as part of government). HMT will also assess Managers’ risk management procedures both in terms of how they originate and execute investments and how they manage, monitor and report on investments once invested. These procedures must be robust and adequately documented. In addition to providing details on formal reporting (including valuation reports), Managers are required to set out how they will additionally engage with HMT to provide information and assurance on the allocation of capital, monitoring of investments made and ongoing performance of the Fund. Managers must further demonstrate that they are of an appropriate financial standing to give confidence that they will be able to provide the necessary management services for the life of the Fund.

6.5 Management team/key personnel

HMT will be looking for teams that, in HMT’s view, are able to demonstrate having worked together effectively and have the capacity to execute the mandate for the full life of the Fund. This will include an assessment of experience in the sector and in making investments to companies/ projects of the size and type targeted, and a consideration of any “key man” provisions. In addition, HMT will take full account of the track record and background information requested from Managers.

6.6 Track record

HMT will assess the overall returns generated for investors in any funds currently or previously managed by the Manager and/or its key personnel (recognising that these funds may not be in the same sector as the Fund).

6.7 Fundraising capability

HMT will evaluate whether and how Managers can deliver the required level of private sector investment within the suggested timescales. While HMT will view favourably those Funds proposing to raise a higher proportion of private sector investment relative to HMT, and a larger fund overall, it is more important that the proposal is realistic and deliverable, particularly taking into consideration, inter alia, the size of the target sector, proposed investment strategy and fees. A Manager’s ability to contribute their own capital alongside HMT will be considered positively, but is not a requirement.

6.8 Fees

HMT will expect fee proposals to be competitive and provide value for money. Based on the possibility of HMT providing a cornerstone investment into an individual Fund, any proposals to HMT should reflect its role as a major investor. Lower fees and charges will be considered a positive factor. HMT will not accept fees that are higher than those paid by any other pari passu investor. In particular, fee proposals should also provide details of the apportionment of establishment costs, any abort fees, custodian and administration fees, investment advisor fees, operating expenses and other costs, management fees/ general partner profit share as well as a proposal regarding carried interest, hurdle and clawback.

7. Terms and conditions

7.1 Notwithstanding any other provision of this RFP, HMT reserves the right:

• 7.1.1. at any time not to make an investment and/ or cancel or withdraw from the process at any stage. Any costs or expenses incurred by a bidder will not be reimbursed by HMT and HMT will not be liable in any way to a bidder for costs, expenses or losses incurred by the bidder as a result of this process;
• 7.1.2. to request clarification of information submitted and to request additional information regarding any proposal including the right to request face to face meetings.

7.2. HMT will not be required to provide details of its decisions or the grounds on which they are based, except to the extent it is required to do so by applicable law or regulation.

7.3. All information provided by Managers will be treated as commercially confidential. Save to the extent set out in paragraph 7.4 below or where required by law or regulation or where the consent of the Manager has been obtained, such information will not be disclosed to third parties other than those involved in assessing the bids or advising HMT.

7.4. The Freedom of Information Act 2000 (FOIA) applies to HMT and the IPA. Managers should be aware of HMT’s obligations and responsibilities under the FOIA which may, unless an exemption applies (which could include commercial sensitivity), require HMT or the IPA to disclose, on written request, recorded information held by it.

7.5. References in this RFP to HMT should, where the context permits, be construed as including a company or other entity owned or controlled by the Crown (which, for the avoidance of doubt, could include other government departments).

8. Information requirements to supplement proposals

Proposals should, at a minimum, address the information requirements outlined below, which HMT intends will form a key role in the evaluation process outlined in section 6, and may be additionally assessed, inter alia, in any due diligence process. Information provided under one heading below may, where relevant, also be taken into consideration when evaluating other criteria.

8.1 Background information on the manager

8.1.1. A description of the Manager, including full legal name and type of organisation (e.g. partnership, limited company), administrative details (registration number, registered address etc), location, date of formation, details of significant owners and any changes in ownership or ownership structure over the past 5 years, names and addresses of directors.

8.1.2. The last three year’s accounts and a summary of financial position.

8.1.3. Brief details of any material litigation, disputes or regulatory actions or investigations in the last three years, or confirmation that there are none.

8.1.4. Details of professional advisors including legal counsel and auditors.

8.1.5. Details of appropriate permissions from relevant regulatory authorities.

8.1.6. Details of remuneration, governance and risk management policies and arrangements of the business and the entities to be involved in the Fund.

8.2 Fund structure and sector focus

8.2.1. Details of the proposed Fund structure, including legal structure, location and tax domicile, payment flows, custody and administration arrangements (including reporting requirements), location and tax domicile of the investment manager and investment advisers.

8.2.2. The anticipated size of the Fund, including the total amount of funding requested from HMT and the total amount of funding expected to be committed to the Fund by private investors. With respect to HMT’s investment, as well as a specific amount, a range of investment sizes that would be acceptable should also be submitted.

8.2.3. Details of the proposed timing of the Fund raising activities taking into account the Q1 2017 target for Closing the Fund outlined, including the marketing channels intended to attract private investors and the types of target investors.

8.2.4. Details of the arrangements for distributing funds during the term of, and at the maturity of, the Fund (including as to the timing and nature of distributions, whether cash or, if relevant, the circumstances of any distribution in specie).

8.2.5. Expected UK tax treatment of Fund cashflows, including withholding tax on loan interest and taxation of profits, gains, distributions and fees.

8.2.6. Details of proposed accounting standards for the Fund.

8.2.7. Details of the proposed term of the Fund.

8.2.8. Details of provisions for termination / dissolution of the Fund.

8.3 Investment strategy

8.3.1. A description of the Fund objectives and how they will be met, with particular reference to the requirements for a UK ultrafast broadband focus.

