Lachesis Fund - Policies and Procedures

The Lachesis Fund Policies and Procedures documents, agreed at the second meeting of the Lachesis Fund IAC, June 2002. Modified December 2006 and June 2009

Lachesis Fund Investment Policies

1. This paper summarises the general objectives of the University Challenge Fund Initiative and outlines the proposed investment policies of the Lachesis Fund ("LF").

General Background

2. The LF investment policies outlined below reflect:- The University Challenge Fund Guidelines and Supplementary Guidelines ("Guidelines") issued by the Office of Science and Technology ("OST"); and the Lachesis Fund 2001 Round 2 Full Proposal Business Plan ("Business Plan") that was submitted to the OST by the Universities.

3. The Guidelines state "the funds will not necessarily be self-sustaining although it is highly desirable that they should be". The Business Plan aims to establish a sustainable fund.

4. Another major aim highlighted in the Guidelines is that the LF should fund new activities that would not otherwise have been possible.

5. The Guidelines suggest that the seed funds should "help the commercialisation process in a number of ways - financing access to managerial skills; by securing or enhancing intellectual property; by supporting additional R&D; construction of prototypes; preparation of Business Plans; covering legal costs; etc." It is envisaged that the LF will provide all these types of assistance.

6. The LF is a £10m seed fund. It has been established with £1m donation from the Universities, £3m from the OST, £0.65m from HEIF2, £2.35m from ERDF and £3m from emda.

7. The purpose of the LF is to assist in the evaluation and commercialisation of research in science, technology and medicine carried out within the Universities.

Balanced portfolio

8. The aim is to build a diversified portfolio, with an estimated 70:30 spin outs to other projects split, based on a budget prepared by the Fund Manager and agreed with the IAC each year, normally in June.

Spin Out Projects

9. This segment of the LF portfolio will largely consist of growth orientated technology companies operating across a range of industrial sectors. The portfolio will contain early stage investments that will normally have the following characteristics: no sales, cash negative operations and limited management resources.

10. Investments are expected to range in size from approximately £100,000 to £200,000. An initial investment may be increased in subsequent years by follow-on investments. Normally, no investment valued at cost shall represent more than 3.16% of the total value of the LF (ie £250,000). However, in April 2009 notification was received from DIUS that University Challenge Funds may invest up to a maximum of £500,000 per project. Accordingly, in exceptional circumstances, the Fund may invest up to a total of £500,000 in any one project. Such investments would be reviewed by the IAC, and would only normally take place where the LF investment would be transformational ie fund the company to a defined value inflexion point or support the company to a subsequent funding by external investors ("a bridge round").

11. The actual rate of investment will depend on the quality and number of opportunities generated by the Universities and offered to the LF, and the agreed budget for the year. At the time of the initial investment the fund manager will normally also propose a firm reserve.

12. The level of firm reserves against individual investments may exceed 20% of invested fund at any one time.

13. The portfolio is expected to consist of investments made by subscribing for ordinary shares and preference shares, possibly combined with loans (or bank guarantees to a more limited extent). Where appropriate investee companies may pay interest and dividends prior to an exit. However, the majority of investment returns are expected to be generated by capital growth rather than income and to be realised on exit.

Pathfinder and Large Projects (Up to £1.5m over 5 years)

14. This segment of the LF portfolio will consist of early stage R&D projects that have the potential to produce valuable IPR that can be commercially exploited either via a subsequent spin-out company or by licensing or sale of IPR. One of the early investment objectives for the LF is to ensure that there is sufficient investment in the high-risk, proof of concept stage projects to generate the IPR pipeline that will feed future licensing and spin-out activity. Pathfinder expenditure is expected to include the activities below. In each case the expenditure would only be authorised where this would not otherwise be supported by the university for budget reasons:

Consultancy projects carried out by external third parties to cover market scoping, customer or competitor analysis, patent searching and "freedom to act" studies, purchase of reports, commercial analysis and business case development etc
Further small scale proof of principle research and development activities, to finalise a working prototype, or develop a customer demonstration etc

15. Approximately £210,000 per annum (including firm reserves) may be invested in up to 7 Pathfinder Projects and 3 Large Projects, but the actual rate of investment will depend on the quality and number of opportunities generated by the Universities and offered to the LF. At the time of the initial investment the Fund Manager will normally propose a firm reserve and agree appropriate milestones.

