Cynulliad Cenedlaethol Cymru

Good morning, and welcome. Bore da. Croeso to this meeting of the Public Accounts and Public Administration Committee in the Senedd. No apologies for absence have been received. Do Members have any declarable matters of interest that they wish to share with us that aren't already on the public record? No. Thank you.

We have two papers to note at the beginning of the meeting. The first is a letter from the Stop Gilestone Farm Project to the Chair of this committee, i.e. me. The committee was sent an open letter on behalf of the Stop Gilestone Farm Project, addressed to me in my capacity as Chair, as well as to you as members of the committee. This responds to a letter considered by the committee at our previous meeting, on 14 September, received from Fiona Stewart, the managing director of Green Man. The letter responds to a series of points made by Ms Stewart in her letter, and links to the campaign group's website. It also refers to a survey undertaken by the Talybont-on-Usk Community Council, the results of which can be found online. We will be discussing later in the meeting a response we received from Welsh Government yesterday regarding this, and then proceeding as previously agreed by Members. So, Members, before I ask you to note the letter, Rhianon, your hand is up.

I believe I'm unmuting myself, so I've just unmuted—apologies if somebody else has. It's just, again, I will underscore my concern in terms of approaches from any type of lobby group, because we have to get a fair picture. I think the points that have been made in the last letter are absolutely relevant to the organisation themselves. I have a concern that we could turn into a committee that is going to be inundated by lobby groups in the future. So, it's just, from me, a comment that I wanted to underscore. Thank you, Chair.

Thank you. We had a brief discussion before we went into session about this, and there was complete consensus that we must remain entirely within the remit of this committee, and make all parties fully aware of that. We're not here to make judgments about allegations about personal conduct by anyone against anyone; our focus is purely on the matters that fall within the remit of this committee. Now we have had a holding response from Welsh Government; we still don't yet know what the Welsh Government's going to be doing, what final decision they're going to make for the site. And it's at that point, if you will recall, that we agreed we would then consider taking further evidence on the material points that fall within this committee's remit from a specified list of relevant parties, including the owner of the site and the community council, at that time. So, Members are invited to note the letter.

Happy to note, Chair.

Thank you. The second item is a letter from the chair of Betsi Cadwaladr University Health Board, again to me as Chair of this committee, and to the Chair of the Health and Social Care Committee. The chair of the health board replied to the joint letter the two Chairs sent to him on 7 July on three matters of interest. On the health board's response to the special measures organisational response plan, the board considered and approved the plan on 25 May, which represents cycle 1, which is the first 90 days of the stabilisation phase, as they're calling it. The board will consider the progress against the cycle 1 response plan at its meeting later this month, on 28 September—that's tomorrow, isn't it—so, tomorrow, where they will also consider the second 90-day response cycle.

On reporting processes and timetables in relation to progress against the plan, as well as the 90-day stages, the chair of the health board explains that these are discharged at an executive level through the board and its sub-committees, with board reports providing an overview of progress, an outline of where further work is needed or under way, and any potential delays. They also work with the Welsh Government through the ministerial special measures forum and the special measures assurance board. The health board chair has agreed to share progress reports with this committee and the Health and Social Care Committee, as we have requested, and the committee's clerks will discuss together future work on this subject with clerks from the Health and Social Care Committee, and gauge that committee's response to the letter. We can then hopefully agree what further action we may wish to take in relation to the suspended inquiry we had already started last year.

Rhianon, is your hand still up, or is it—?

No, no, it's a new hand. If I may, Chair, in regard, obviously, to the deep and entrenched situation that we have and, obviously, the mitigations that are taking place around Betsi, it's just a simple question for reassurance in a sense, also from the board's perspective, and bearing in mind the issues at play and, obviously, our remit as a committee, that we are absolutely not duplicating the work of other committees. It's just that question I wanted to ask, Chair.

Well, absolutely. Again, as you are aware, we're collectively keen to ensure that, which is why we made this joint approach so that we don't replicate by working together, and they're focused on their remit, particularly clinical issues, and ours on the effective and efficient use of resources. So, yes, that's very much the agreed approach. So, we look forward to hearing back from the clerks, and, otherwise, I invite Members to note the letter. Thank you very much indeed. In that case, we can have a five-minute break and then we'll be going into our main item, on the life sciences investment fund. Thank you. 

Bore da a chroeso. Good morning and welcome back to viewers to the Public Accounts and Public Administration Committee in the Senedd, and welcome to the participants who have joined the meeting. I'd be grateful if you could begin by stating your names and roles for the record, including recent roles and responsibilities in respect of the fund, and to confirm the extent of any involvement that you've had in previous roles in relation to the establishment of the fund, and in the period up to the auditor general's report in 2016. So, I don't know who—. Andrew Slade?

Shall I start, Chair? Good morning, bore da, Chair and committee. I'm Andrew Slade, director general for economy, treasury and constitution in the Welsh Government. I took up the role of director general for economy, skills and natural resources in 2018, and I've had some indirect dealings with the fund management process since then, but prior to that, not at all.

Okay. Mr Hamer.

Good morning. I'm Duncan Hamer, I'm director of operations for the Welsh Government's economy department. I had no active engagement with the fund prior to the Regeneris report, and started as sponsor for the Development Bank of Wales in 2018. 

Thank you. Mr Thorley. 

Bore da, good morning. Giles Thorley, I'm the chief executive of the Development Bank of Wales. I started as chief executive of Finance Wales in April 2016, so around the time of the Regeneris report. The Development Bank of Wales was the fundholder on behalf of the Welsh Government for the fund—we'll discuss that later. I've had no other active involvement in the fund management of that business. 

And Mr Hunter. 

Bore da, good morning. I'm Rob Hunter, I'm strategy director in the Development Bank of Wales. The role I have in relation to the fund is I look after the fundholder function for the bank. I did have involvement in the fund prior to joining Finance Wales back in 2015, because I was the finance director of the department for economy, so it would have been one of the projects that would have, sort of, come through me for financial approval at that stage.

Okay, well thanks very much all four of you for that. As you'd expect, we have a number of questions shared between Members. I'd be grateful if both Members and yourselves could be as succinct as possible to enable us to cover the wide range of issues we seek to cover, as generated by this topic. As tradition has it, I will ask the first question, or set of questions, as Chair, before bringing in my colleagues. 

Some of the overall investment figures in your evidence paper differ to those in the auditor general's report, or the Regeneris report. For example, your paper puts the investment in Sphere Medical at £5 million against a figure in the other report of £4 million, and you put the investment in Apito—Apipto—

Apitope.

Thank you—[Laughter.] That at just over £4.5 million, compared with the auditor general's figure of £3.9 million. Why are there these differences, and other differences, showing?

I imagine these are point-in-time analyses, Chair, but I don't know whether Rob knows. It will depend on where the fund was at the point when the report was being written.