8.3.2. Target number, type (including where in the capital structure) and value of investments.

8.3.3. The type of company, other legal person or project targeted, and respective risk profile(/s).

8.3.4. Investment guidelines and restrictions. To include, inter alia, views on restrictions across the whole portfolio, legal construct of investee company or legal person (e.g. SPV vs corporate structures), max/min size and number of individual investments, exposure to individual companies, concentration limits with respect to different types of investment (e.g. senior debt vs mezzanine debt vs equity) and, if applicable, sub-sectors.

8.3.5. Proposed investment period and any subsequent requirements for “follow-on” investments.

8.3.6. Any proposals for co-investments by limited partners or others alongside the Fund.

8.3.7. Details of the proposed leverage policy of the Fund.

8.3.8. Where the Manager’s Fund is currently being marketed, or exists, the prospectus for the Fund and related Fund agreements.

8.4 Organisation and operations

8.4.1. An overview of the Fund’s processes including:

• details of how the Manager will originate opportunities
• details of how the Manager will approach marketing the Fund to potential borrowers
• details of how investments and opportunities are assessed including due diligence process, credit analysis risk/return analysis, engagement of advisors
• any further details of the investment decision process including regarding membership and processes of the credit/investment committee
• ongoing monitoring of investments, including interest payments or other distributions and Fund’s performance
• details of valuation methodologies and write-down policies

8.4.2. The Manager’s contemplated principal financial terms for the investments, including hold period, expected return (or interest rate), security and covenants, if applicable.

8.4.3. Details of any proposed advisory board / advisory committee.

8.4.4. Arrangements for identifying and managing conflicts of interest and in relation to the allocation of investment opportunities.

8.4.5. Details of professional indemnity insurance cover.

8.4.6. The proposed level of active portfolio management.

8.4.7. Drawdown arrangements, including notice periods that will apply, measures to be put in place to ensure that commitments are met and default provisions.

8.4.8. An outline of how Mangers propose that they would engage with HMT, as well as with investors generally, including as to reporting proposals.

8.4.9. Details of any investor governance process, including how, and under what circumstances, the general partner / Manager(s) can be replaced (and the proposed indemnification of any general partner / Manager(s)).

8.4.10. Details of how the Manager and the Fund’s terms will address the reputation and integrity requirement referred to in paragraphs 6.2 and 6.4, including the use of appropriate and transparent structures in establishing the Fund and appropriate ethical standards in the operation of the Fund and selection of private investors and choosing sectors into which loans are made.

8.4.11. Details of:

• proposed enforcement policies
• transferability of investors’ interests in the Fund
• admission of new partners in the Fund
• provisions (and any restrictions) on transfer/trading of investments
• provisions (and any restrictions) on borrowing by the Fund
• use of derivatives

8.5 Management team/key personnel

Key personnel includes each individual whose experience and expertise is to be taken into account by HMT when assessing a proposal. Managers are requested to submit the information requested in this section 8.5, where appropriate, with respect to each key person.

8.5.1. Biographical details including name and address of key personnel, key positions held, details of existing commitments on their time and of their proposed role and responsibilities.

8.5.2. The length of time they have:

• worked for the management company
• worked with other members of the team
• worked in the industry

8.5.3. Details of their relevant skills, expertise and previous experience including details of other Funds they have been engaged with.

8.5.4. Details of any individual approvals from regulatory authorities.

8.5.5. Plans for future additions.

8.5.6. A description of arrangements to ensure retention of key personnel and of remuneration and incentivisation policies and practices for key personnel.

8.5.7. Written/signed consent for background checks, including checks of bankruptcy, financial or criminal records, to be undertaken.

8.5.8. Details of any “key man” provisions.

8.6 Track record

8.6.1. Details of current and previous funds under management (including those in other asset classes or sectors, if relevant), including details of the performance, size and investment policy of each Fund.

8.6.2. Details of fund raising experience, including amounts raised for each existing or past fund, number of LP investor relationships and analysis of LP relationships by LP type, investment size and location.

8.7 Fundraising capability

8.7.1. Details of the Manager’s own financial commitment to the Fund.

8.7.2. Confirmation that the Fund will have expected to raise investment from the private sector and will be in a position to commence making investments by the end of the current fiscal year (March 2017). Evidence of current funds or fund raising activities will be required to provide comfort that this deadline can be achieved.

8.7.3. Details of when the Fund is expecting to grant its first investment and by when it will be fully invested. Whether it is anticipated that investments will commence during fund raising, and how this process will be managed. HMT may wish to ensure that the first investment is only made by the Fund after 31 March 2017 (although the Fund agreements may be signed as described in paragraph 5.5 above, and investments earlier than 31 March 2017 considered on an exceptions basis).

8.7.4. Details of the Manager’s internal approval process for establishing the Fund and where the Manager is with respect to that process.

8.8 Fee structure

8.8.1. Details of the level, structure and timing of management fees / general partner profit share and other remuneration.

8.8.2. Where carried interest is to accrue to the Manager, the basis of the calculation, including the hurdle return for investors, a detailed vesting schedule and any clawback arrangements.

8.8.3. Details of any other fees or charges, including establishment costs, abort fees, custodian and administration fees, advisors’ fees, operating expenses and provisions for third party costs for potential lending opportunities reviewed but where a loan is not granted. Managers should explain whether these fees or charges accrue to the Fund or to the Manager.

8.9 Term sheet

8.9.1. A summary term sheet for the Fund and related agreements would be helpful, if available.