16. The initial investment in a Pathfinder Project will not normally exceed around £15,000. The Fund Manager is authorised to make investment decisions concerning projects up to £25,000, after prior consultation with the appropriate TTO, without reference to the Investment Advisory Committee. However, no more than 1.3% of the fund (ie £100,000) in aggregate can be invested per annum without reference to IAC. All such investments will be reported at the following IAC Meeting.

17. By the fourth anniversary of the LF's establishment, it is intended that at least 80% of the £850k of funds committed to this segment will have been invested in 35 projects. The balance of the funds of up to 20% (ie £170k) may be held as firm reserves against existing projects. This will clearly depend on progress and subsequent funding requirements of projects.

18. The portfolio is expected to consist of "investments" consisting of funding to departments and entitlements to share in the future commercial value generated by associated IPR, either via licensing royalties, selling IPR or by subscribing for ordinary shares and/or preference shares in the company that exploits the IPR. The LF will secure an interest, via a binding offer letter, in the IPR generated by projects that it has funded or part funded.

19. Over the whole portfolio, investments are expected to range in size from approximately £10,000 to £225,000. An initial investment may be increased by follow-on investments as the project progresses along the development pipeline.

Key investment criteria

20. The Fund Manager and IAC will consider the following attributes when evaluating a potential investment in a project that may lead to a spin-out opportunity or start-up company:

Strong technology and IP base;
Products or services able to sustain competitive advantage in identified markets;
A strong business leader/entrepreneur; and
Clear growth opportunities.

21. The Fund Manager and IAC will take into account the future prospects of realisation of the investment, either by way of flotation, or a trade sale. The investment proposal will consider the potential strategy for realisation of the investment, including timing and valuation.

22. The Fund Manager and IAC (or Fund Manager alone, if the investment is below £25,000) will look for the following attributes when considering a potential investment in an R&D project:

Innovation of the science: critique of the research compared with other approaches;
Intellectual property: outline of IP opportunities and review of the relevant prior art;
Background of the key people and their motivation; and
Size of the commercial opportunities: route to extract value from the research.

23. The Fund Manager and IAC will take into account the opportunity for the LF to make an appropriate return on its investment either via licensing revenues from patents, sale of IPR or taking equity in an IPR development company.

Developing and realising investments

24. The University Technology Transfer Officers will normally be responsible for the development of investments. The Fund Manager will assist the Universities in this respect. The IP offices should play an active role in enhancing the full potential of each investee company and project.

25. The Fund Manager will seek to add value to investee companies in a number of ways, including strategic and financial planning, helping with the development of the management team, identifying and advising on acquisitions and mergers, helping to prepare the company for flotation or trade sale and the selection of specialist professional advisers.

26. Generally, an investee company will be required to have at least one non-executive director and, in most cases an independent non-executive Chairman. In addition, the project manager will seek to arrange investments on terms such that the LF's consent is required prior to key matters occurring, such as changes in the nature of the investee company's business, the assumption of any material additional indebtedness, material acquisitions or disposals by the investee company, modifying financial planning process/controls and changes in the directors' remuneration.

27. Investee companies will normally be required to provide financial reports (ie monthly management accounts) and other information to the Lachesis Fund administration.

28. The Lachesis University Investment Manager and the appropriate Technology Transfer Officers will be responsible for monitoring the progress of projects and preparing a regular report for the Fund Manager.

Allocation of investments

29. An investment will only be made with the approval of the IAC, where the Fund Manager recommends that an investment in a Lachesis spin-out company be made by third party funds (including private investors) and either not involving the LF or where such third party invests alongside the LF, when the latter is not fully invested

30. In the event of a conflict of interest on the part of the Fund Manager or IAC members in connection with a proposed investment, such investment will require the approval of the IAC, subject to its rules for dealing with such conflicts.

31. The Fund Manager will continue to act as the investment manager to various other funds. Investment opportunities may be suitable both for the LF and other funds managed by the Manager. In such cases the LF will have the first opportunity to invest, where the investment results from the Lachesis Universities' "Technology".