Yes. It was something we were discussing before we came in. The thing is, these reports were all written at different times through the life of the fund. I can just have a check, because I have—just to see the sort of timeline. So, you mentioned Sphere and Apitope. So, if we look at Sphere—. I'm just trying to see when the investments took place. So, there was—£4 million was put in in 2015 and an additional £1 million was put in in September 2017, so that would have been after the report. So, both figures are correct. And for Apitope—I'll just get to my tag. Yes, so, for Apitope, there was £3.6 million put in in September 2015, and another £884,000 was follow-on funding, which went in in September 2017. And I think, with this, it's not just going to be the timeline, but it's also going to be the valuation point. So, you may have other queries about numbers, but some of the valuations are undertaken quarterly, so if they are listed companies, they will value day by day.

Okay, thank you. How were decisions taken regarding the strategy for the investments held in the final year of the fund ahead of its winding up?

Colleagues from the bank might want to talk to that one. I think it's worth just saying, Chair, that, ultimately, this is part of a wider approach to the development of the life sciences sector, so we've got to put it in the context of the wider policy objectives that the Government was trying to achieve when the fund was originally established, as part of a strategy around the life sciences sector, which is hugely important to Wales and across the UK and, indeed, globally. And I think it's also fair to say that at the point that funds are invested, you are effectively, then, in the hands of the fund manager, the companies that you're investing in and the market, and I think that's an important bit of context for this. I don't know whether, Rob, you want to talk about the final year?

Yes. Within the final year, what we were seeking to do, and the fund manager was seeking to do, was to exit as many of the investments as possible, but you've got to wait for the right point to exit—they call them inflection points—so when the fund is in a good position to sell. The last thing you want to do is to fire sell and get very, very low value for the fund. One of the big events that occurred in 2022 was in June 2022, when Rutherford Health failed, and that had quite a significant impact on the fund. But we did speak to the fund manager to encourage these exits. Verona was exited in December 2022. It was the right time to exit that because they had just had clinical stage 3 trials, which were successful, so the value was good for a sale at that point in time. The other thing we did was work with the fund manager to work out what the strategy would be at the end—whether they would continue as fund manager for two years, which was an option within the contract, or whether those investments would transfer to the development bank. So, we worked quite closely with our Welsh Government colleagues during that period as well, to try to work out what that transition would be.

Okay, thank you. Well, excepting liquidation of any individual investments, how much, if any, funding did the public purse receive in terms of additional capital coming back?

Okay, so, this is stuff that is over and above. One of the things we did receive, actually—this would have been back in 2017, when Arix invested £5 million into the fund—was something called an equalisation payment, so it was their share of the fees up to that point. So, we did get some fees back. I think that was in the order of—. It was £160,000 to £200,000. It was in that sort of order in terms of those sort of catch-up fees.

There is still some cash, actually, in the partnership, which will be distributed once we get to the endpoint, which will be some point this year, and we finalise the transfers of all of the assets across to us. It's going to be in the low hundreds of thousands, it's not a huge sum of money, but we are anticipating some more cash coming in through the fund. And, of course, we've got the four investments that are being transferred into us; those have a value, and we've been managing those out as well, and those proceeds will come back once we've exited.

And those various proceeds that you refer to—do you have a rough idea of how much they collectively come to?

It's somewhere in the order of about £2 million, I think, the full value of everything, including the cash. I'd need to check—

So, that's the Verona proceeds. The remaining cash in the business plus the proceeds of the liquidations of the remaining four businesses, which have a current value, I think, of £180,000.

Okay, thank you. Beyond that, no further capital has come back or is anticipated to come back.

Well, in theory, there are three businesses that were liquidated, and there's a very slim possibility that, as part of the liquidation, other proceeds could come back. I think that's extremely unlikely. Rutherford would've been the largest of those, and that was a very highly indebted business in its own right.

Okay, thank you. How would you clarify the distinction between the financial transactions capital element of the Welsh Government's commitment to the fund—£42.4 million—and the non-repayable public equity element—the £7.6 million—and what, if anything, has this meant for the fund in practice?

Well—. Sorry, did Mr Hedges want to come in?

When you answer that, I've got a supplementary question.

Fine, okay. I wonder, maybe, Duncan, if you could talk through what FTC is and how it works.

Certainly, yes. So, there are two different types of capital put into the fund, as you've identified. Financial transactions capital provided by the UK Government to the Welsh Government, in this context, can only be deployed through a private entity, for loan or equity investments. So, in effect, it couldn't be spent on general capital investment in schools or wherever else. The requirement of FTC, financial transactions capital, is that 80 per cent of it, as a minimum, is repaid to the UK Government. Just for context, the overall FTC involved in the development bank is due to return, we estimate, around 90 per cent, so we're on target. The general capital was applied to this fund to help us manage the risk—because you have to repay 80 per cent of it, we applied some general capital just to mitigate the risk of not being able to repay the full amount.

You've answered nearly everything I was going to ask, but if I could just carry on—so that financial transactions capital that has been lost is not a loss that actually has any material effect on Welsh Government's balance sheet, or on the amount that has to be repaid. And can I just put a preface in here? According to the Office for National Statistics, we're under weight in Wales on life sciences. I actually believe that we need to invest in life sciences and I hope that nothing comes out of this that makes you more risk averse in investing in things like life sciences and ICT—growth industries on which we are phenomenally low in Wales.

I think that's a really important point, because as we've gone through this process we've asked ourselves what lessons we can learn from the operation of this fund, and I think we could, potentially—to your point, Mr Hedges—learn the wrong lesson, which is that these sorts of things are not worth doing. They can be worth doing in particular circumstances, to pursue a policy aim; it's how you manage them that I think is the thing that we've been discussing, both within Government and with the bank. We may come back to that later in the session, but I think that is an important point.

And you can also rest assured that the development bank continues to invest in the life sciences sector. In the last 10 years, we've invested almost £50 million outside of the Welsh life sciences fund. We tend to invest in smaller businesses, but also businesses focused on certain clusters that have significant strength in Wales, for example wound care, some of the medtech businesses that we've invested in. And one of our biggest businesses is the world leader in endoscopy, Creo Medical; they're based in Chepstow and they have offices all over the world. They started their operations with funding from Finance Wales in Wales.

Could I just add as well, just on—? Just that it's really important to know, even though, clearly, none of us set out to lose any funding, the objective was clearly to make a return on this fund, but as Giles and Andrew have mentioned, life sciences investments, as you've hinted at, are quite binary in their decision; they pass or fail on the results of drug trials et cetera. So, I wouldn't want to our estimates—clearly, we'd rather be reporting a return. 

Thank you. I'll bring you in in a second. Building on, I think, the first part of Mike's question, what, if any, hit did the Welsh Government itself take financially, either directly or in terms of the repayment to the Treasury, or what—

It's partly complicated by the—. It's a classification process, isn't it?

