Venture capital spec, partnership

Press, 15 November 1984, Page 30

Venture capital spec, partnership

Challenge Corporation Services, Ltd, has recently released a prospectus which invites investment in the. country’s first public offering of a Venture Capital Fund, Challenge Venture Capital, Ltd, and Company. This Venture Capital Fund is a special partnership. It offers the investors an opportunity to participate in a portfolio of investments in new technologies including electronics, genetics, computer software, and biotechnology, and, where there is high growth potential, in businesses which are based on existing technologies.

The fund is not a taxbased investment although there may be some benefit

from income or tax losses flowing directly from the fund’s investments through to the investors. The primary return of the fund will come from the growth and hence capital gains from the realisation of investments. In the United States, where similarly structured funds are commonplace, they target five times capital invested over the seven year life of the partnership, or 30 per cent compounded per year as the return on investment.

The partnership has been formed to invest in commercial risk ventures and in syndications with other venture capital funds. The Deed of Participation provides that the special partners contribute to the capital of the partnership and that their liability will be limited to the . amount they agree to contribute. Only the manager will be permitted to transact the business of the partnership.

The amount to be raised is 7500' units, comprising 6000 units at $lOOO each and 1500 units at $lO each for a. total of $6,015,000. A special partner may subscribe for any number of $lOOO units in the partnership, with a minimum of three units. The two original special partners have subscribed for five $lOOO units each and the promoter has subscribed for two hundred $lOOO units. Therefore 5790 units of $lOOO each are now being offered for subscription. The minimum to be raised before the partnership will commence business is $3,007,500. All of the $lO units will be subscribed for by the promoter. $lO units will be issued on the basis

of one $lO unit for every four $lOOO units subscribed for by all special partners under the terms.

The manager will distribute income and capital gains (both net of expenses) and any of the capital of the fund, whether during the continuance thereof or on its determination, in the following manher: (a) The allocation and distribution of capital gains (i.e. profits other then net income) and the distribution of original capital contributions shall first be made to the holders of the $lOOO units on a pro rata basis until they have received 100 per cent of their capital contribution of $lOOO per unit. Thereafter allocations and distributions shall be on a pro rata basis according to the total number of units held (regardless of nominal value).

(b) The > allocation and distribution of net income (being the ordinary income of the partnership) shall be on a pro rata basis according to the total number of units held (regardless of nominal value). Hence, the promoter will receive 20 per cent of the net income and capital gains of the fund, but will only begin sharing in capital gains after the special partners have received 100 per cent of their capital contributions, through either capital gains or a return of capital. Some investments may be distributed as shares in portfolio companies instead of as cash. This would enable special partners to continue to hold their share of such investments if they wished.

At the end of the partnership, the fund may include investments which are not immediately marketable. The manager will use its discretion to find the best means of distributing such securities.

The manager will be paid an annual management fee, payable quarterly in advance of 2.5 per cent of the capital contributed by the special partners.

The fund will be valued at each year end (July 31) by the manager.

Unless earlier dissolved in accordance with the provisions of the deed of participation, the term of the partnership will be for a period of seven years. The

term of the partnership may be extended beyond seven years if so agreed by the special partners who hold at least 75 per cent of the nominal value, of the partnership.