Lachesis Fund Investment Procedures

1. This paper summarises the proposed general investment procedures of the Lachesis Fund ("LF").

2. The following terms are used as defined below:

Investment Advisory Committee (IAC) - role and remit as defined in the Limited Partnership agreement.
University Group - the five nominated representatives from each University with responsibility for the Lachesis Fund
Quester - the Fund Manager and General Partner in the Lachesis Seed Fund Limited Partnership
Lachesis University Investment Manager - Miss Elaine Eggington, appointed to the LF under agreed terms of reference
Technology Transfer Officer (TTO) - the appropriate technology transfer officer from an individual University.

Investment Decisions

3. All investment decisions to be made by the General Partner ("Quester"). However, investments are only made based on recommendations that have been presented for review to the IAC, if in excess of £25,000, or to the University Group if for £25,000 or less. In reporting any investment decision of the Fund Manager to an applicant for funding, the Fund Manager and the TTO may pass on appropriate comments of the IAC (unless specifically instructed not to do so) in order to assist the applicant in understanding the reasons for the Fund Manager's decision, but in no circumstances shall the Fund Manager or TTO attribute any comment to any particular member of the IAC and they shall at all times take care to report the collective view of the IAC as a whole.

Investment Decisions over £25,000

4. Investment decisions made by the Fund Manager are only made on the basis of an application paper prepared by the appropriate Technology Transfer Officer, the Lachesis University Investment Manager and Quester, after appropriate research, due diligence and reference checking. The TTO from the host University will have had an opportunity to review the application paper, prior to its circulation to the IAC. In certain cases, due diligence reports may be commissioned by the Fund Manager from external consultants as part of the process of evaluating a particular application. Given that such reports normally contain standard confidentiality provisions, it is accepted that Quester may not be entitled to release such reports to any other party including University Limited Partners unless authorised to do so. Accordingly, release of such reports shall be entirely at the discretion of Quester who may, as a condition of any such release, require that the receiving party enters into a corresponding confidentiality agreement with Quester.

5. The TTO, supported by the Lachesis University Investment Manager, will be involved in the preparation of all investment recommendations and will be invited to participate in the process of review by the IAC, but, for regulatory and compliance reasons the decision must rest with the Fund Manager. Investments of more than £25,000 can only be made with the prior endorsement of the IAC.

6. Investment proposals that are reviewed and supported by the IAC will be minuted. The Lachesis University Investment Manager will arrange for a copy of the investment proposal, the relevant IAC minute summarising the amount and structure of the investment, and the Lachesis Fund Application Form countersigned by the department head (or other appropriate University authority as agreed by the Universities) and lead researcher, to be sent to the Loughborough University accounts department:- whereupon arrangements will be made to transfer funds to the appropriate investment accounts. The Loughborough University accounts department will confirm to the appropriate TTO that the instructions have been carried out.

7. In situations where an investment decision is required before the next scheduled IAC meeting, the Lachesis University Investment Manager will circulate the appropriate investment proposal papers to each Board member (by email, post or fax). Quester and/or the Lachesis University Investment Manager will then seek to obtain positive confirmation from each member of the IAC that they are in favour of proceeding.

8. If there are any objections raised by IAC members or it is not possible to contact a Board member, Quester will contact the Chairman of the IAC for approval to proceed on a majority basis. The Chairman will decide whether to reject the proposal, defer the decision or approve the proposal recognising that positive confirmation has not been obtained from all IAC members.

Investment Decisions up to £25,000

9. Investment decisions of less than £25,000 made by the Fund Manager are only made after consultation with the University Group, TTO and following careful consideration of the Lachesis investment policies.

10. In exceptional circumstances at the discretion of the Fund Manager, additional spending above £25,000 in total on a previously agreed Pathfinder Project may be made following email or telephone consultation with the IAC. This may take the form of an extension of the original Pathfinder, or the award of a second Pathfinder Project.

11. An "offer letter" will be issued by Quester and signed by the department head, researcher, University signatory and Quester. The document will contain details of the project, funding being provided, and the commercial interest that the LF has in any IP associated with the project (non-contractual arrangement or legal contract basis). The fully signed offer letter for the project must be received by the Lachesis Fund before the Investment can be formally made and funds released.

12. Authorisation from the Fund Manager along with the necessary payment instructions will then be sent to the Loughborough accounts department.