Yes, it is. Macro picture: so, the FT that the Government have invested in—sorry, the development bank—as reported, we remain on target to repay the required level, 80 per cent plus. So, at that level, we're delivering. As Andrew mentioned, this is slightly complex, because recently the bank has been reclassified by the Office for National Statistics as a part of Government, in effect, a public body. We're working through that process, which means we just need to unpick how this shows in the accounts, if you like, of the Welsh Government. And we're waiting on HMT, in effect. The Treasury classify how we treat the finance within the bank as part of the extended Government.

All right. And within the bank, what is the figure that you're currently showing?

We provided for the investment in the Welsh life sciences fund, and we declared a loss of £27.1 million—

Yes.

—in this year's accounts. That number was provided to us towards the end of February by Arix. We then incorporated it into our accounts, and our accounting year end is in March. Their year end is December. The notification of that, or the discussion on that, was put to the board of the development bank in June, and we notified the Welsh Government at the same time that we were going to be declaring a £27.1 million loss.

So, if, dependent upon ONS and HMT, this is reclassified, that will then be the figure you anticipate showing in Welsh Government accounts.

I'm not responsible for the Welsh Government accounts, sorry.

We're still working through that. Colleagues in the accounts department of Welsh Government are working through that in the context of the reclassification that Duncan was just describing.

The Welsh Government had previously provided for changes in valuation of the fund in previous years, so it would be the main change, which was Rutherford, and the loss in that year. But I understand they provided for more than £10 million in previous years, so the impact is the difference between £27.1 million and whatever they've provided for, £15 million or £16 million, would come through. But the important point is, and Duncan's mentioned it, that, when you look at the financial transaction, if you take the life sciences fund alongside all of the development bank investments, we are in a very good position to fully honour the repayment of FT to HM Treasury.

Again, actually, just for the record, perhaps I should say, the ONS is the Office for National Statistics—

It is, Chair. Sorry, yes.

—and HMT is His Majesty's Treasury, formerly Her Majesty's Treasury. Natasha.

Thank you so much, Chair. I was actually going to ask exactly the question that you asked, which was just to give that figure, so thank you for providing that. Just talking about the accounts, going forward, I'm very new to the committee, I think I'm the baby of the committee when it comes to Members. So, just going forward, when it comes to the actual loss that will be declared in up-and-coming accounts, what category will that be placed under?

I'm not sure I know the answer to that question. I don't know whether Duncan—

No, I'll need to—

If you can please clarify, I'd like to—

I would be guessing the four-letter acronym, so I won't guess.

That's fine. Just so we can keep an eye out for it when it does come up. Thank you.

Yes, sure.

Thank you. Following questions raised in Plenary in the Chamber in July, why did it take five months to update the Senedd on the closure of the fund?

Well, I think, probably, you've just answered—. Have you just answered that?

Yes. Sorry, Chair. So, just to be clear, the fund manager's year end was 31 December 2022. So, we didn't receive provisional figures—. In fact, I don't think we've received their final accounts even yet.

I think we have just, yes.

Just. But we received their provisional figures in 20 February 2023, which then were incorporated with our auditors into our accounts, with our year end being the end of March 2023. So, since March, we've been doing the accounting process. Our accounts were signed off only at the end of September—sorry, at the end of August—but, because we were aware of this, we brought this forward to a board meeting of the development bank in June 2023, confirming the write-off and advised that to the Welsh Government, and then the Welsh Government took that to the statement that was made thereafter.

Yes, I think the Minister—. Was it 11 July the Minister made his statement? 

Yes.

So, I think there's a pretty swift set of actions and communications that follow off the back of the notification.

The big event that happened in June 2022 was the failure of Rutherford, and, actually, Rutherford had the potential to more than return its investment and possibly even bring the fund back into balance. So, in June 2022, I think it was a shock—it was a shock to us, and it was a shock to the fund manager—that Rutherford went into liquidation, and there was a process that the fund manager was working with the receiver, and that would have taken some months after June 2022 to work out what was recoverable from that, and then we really did have to wait until we got the accounts to find out what the position was with the other investments in the fund, so it’s just worth stating that.

Yes, as you said, because the Verona investment was actually only sold in December 2022, so that would have been literally at the end of their year end, so we had to wait again for the details on that.

Okay, thank you. I’ll bring in Natasha Asghar.

Thank you so much. Gentlemen, I'm going to be asking you some questions about the fund manager's entitlements, particularly when the plans were going ahead. So, was the fund manager entitled to any share within the partnership’s assets upon closure, and, if so, how were the assets split between the partners?

Well, I'll just give you the outline. So, in principle, there are two elements of which you can get a return as a fund manager. So (1) would be if they do what's called 'co-invest', they make a co-investment; and then (2) is what's called 'carry', and that's only paid if the return is in excess of a certain threshold.

What is the threshold, if you don't mind me asking?

Well, I think—

It's 8 per cent.

Eight per cent. I can make that easy—there was no carry, because obviously, the fund has returned less than 100 per cent. Arix invested £5 million as part of their responsibility when they took over the fund management contract, so the fund went from £50 million to £55 million, and so their share of any returns on the investments would be five fifty-fifths of the total investment, so it's just pro rata to their investment.

Okay. Not including any repaid loans, and assuming any loans were repaid in full, how much did the fund manager receive from managing the fund over its lifetime, both directly in management fees and share of assets, and indirectly, even, through arrangement fees paid by investee companies?

Yes. So, the fund manager received sort of three elements. Giles was talking about—. Three elements. One was fund management fees on the fund itself, so this was for managing the fund. In total, that was £7.7 million. And that figure, £7.7 million, is subject to the final distribution of cash; it can change a little bit up and a little bit down, but it's going to be around £7.7 million. That works out at about 1.7 per cent management fee through the life. Now Regeneris did point out that they felt that the fees were on the high side for the realisation phase, so, when Arix put the £5 million in back in 2017, we renegotiated the fees with them in light of the Regeneris recommendation, and lowered the fee during the realisation phase.

So, to give you a sort of market comparable, the standard fee—and it is standard; it's about 60 per cent or 70 per cent of investments that would follow this, and there are some differences, but—they call it the 'two and 20' rule. So, in effect, most fund managers through the investment phase will charge 2 per cent of the value of the fund annually that they're investing, and they charge 20 per cent on the superprofit, so the amount over the 8 per cent return we would expect, and, generally, fund managers will make 50 per cent of all of their fees through the fund management charge and 50 per cent through the superprofit they make. It's a gain-share-type thing. So, 1.6 per cent, 1.7 per cent is pretty much, I think, fairly competitive for the market in that sense.

