Isis raises £51.5m co-investment fund

Kimberly Romaine
03 July 2013

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Isis has raised a fund to co-invest alongside its Baronsmead VCTs. The fund comprises four limited partners and is the first time a VCT has raised an institutional co-investment fund.

The fund allows Isis to continue investing across the entire £2-40m space, as it has done since 1995 through its VCTs and institutional funds. A change to VCT rules in 2012 effectively precluded the tax-efficient investment vehicles from providing more than £5m to a business in any one year. The new fund will co-invest alongside Baronsmead VCTs in all deals at the lower end of Isis's deal-value spectrum, ensuring the rule changes leave the GP with no un-investable 'gap'.

The fund was raised from four institutional investors convinced of the merits of the fund by looking at the track record of the VCTs, according to Andrew Garside of Isis (pictured). "The returns are the same across the £2-40m spectrum Isis backs, whether it's backed by the VCTs or the institutional funds. It's not two teams doing different things so we weren't surprised by this; the marketing, diligence, rigour, investment committee, operating partners are all very similar whether it's a £2m or £40m cheque." The difference lies in how the returns are paid: as dividends for the VCT backers versus fund capital returns for the institutional investors.

Isis's most recent exit from its Baronsmead VCTs saw it reap 2.8x money in the March sale of Micro Librarian Systems to Capita. The business had been backed initially in 2006 in an £8m deal – a size which would have been precluded from the VCT's remit by the new rule changes had Isis not raised the new co-investment fund.

"We spoke to a small number of investors at the end of 2012 to gauge interest in the co-invest product. We only engaged with loyal and longstanding backers of Isis's institutional funds to ensure we were structuring a market-standard vehicle," says Isis's Fiona Dane.

As Isis had just closed its Fund V in April that year on its hard-cap of £360m – with a re-up rate of two thirds – the Isis brand would have been fresh in LPs' minds. "It became clear that we had ample investor appetite wanting to access this part of the market and we'd not need to undertake a wider marketing effort," Dane explains, adding that the investors were already comfortable with the idea of two sets of funds within one GP.

The four LPs hail from the UK and western Europe and committed £50m to the co-investment fund; the remaining £1.5m was management contribution. The fund has a 10-year lifespan and the terms are apparently market standard for a co-investment fund structure.

The Baronsmead VCTs have annual top-up fundraisings when required and raised their target of £30m in the last tax year.

Isis Fund V made its first investment in May, 10 months after its investment period commenced, with the £14m injection into digital recording business Red Box.

The Baronsmead Co-investment Fund did its first deal in June when it co-invested alongside Isis's Baronsmead VCTs to pump £3.5m into the MBO of Armstrong Craven.