13. All investments of under £25,000 will be reported at the next IAC meeting. Quester will confirm that in aggregate not more than £100,000 (ie 1.3% of the LF) has been invested in projects of this type in any 12 month period, without the prior consent of the IAC.

Other material issues

14. Where a possible conflict of interest arises it must be referred to the IAC. The IAC must consider the terms of the investment, the issues of conflict arising and any reputational issues and may veto any investment proposal made by Quester. The IAC may recommend modifications to an investment proposal that would remove their reservations about any potential conflict of interest.

15. All fees associated with a particular investment recommendations due to Quester, third party professional fees, and consultants fees are to be disclosed to the IAC. Confirmation from the IAC (through minutes of its decision) is required approving such fees. The IAC must approve third party fees associated with the running of the fund, if they are to exceed £5,000 in any period of 12 months.

Making the Investment

16. Whenever an investment is made in a spin-out, an appropriate firm of lawyers will be retained to prepare suitable documentation. The investment agreement will contain warranties and other safeguards to protect the investment. The Fund or its lawyers will also make appropriate enquiries in relation to the identity of co-investors to comply with the prevailing money laundering legislation.

17. Where an investment is made in a project within the University (eg prior to company formation or to licensing etc), an appropriate offer letter will be signed by the department head, researcher, University signatory and Quester. The document will contain details of the project, funding being provided, and the commercial interest that the LF has in any IP associated with the project (non-contractual arrangement or legal contract basis).

Investment Records

18. When an investment is made or there is a change to the terms, an offer letter is prepared/amended and signed. It is then copied to the Loughborough accounts department and Quester and reflected in the management reports. This record is the main document for tracking the progress of project against agreed milestones and a key control for the purposes of management accounts for the LF. Amendments may be subsequently made and confirmed by email.

Managing and Monitoring the Investment

19. Where a company has been formed, normally an IAC member or LF representative will be appointed to the board of the company, both to protect the Fund's investment and to enhance the value of the investment through assistance and advice. Where an investment is made within the University, a mentor from, or nominated by, the IAC may be appointed to oversee the progress of the investment. Additionally, the Lachesis University Investment Manager will be given responsibility for monitoring the investment's progress.

20. Appropriate management and monitoring arrangements will be decided on a project by project basis and will reflect the size and complexity of the investment.

21. Where the Lachesis Fund investment in a University-based project, it is the responsibility of the University Technology Transfer Officer to ensure that management accounting information is provided to the Fund on a regular basis or as requested. Where the investment is in a spin-out Company, the Lachesis University Investment Manager is responsible for ensuring that such management accounting information is received on a regular basis or as requested.

22. Year end draft valuations are prepared by Quester and the Loughborough University accounts department based upon BVCA guidelines and following internal evaluation. Final valuations are subject to review and comment by the IAC in meetings which may be attended by the auditors at the year-end. Annual audited accounts are to be prepared for the year ended 31 July.

Arrangements for meetings and communications

23. IAC meetings are generally held every quarter or more frequently if needs be. Meeting papers, including an agenda, previous minutes and any investment papers are sent to all Board members at least 5 working days prior to the meeting. In certain circumstances, individual papers may be circulated to the IAC after the main papers have been circulated.

24. Minutes of the previous IAC meeting are circulated promptly and formally approved at the next meeting and signed by the Chairman. Copies of all IAC meeting papers are to be filed by the Lachesis University Investment Manager.

25. The IAC are appointed under the terms of their appointment letter, which shall contain confidentiality and non-use provisions.

26. At the first meeting of the IAC, 21st February 2002, it was agreed that the IAC would be quorate where 5 members are present, including the two University IAC members.

27. The two University representatives on the IAC may be represented by a designated alternate.

28. The quorum for University Group meetings shall be a minimum of three University representatives; plus the Fund Manager, represented by a specified FSA registered person (currently specified to be Dr Jonathan Gee.)

29. For the University Group meetings, each University is permitted to nominate alternate representatives. The Fund Manager is permitted to nominate an alternate representative, who need not be FSA registered. Any decisions made at a UG meeting at which the specified representative from the Fund Manager is not present must be subsequently ratified by agreement from Quester after the meeting.