Now the second element of fees were arrangement fees. Now the arrangement fees were £2.4 million through the life. That works out at about 4 per cent, but there were some outliers on that; one of the investments, they actually took a fee of 10 per cent, so it was quite, quite big. Now this was pointed out by the auditor general's report, and, once again, when we renegotiated when this £5 million came in, we put a stop to any arrangement fees being charged to the investee businesses by the fund manager, and, if we were to be doing this again, and it is a lesson learnt, we would make sure that, actually, there would be one of two things. It is standard commercial practice, by the way, to charge arrangement fees, but what we would look to do is to make sure the vast majority of that comes back into the fund and doesn't go to the fund manager. So, that's a lesson learnt and it was picked up through that review—

Can I just ask you a quick question? Sorry, I knew you were going to carry on, but you mentioned that the £7.7 million, you managed to get that lowered—how much did you get it lowered to? I think, just for the benefit of the committee, we'd like to know.

That's a difficult question to answer, because what we did was we made sure that the fee wasn't being charged on assets that were being written down. So, it's a difficult one, but, instead of charging on an amount that had been invested, we shifted so that we were charging on the value of the asset as it was listed. And because these were listed lower, they were charging a fee on a much lower amount. So, I don't think I'll be able to answer how much lower it was, but there was definitely some form of saving. 

Okay.

And the final element, which Giles touched on, is that they actually also shared in five fifty-fifths of the loss, so, that’s a negative figure, if you like, which was paid by the fund manager, because they invested on the same terms as we did.

Okay. All right. The Regeneris report notes that, with fund management fees at the upper end of the industry standard range and the ability to retain both arrangement and management fees, it raised a question about the appropriateness of the level at which the overall fees were set. I know you mentioned that, obviously, it's not going to put you off going forward, but what are your overall reflections on the value for money of those arrangements and what lessons are you now going to put into place to ensure that this doesn't happen in future?

Yes, well, I think Rob touched on the key point, which is—. It's quite common; the development bank charges arrangement fees up to 2.5 per cent for equity investing and 2 per cent for some lending and 1 per cent for others. But we allocate those fees as part of our total return analysis and it's my view that that should have been included in the total return for the fund, rather than as a direct benefit to the fund manager. The fund manager, clearly, is able to receive his return in due course, either through his investment in the fund, or through the carry, as I mentioned earlier. And so that would be probably the primary restriction. And I also think that the level of fees, as Rob mentioned, in one case was excessive and I think that that would—. We would set a maximum level in the investor rate bids. It's what's called IOGs, investment operating guidelines; we would set those at a maximum.

Okay, thank you.

I think the original arrangements were silent on those points.

They were silent on both of those points, yes.

I should just add, as well, on the fees, I think, Rob, you quoted the actual reduced fee of £7.7 million, and the upsurge we'll come back to you on—I think it was about a £400,000 saving from memory; I just can't find the figure in the pack. The £7.7 million was the reduced figure, not the original.

So, that was actually the—

That's the reduced figure, yes.

What was the actual—?

Well, I was just trying to find it in my pack. I can't find it. I recall it was £8.1 million, I think, but I'll see if I can find it during the committee.

That's fine, that's okay, not a problem. Thank you so much for that.

Talking about the written evidence that you sent previously, it suggests that the fee structure changed in line with down-valuations of investments, following a fund report in 2017, I believe. Can you explain how and why the management fee structure changed over the life of the fund and how value for money was considered at that time? 

Yes, I think I've probably touched on this in terms of there was—. Well, the first thing was, there was an equalisation payment. So, in effect, when they invested in the fund, they invested after most of the investments had actually been made, so, they were buying into those investments. So, in effect, what happens is you have to take them back as if they'd started at the beginning, so, they need to pay their fees for those investments that you've already made because they're buying in. So, we did get a rebate from them at that time. It's called an equalisation payment, which was paid to us. And I touched on the point that, at that stage, we looked quite closely at how they would charge us through the realisation phase and we strengthened, I think, the conditions of that to make sure that we were getting best value for money. 

Okay. My final question is: building on the written evidence about the fund's structure, can you explain the implications of changes following Arix's £5 million investment into the fund after it acquired the original fund manager and the base of the equalisation payment that you've referred to?

Well, it's pretty much as Rob described. But one of the things that we did do, as part of the transaction, is use the opportunity to renegotiate the fees, as we discussed, so that, thereafter, the fees on the realisation phase went down. The £5 million was invested alongside the remanding money, subject to the equalisation payment that Rob discussed. And there was the small rebate that we received out of that, which reflected, effectively, their share of the fees that had been paid in the past.

Okay. Thank you, Chair. I'm done. 

Thank you. I'll bring in Rhianon Passmore.

Thanks, Chair. In regard to the ongoing developments and costs, the Minister's July statement put the overall value of the four investments transferred to the development bank—I'm talking about the transfers—at £2.5 million, and the other paper suggests £1.8 million. So, I suppose in regard to the difference in the reported figures, you would again, I presume, put it down entirely to chronology, the snapshot of sale in time when these funds were exited. That could be a simple 'yes' or 'no'.

Yes, that's correct. Two of the investments are listed vehicles, and so it's just a matter of the share price. 

Okay. That brings me on to a second question, which I'll put in after this next one. There's been a reduction in value, hasn't there, obviously, as you've articulated, of the transferred investments. You've already touched upon lessons learned; how is that going to influence future thinking and the rationale for continuing to hold these investments on fund closure? And obviously I'm thinking about other arm's-length funds we've got and the endowment fund. And as a caveat to that, really, in terms of the inflection point sale and market, in a sense, it has to be speculative, so do we actually have the skills in-house within the Welsh Government for this type of work, bearing in mind Mike Hedges's point, which is absolutely right, that we have to be ambitious and do what we should be doing in the twenty-first century; we're not Dickensian. So, that's a supplementary: do we have those skills?

The development bank is holding these last four investments at the moment. We have a team within the development bank who specialise in life sciences businesses and have invested in life sciences businesses. We also have a number of listed investments. Whilst these investments are relatively small as a percentage of the companies—I think the largest investment is approximately 10 per cent of one of the companies—these are relatively illiquid assets, and therefore trying to sell even a stake of this size in one go would actually, generally, lose you more money. 

When I started in investment banking, I was told that there's only one thing that's important about investing: it's not supply and demand, it's liquidity. And, as we've seen in financial crises, if there's no liquidity, then it doesn't matter what you think the thing's worth, it's worth nothing. So, in that respect, we are holding the investments and learning about the businesses so that we can be better informed to decide when the best exit opportunities lie. And that could be market conditions, it could be liquidity, it could be developments within the companies. And all of those will be taken into consideration. 

So, in terms of my question as to do we have the skills, you would say what?

I'd say we do, yes.

Obviously, we've got the Development Bank of Wales, we've got the team there, but—.

I was going to add that I think this is the point Andrew made about being careful not to learn the wrong lessons. Clearly, one of the skills we looked for in 2016 was to have an external fund manager. We do absolutely have relevant skills with the development bank—Giles sat alongside us today, and Rob. We have expertise within the team, but we also recognise that in really specific and in expertise areas we sometimes need to supplement that as well, so we're not at all scared of adding to the team as required. 

Okay. Thank you. I'm going to move on. In terms of the ongoing costs with the four investments that have been transferred, what is their legal form and what is their current value individually? If you don't have that at hand, you can write to us. I'm sure you'll know what kind of legal entity they are, though.

I thought we listed that in the evidence paper, but the actual values—

But the current value, though, individually. I don't think that's in the evidence paper, is it?

In the evidence paper, on page 9, that was the February 2023 valuation, so I just refer you back to your comment about time.

Yes, the snapshot. So, could you give us the updated figures please—

Yes. Yes, we can.

—because the difficulty is that it's volatile and constantly moving, and it's very difficult to get the up-to-date understanding, isn't it? Okay.

So, control and influence with these transferred investments—what representation is there on the boards of investee companies? I think I know what you're going to say.

I sort of touched on this in a previous answer. These are small investments. We don't have any right to representation on the boards of these companies. The largest single investment is just under 10 per cent. Having said that, in the case of the listed entities, they are obviously required to provide information, and actually, in most cases—I'm pretty sure in all cases—they will be required to provide information to investors anyway, whether they're listed or not. So, we will be receiving quite a lot of information on those businesses, and we'll be assessing them accordingly.

Okay. I just suppose, from this committee's perspective, in terms of public purse and our mandate, it is that sense of trying to get reassurance that we're having all of the information that we need to keep track of what is happening, and to do that there has to be that eye on the ball, doesn't there? It sort of leads back to my other previous question, which you already answered.

I better move on, before the Chair asks me to. So, the businesses that were liquidated or closed during the life of the fund—. I'm not going to attempt to say their names; you know them all. So, of the three businesses that closed—obviously you've talked about Rutherford—during the fund's life—and you may have answered this—was the entire investment lost or are you still a creditor?

Yes, we are still a creditor, but I would say that the chance of recovery is very, very low.

How do we measure that? 

Well, I mean, they've been written off to zero, so the answer is, 'Very low'.

Okay.

All three are written down to zero. On one of them, there is something called deferred consideration, which—

That's what I mean—

In a kind of extreme event, we might get some money back, but I don't think so. But there is technically a possibility.

You just said there that we might get money back. I'm not interested in that. I'm interested in whether it will come back to us for further—[Inaudible.]

No.

Thank you. A final question from me. I think you've already answered this, but I'll ask it anyway so that it's clear, and this is what we want—that clarity. Did the fund secure any return from these three investments in the form of dividend or interest? Obviously, Rutherford Health closed most recently, and there was—[Inaudible.] Who wants to answer that?

Not that I'm aware of.

No. During the life of the investments when they weren't failed, the answer is 'no'.

Okay. Thank you very much, Chair.

Thank you. I'm not sure—. Correct me if I'm wrong, but I didn't hear an answer to the question on what ongoing costs are associated with holding the four investments.

Sorry. We've taken responsibility for that for no additional cost. These four investments, relative to the size of our investment portfolio, are very small, and we'll just manage it with the same team that would manage our other life science investments.

Okay, thank you.

Chair, may I just raise two answers to the Members' questions previously? So, on fees, excluding arrangement fees, which are commercial: an original figure of £8.5 million, expected to reduce to £7.7 for the reasons Rob mentioned. And on accounting treatment, Rob mentioned over two years. So, in year 1, 2021-22, an ECL, expected credit loss, was raised of £10 million, which has then been converted to RDEL in this year, and the same will happen next year, if you see what I mean, so the balance will be an expected credit loss this year converted to RDEL when it's actually all closed off and concluded. 

Thank you. Mike Hedges.

Please correct me if I'm wrong on this bit first, and then I'll come on to some other questions. My understanding with life sciences is that they're either very successful or they fail. There's very little just ticking over in the life science market, and it's unfortunate; if you had one great success in there, everything else would be forgotten, because it would have taken us on. Is that a fair description of the market?

I think that feels pretty fair. I mean, you used the term 'binary', didn't you, in discussions the other day for a lot of these types of investments.

Yes, I would say 'binary' is a good description, but there are also very, very clear demarcation lines, because you obviously have to develop an idea, then you go to pre-clinical testing, then you have to go to clinical trials, and each stage of those could be a go, no-go point. I can give you an example of a business that we invested in, just to show how—. This is a very simple example. This is a company called PulmonIR. This was invested by the development bank. It was a spin-out from Swansea University, focused on developing a clinical diagnostic for chronic obstructive pulmonary disease. This disease affects more than 330 million people worldwide, and latest estimates suggests it costs the UK NHS £1.9 billion per year. So, as an investor, my first look at that is saying, 'This is a very big market, a very significant prize if you find a successful product to deal with it.' Between 2016 and 2018, the development bank invested £195,000 in total, alongside co-investors IP Group and Swansea University Innovation Fund. Following the funding of the manufacture of a prototype in 2018, 18 months of phase 1 clinical trials conducted in partnership with Cwm Taf Morgannwg University Health Board proved to be inconclusive. The company was subsequently shut down and formally dissolved in September 2021. A lot was learnt in that process. Not a huge amount of money was put at risk—but a sizeable amount—but it was binary. Ultimately, the solution that they were coming out with didn't work. 

Of course, if it had, you'd be talking about a multimillion-pound company. 

Undoubtedly. 

Could I just add to that? There is a slight exception to that. I think, for the vast majority, that's true, but if you take Simbec, which was invested in via the fund, that was a revenue-generating business, which was turning a profit because it was offering a service. So, within life science, not every life science business is binary; all of the ones, I think, that rely on clinical trials are, but there are other businesses that are lower risk that can make up a portfolio in life science. 

Okay. I'd love to discuss that in greater detail, but I'm sure the Chair won't let me. On the performance framework, I can read you a load of numbers out, and you can tell me whether they're right or wrong, but what's your understanding of how many jobs we aimed to create, and how much private sector investment we aimed to raise?

I think this is an important area in terms of lessons learned, because I suspect what was being said about potential job numbers at the outset was overconfident or overambitious. You've made the point, Mr Hedges, about the quality of the jobs and the importance of the ecosystem in respect of life sciences, and I think that's one of the things that we would look to consider in any new departure in this area. Giles has already described the work that the bank is doing in respect of life sciences. On fund expectations, the original plan was to have fund-level investment that matched, on a one-to-one basis, the £50 million. 

It was an ambition to raise £50 million against the fund. The contract actually said that the fund manager had to make endeavours to do so. We did challenge the fund manager, because there was clearly a failure to do so, and this was reported in the Regeneris report and the auditor general's report. One of the things the fund manager cited—and I think it's probably fair—is that, during the initial phase, so prior to them making all of the investment, so from 2013 right up until almost early 2016, there was an ongoing auditor general review going on, and the fund manager felt that they couldn't go to the market until this thing had been concluded. And by the time it had been concluded, it was almost too late. And I can understand that. I think you would have to disclose to any future investors that this fund is under investigation. I think that is a mitigating factor for the fund manager, in fairness. 