Conflicts relating to Quester and Investment Proposals

30. In situations where an investment decision is required prior to the next scheduled IAC meeting - the relevant investment proposal papers are circulated to Board members. Quester and/or the Lachesis University Investment Manager will contact members for their comments and:

Where there are no potential conflicts of interest associated with an investment proposal and the investment is more than £25,000, Quester may proceed with an investment based on direct telephone communication (conference call) with the IAC.
Where there is a potential conflict of interest and the investment is for more than £25,000, Quester must ask for written/fax confirmation from IAC members that they agree with the proposal prior to proceeding with the investment. This process will only work effectively if communication is good and response times are reasonable.

Conflicts relating to the IAC and Investment Proposals

31. Although the IAC is an advisory body only, each member of the IAC will make an annual declaration of business interests to Quester. This declaration will be taken into account by Quester and the Chairman when applications are considered by the IAC.

32. If an IAC Member is required to consider a matter in which he has an interest which is material and which conflicts or may conflict with the interests of any applicant for funding, the IAC Member shall notify Quester of such interest.

33. An IAC Member who has such an interest shall not be precluded from considering any application for funding from any relevant applicant provided always that he has declared in advance either at a meeting of the IAC or, if such a meeting is not scheduled to take place before such application is due for consideration, by writing to Quester.

34. If any member of the IAC wishes to advise against an identified and well researched investment where there is no conflict, or involving a conflict veto an investment, or declare a conflict, he should contact Quester and the Chairman of the IAC. Any concerns of this nature should be communicated as soon as is practical and within 5 working days.

35. The IAC is to be notified of all investment recommendations over £25,000 prior to Quester and the Lachesis Fund making an offer to invest to a researcher.

36. The IAC will review the draft annual accounts and draft report for the OST, which may be done in the presence of the Fund's auditors. The IAC may delegate this responsibility and other accounting related matters (such as valuation policies and accounting policies) to an audit sub-committee (including the Chairman of the IAC and at least two other Board members).

Confidentiality of information

37. The members of the IAC shall not disclose any information which is obtained by reason of their involvement in the LF and is not already in the public domain, unless they have the prior approval of the IAC.

38. All LF press releases or comments will be approved by Quester and the University Group.

Administration of Funds

39. The LF will have separate bank accounts. The normal Loughborough University signatories will have control of the account. The release of Funds requires a payment instruction signed by the Fund Manager.

40. Surplus cash balances are to be invested by for the benefit of the LF in line with OST requirements.

41. Realisations for cash, net of costs, will be retained by the LF and will be reinvested. Quoted shares and other shares issued on acquisition will not be distributed in specie.

42. Cash may be held in the fund's account to cover LF expenses and short term funding requirements.

43. The General Partner will prepare a fund management progress report on portfolio companies and proposed investments on a quarterly basis (within 15 days of end of March, June, September and December).

44. Reports to the central OST are prepared annually; the first to cover the period from establishment of the LF to 31st July 2003, and thereafter annually. The report and audited accounts will be prepared within three months of the end of the accounting period.

45. The annual report will contain the audited balance sheet, P&L and cashflow statement; reports on the portfolio investments; and a chairman's statement outlining investment progress and LF activities.

46. Audited accounts are prepared annually for the year ended 31 July.

47. Quester and an appropriate representative of the Lachesis Fund will attend the annual "University Challenge" meeting to be arranged by the OST.

Complaints Procedures

52. Complaints from IAC members or the Universities should be communicated first to the IAC Chairman, who will inform Quester of the nature of the complaint.

53. Complaints from Projects or applicants should be communicated first to the local technology transfer office. If the matter is not satisfactorily resolved at that level it shall be referred to the Chairman of the IAC.

54. A Senior officer of any of the Universities or the IAC Chairman may contact Andrew Holmes (MD of Quester) at Quester directly with any complaints. Quester's Managing Director will investigate the complaint, and a prompt response will be made to the complainant. Details of the complaint are entered on the complaints register. Details of significant complaints must be kept for three years.

55. The first substantive response must, unless it offers a settlement reasonably expected to be accepted, advise the complainant that he has the right to complain direct to the Investment Ombudsman and enclose a copy of the informal guide to the Investment Ombudsman service (in accordance with FSA rules).