In terms of overall outcomes, to your point, Mr Hedges, I think we talk about 300 plus high-value jobs, 50 PhDs based in Wales. There's a lot of other spin-off benefits that have come from this endeavour, and I think that kind of wider framing of what we're trying to achieve, and why, is important. 

And patents. 

And patents, yes, as well. 

Okay. Thank you for that. I think you just said there were some problems about the robustness of some of the initial targets and projections. 

Yes. 

But people do tend to be ambitious, they do tend to look on the bright side of life, as it were. So, I'm not criticising you for that, but I think, perhaps, a more realistic appraisal in future would be helpful. 

Yes, I think that's fair. 

The other thing is that you talk about inward investment. Do you mean inward investment as in overseas investment inwardly, or do you mean local investment, or do you mean investment via the stock exchange and the alternative market?

Do you want to answer that one?

Basically, we mean businesses relocating in Wales, in a form, be it from the UK or globally. And the only other measure I was going to mention is, in terms of the investments made, we shouldn't forget that there was nearly £273 million invested by other parties as well in this same group of businesses.

Yes.

And the level of individual deals.

At individual-deal level, £270 million, of other people. To your point there about confidence in these investments and what they were doing, our fund was investing alongside the £273 million, which does show a level of confidence outside, if you like, the fund itself.

Can I just bring in Natasha Asghar?

Thank you so much, Chair, for allowing me to ask a question. Gentlemen, I'm 100 per cent behind what my colleagues Rhianon and Mike Hedges, have said—we are all genuine supporters of this industry, going forward, developing and thriving in Wales. But the one thing I've noticed, having gone through the figures, is we've hardly set the world on fire, have we? Let's be honest. We've put a lot of money into these in the past, in these various industries, various companies, et cetera, but the profits aren't exactly, like I said, setting my world on fire. So, I just want to know, going forward, what confidence can you give me and others, when it comes to actually investing in these companies, which we want to see you investing in and not having that worry and fear in you that, if we do put money into it, it's going to result in a loss. What are you going to ensure that you do to perhaps provide that assurance to us and the Welsh public that we are going to go ahead and make profits as opposed to losses, and then sit around this table, like we're doing today, and say, 'Actually, we've saved ourselves x amount of £100,000, £1 million'? None of us, like I said, want to see a loss, but we also want to see this industry thrive. So, what exactly are you going to be bringing to the table now to ensure that this doesn’t happen, going forward?

I think that is an interesting question, because if we go back to the point that Mr Hedges was making and Giles responded to, if Rutherford had gone a different way, we probably wouldn't be in front of you because the fund would have done what it needed to do at the point it closed, and so on. I don't think any of us—. Didn't we hear from the chief executive of the British Business Bank this week? They've just posted—

A £120 million-odd loss, wasn't it?

Yes, compared with last year, you were saying it had been—

A £600 million profit.

So, things fluctuate. We invest as wisely as we can, using the expertise that is available to us, but we've learned some lessons from the operation of this fund. We can't give any guarantees about success. And I think the other point I would make is, at the end of the day, this was about economic development—economic development for Wales. That will, to some extent, come with a cost. Nobody wanted to post a loss or to be having this component of this discussion with you today. But this was about developing the life sciences sector in Wales, and there are lots of good stuff that has come from this process, and we got a return on part of the fund, just not the whole lot back, basically.

So, let me just follow up. You mentioned Rutherford as the most recent example, which we're all aware of. Rutherford, obviously, is dissolved now, or what have you. But I just wanted to ask you at what point did you know that this was going down the wrong road, because, as an organisation, as a company, as a development bank, you think to yourself, 'Okay, we've made this investment. Things aren't going right. We need to either step in, step up, or get them to step up their game.' So, at what point were you aware, because we as politicians found out a bit late in the day?

I think we all knew at the same time, didn't we?

Well, yes, I would say that I agree with that. So, firstly, you have a fund manager that has a very specific target. I would say, in the world of fund management contracts, it was a challenging one, because they'd been asked to invest £50 million specifically in the life sciences sector and specifically in businesses that are in Wales or are going to relocate to Wales. So, very, very narrow criteria. And to be fair to them, they did that. They managed to do that. They didn't raise the additional £50 million, and my colleague has discussed why that was the case. But, they managed to achieve that.

Within those individual businesses there were successes and failures. Simbec-Orion is a successful business that they exited that had had significant return. And the other businesses didn't turn out to be that case. But there was a point in 2018 when the valuation of the fund was £70 million plus. So, there's an element of timing, there's an element of the success or failure of individual businesses. In the case of life sciences, I think it is the case that you are relying on one or two very, very successful businesses compensating for the risk you're taking on some others that weren't so successful.

But I'm just asking, in relation of having a fund manager in place—. Yes, of course, the element of investing the money, putting it into the business, I completely accept and respect that. But if, for example, a fund manager is made aware that this business isn't going anywhere, it's not thriving, it's not flourishing, there are options, and there are fund managers out there who do step in and give potential suggestions on how to improve it. So, I'm just saying, where was this fund manager when it came down to Rutherford, for example—we'll just use that example—to say, 'Okay, if it's not working for you, yes, we've given you the money, we've done our job from that side as a fund manager, but here are the options. Here, we can try and do this, this and this with the Welsh Government, with a private equity fund, whoever, and turn it around'? Did that not come to the fund manager's thought process at the time?

We had extensive conversations with the fund manager in the lead-up to June. We were not aware that the company was in such severe—neither the fund manager nor us were aware—in such financial distress, and they were pursuing, almost right up until the eleventh hour, options to actually sell at a profit. So, really, this one was genuinely a shock.

I think one of the other things in terms of how we can prevent these sorts of things, there were two significant almost UK or global events that occurred that impacted these investments. The first of them was the loss of Woodford. Now, Woodford was one of the major co-investors in life science businesses across the UK, and he heavily invested in these companies. So, that loss basically made it very difficult for the fund manager to find follow-on funding. Giles mentioned liquidity, and liquidity is everything. So, these companies basically had to find a new supplier of cash where they were in this position where they call it 'cash ban', where they're actually spending money.

And the second thing, particularly on Rutherford, was the impact of COVID. I think that was underestimated by the fund manager, and that was underestimated, I think, by the company. They lost contracts, or didn't succeed in the contracts that they planned to do because the NHS's attention had turned, quite rightly, to the impact of COVID during that period. Now, for a very capital-intensive business, that's a nightmare scenario. You've got lots of bills to pay; you've got a huge balance sheet to manage, and yet the cash basically turned off. In terms of having a friendly investor who would see you through that difficult time, Woodford had gone. So, there was a number of things that kind of happened at that time that were actually quite extraordinary, which impacted those two investments. In reality, certainly Rutherford was a very ambitious investment. I think it would have been fantastic for Wales; I think it would have had an amazing impact on the NHS, for example, in Wales, and it's a real shame that it didn't succeed.

I agree. Thank you.

Can I bring in Rhianon Passmore before Mike comes back in?

Thank you very much. Some of the points have already been touched upon, but I think it's absolutely the crux of the matter. I mean, look, I think it's been said, and I don't think we've said it enough, we need to make Wales a centre for life sciences, and we have to be able to attract them to it, and this is a mechanism to do that, and it has been 50 PhD jobs and others, et cetera, et cetera. They're invaluable; that's not about profit, is it? However, equally, on the other side, my question, really, and I think I would like a response, if it's possible, Chair, in full, is: is it possible—yes, we learn lessons from what's happened, and I've already asked the question about having the skills in-house, if this is going to be a way forward for us in Wales—and do we really have an ability to put safeguards and protections in place, because, at the end of the day, this is market judgment? When it gets to that point, it's inflection points, market sales. So, my question, really, is: is it possible to put safeguards in place? We are using public money to do this.

I think—[Inaudible.]—it's a really fair question. I think, just to carry on from the Rutherford example, just like a pub, they lost their market overnight, and that was something we couldn't predict. But what we can predict and I think what I'd point to is, post the Regeneris report, post where we were the last time we were in front of you talking about the fund, we understand better the risk pool. So, the life sciences fund, in isolation, in venture capital terms, is quite a small fund. Therefore, you have a small number of investments, and, to Giles's point, the risk of failure in that fund has real potential to totally turn its direction. I think, if you look at what the bank's doing now, we have a new scheme, the Wales flexible investment fund, a much bigger fund that's able to do all these investments in different ways, but very much spreads the risk. So, it's looking at different levels of companies. Giles mentioned Simbec, for example, as being a different example to some of the other life science companies. So, we're in the round able to ask Giles and the team to better manage our risk portfolio, if you like, of balance and benefit.

That's what I'm asking you—how do we better manage it, and, really, outside of that better management, my question, really, is is it possible to put safeguards and protections on this. And I think it's not; it is about management of that, isn't it?

Well, by definition, it is about management, and Giles may wish to talk about life science investments we're doing now. So, beyond the fund, we're still investing in the life sciences fund, but in a broader portfolio. I think you mentioned earlier that, fundamentally, when you're investing in venture capital or any equity investment, there is risk, and businesses will—. Some will win, some will fail. So, our process and approach now is very much about a pool of risk and different approaches. So, I think very much learning the lessons from that doesn't stop us investing in the life sciences fund. We still have these vehicles available; we're just doing this broader portfolio. I don't know, Giles, if you wanted to speak about the sector now, as well.

Well, I'd say that it's impossible to find risk-free investments. The principle of a risk-free investment is generally Government bonds, and then you go from there. So, there's always going to be a risk, and in these investments, as my colleague said, more than £200 million was attracted from other investors who also believed in these businesses. So, it's not as if this was hubris or insanity by the fund manager in picking these companies; they were legitimate companies with legitimate opportunities. When you've only got a very small number of businesses in a portfolio—nine businesses, 11 investments—it is very, very concentrated, and a failure of any one of the investments would've caused significant damage. Now, in the development bank, we have 1,300 investee businesses, and so the diversification is significantly greater. There are a very, very few investments that would create an existential threat of this nature.

When I worked in commercial—

Sorry, Chair, can I just ask one tiny one more, because I do have to leave? In terms of who we're investing in, are we assured, in terms of our protocol within Welsh Government, that it's not going to unethical companies?

Obviously, every investment we do, whether it's grants or through the bank, we do due diligence on every action we take, and conditionality and the rest. I mean, I can't sit here and categorically say there'll never be an issue, but, obviously, we make every intent and effort to ensure we don't. We want to invest in the right businesses in the right place with the right measures. And I mean this is an increasing trend. So, the bank, for example, is looking at areas such as decarbonisation in that rounder area, about what we can do and what we can do better.

Thank you. I was just going to comment that, when I worked in commercial lending, I engaged with clients, generated proposals. The underwriters then said 'yes' or 'no', but then a further team then monitored continuously the investment—of course, based on scale, with far more attention to the larger than the smaller loans—looking for the almost green, amber, red assessment of risk, as time went forward. And I think, in essence, that's the core of the questioning: what is integrated into your system now that should better flag up problems coming down the road?

So, an investor individual will find an investment, make the investment proposal. It goes to what's called PN, at which they have to justify to a senior peer of investment leaders the investment. Above a certain threshold, the investment will go to an investment committee, which is an independent group of senior managers and non-executive directors of the bank, who sit and opine on the investments. Once the investment is made, they are monitored on a regular basis. We have a monitoring team, and then if a business is in financial difficulty, we have a grading. We have five levels of grading. Anything grade 3 and below goes into what's called a risk team—a team of specialist risk officers who manage the portfolio, manage that business right the way through. And, in many, many cases, businesses that have gone through financial difficulty, we will continue to support, and actually come out of the financial difficulty and continue to prosper.

Okay. Mike.

Mine is a very simple question: how many of these businesses spun out of university research? And the second question is: is there any opportunity for a new company to grow out of any of them, following on the work they've already done?

I don't know the answer to that question.

I think we'll have to come back to you, Mr Hedges, on that, because it's a bit more detail. But, I mean, we're happy to try and do the investigation on that.

Thank you. And the first question, how many spun out of universities?

I don't think so. But, again, I'll have to come back on that as well.

Okay. Fine.

You mentioned in your case study one that worked with Swansea.

Yes, although that's a DBW business.

The principle you're setting out there is a really key and important one. So, through the whole services that come under Andrew's portfolio, we are looking actively to spin out businesses in all sectors, including life sciences, out of universities, with the advice and support of Business Wales, the bank, innovation. So, I think—

And a key part of the innovation strategy.

And a key part of the innovation strategy, absolutely.

Thank you.

Okay. Thank you. Can I bring in Adam Price, please?

So, this is on the financial component, the investment component. What would the bank look at, generally, in relation to the—?

It's a very interesting question about other funds. I'd have to come back to you, Mr Price, on that. It would be quite difficult, because of the specificity of the rules and the investment rules in relation to this fund, namely, that it's to be in Wales, it's businesses to locate in Wales, and given the size of the fund. But there are a number of life sciences funds in the UK, and we can probably find some evidence on those to come back to you on.

Could I—? [Interruption.] Sorry.

Mr Hunter first, and then—.

I can probably answer the two. Probably, yes. If you go back to the fee structure that we were talking about and the carry, most fund managers would make about 50 per cent of their total income from carry. That's actually the gain share they make over the hurdle rate return. So, if you return—. For us, it was 8 per cent; so, if we'd received 108 per cent of the original investment, anything over that would have been shared with the fund manager. Giles pointed out that, in this one—and it makes it incredibly difficult to benchmark it—it was actually, on a global scale, a very small fund. It was a £50 million fund, it had aspirations to be £100 million, and, in this market, that's still actually quite a small fund. And it was across just nine businesses, 11 investments in nine businesses—

It was time bounded as well.

And it was time bounded. So, in terms of benchmarking against that and finding out what the average would be, I think your average is probably, aspirationally, about right, if you averaged it across. It's just that this didn't have the number of investments to spread that risk—it was very concentrated. So, I think that—. I don't know, Giles—.

I would agree with your assessment. The 25 per cent IRR is the sort of investment return that investors would expect from a specialist fund manager in this space. But, to get to that level, I would say there will be a very large number of failed businesses and a very small number of extremely successful businesses in the investment. And that's the unusual feature of this type of investing; it's more akin to venture capital than conventional private equity investing.

Yes. I think it's worth noting—. So, for example, the Ontario teachers fund is one of the top four pension funds in the world, and the other Canadian pensions—. So, the size of these funds is hugely significant, and what they will be doing is not divesting directors themselves—they will be appointing fund managers, in the same way as the Welsh Government did with Arix, who specialise in investing their moneys in certain sectors. So, they have an extraordinarily diversified portfolio across numerous investment sectors and life sciences will be one of those, and it will be investments that they'll make in Canada as they will elsewhere in the world. I wouldn't be able to tell you exactly where they invest, but I would also guess that they will have invested in some businesses that won't have succeeded. 

Yes. We've been in discussions with the Welsh Government on this, and we're doing, if you like, a lessons learned, a final evaluation of the fund. We're going to undertake that as the development bank. We're not just going to look at the financial aspects of the fund; we're going to look at everything else it's delivered, any other lessons learned, which we can feed into our processes going forward. And we're aiming to do that by the end of this financial year—yes, the end of this financial year. So, we will be reporting that to the Welsh Government. 

And that timing gives the committee the opportunity to make any observations off the back of our evidence today and to feed that into the process as well, I think it's fair to say. 

Absolutely, and to feed these comments into the review. 

Yes. 

As Duncan and colleagues have said, any loss is regrettable. I think that's the first thing to say. Obviously, we would have preferred the fund to have made more money—I think that's the first thing to say—but we've delivered lots of benefits through the life sciences strategy and, indeed, through components of this fund. We've talked about the jobs created, the PhDs, the patents. We've talked about the ecosystem in Wales that's been developed I think as a result of all this. Giles pointed out that, against the spec, which was to get businesses in Wales, that was delivered by the fund manager. That was no mean feat in terms of prescription, in terms of what we were talking about in relation to the fund. 

And back to the point you were just making, Mr Price, about diversification and size of the investment portfolio, this is something that we will consider now in the context of the wider portfolio of investments held by the bank. 

Colleagues may have a view on that. I think of the three, Rob talked a little bit about Simbec being revenue generating, so I think across those three companies there was a slightly different level of risk—one higher risk, one lower risk, and something in the middle. I don't know if Rob wants to comment on that. But I think the concentration of the fund against the scale of the overall fund was an issue, and risked the outcomes being skewed by one or two key investments not coming off. Is that a fair way to put it?

Yes, and there's no doubt—yes, the fund was over-concentrated on those three, there's no doubt about that. Part of that was of course the other £50 million wasn't raised. If the other £50 million had been raised, it would have brought the fund actually back into balance, and it would have brought these investments back into balance in terms of that portfolio approach. But Andrew's right—we've got Simbec, which is revenue generating, and we had a very good sale on that one; Rutherford, which was very capital intensive, but it was a business that had a very good business model and would have become revenue generating; and then, within that, so it's kind of a mini-portfolio of its own, we had ReNeuron, which really was very high risk, but also potentially extraordinarily high return. So, yes, it was concentrated, but those three businesses together actually were diversified in their own right, if that makes sense. 

I was just going to add, if I may, on lessons learned as well—we've covered a little bit—since this fund came into existence we really have tried to learn the lessons of what it has told us and what we've learned by spreading our risk more. The fund was part of a wider life sciences strategy, which continues through the work of the life sciences hub. We continue to focus on investing in life sciences companies through the broader work of the bank, but also it operated for 10 years, so, even for some of those that haven't made it through, for five years or more there was further high-value employment that we've seen through. So, I think there is a—. I'm really looking forward to seeing the outcome of Rob's work, the outcome of the committee, to ensure that, the next time we're doing something in this space, we can really understand everything that's happened over the last 10 years. 

Well, I think you make a very important point about learning from everything, whether that's a success or a failure, and I think, understandably, because of the nature of these things, we tend to focus on the things that haven't gone so well, as you point out. Whether there are specifics that we can learn in relation to Simbec from the fund management activity there I don't know. 

Well, I think my colleague mentioned that, unusually, Simbec was a revenue-generating business. It's a services business in the sector, and so presented a lower risk; in the context of a portfolio, quite a good business to have alongside businesses with a more binary result, as I mentioned earlier, but, again, not good enough in the context of a fund that was relatively small and concentrated, as you mentioned earlier. 

Also, I would just add I think it's a really good question about how the fund manager—I mean, we're not the fund manager, but—how the fund manager engaged with the business, and whether that had a really positive effect or not. That's something we'll ask the fund manager and we'll explore further, because I think it is a really good question. 

Okay. We've only got six minutes left and we're only halfway through the questions, so—[Laughter.] I'd be grateful if everybody could be as succinct as possible and not repeat anything that's already been said. Adam, do you want to—?

I think most of the jobs in question were sustained for more than five years. Would that—?

Five years, yes.

Yes. I think we've already said that job targets at the outset were probably a bit ambitious—we discussed that with Mr Hedges a few moments ago. We talk about 311 jobs safeguarded or created. I think most of the jobs safeguarded would have been in Simbec.

Yes. One hundred were safeguarded in Simbec and 40 new.

And the original plan, I think, would've been based on the total fund of £100 million, which, as we know, didn't come to pass. So, I mean, there's a set of issues there that takes us back into some of the lessons learned that we've already talked about. I don't know whether there's anything else you want to say about jobs.

Well, I think the lessons learned and the fund close-down plan—so, the Member's question—will include the whole final picture on jobs and the breakdown accordingly. So, I think we will be able to provide that back to the committee, I think, as Rob indicated, by the end of the year.

Thank you, yes. We'll follow up with that and some others as well, if that's okay with you. But, Natasha, you have the next question.

Yes, thank you so much. Just relating to the Regeneris report, it highlighted that even the apparent original target of 750 jobs for a £50 million public investment offered actually relatively poor public value for money, based on a gross public sector unit costing £67,000. Your written evidence, I believe, states that the cost to the public sector is actually £87,000 per job. Can you please just confirm for the record how this £87,000 figure has been calculated? And I'll just throw in a sub-question, because I know that we're short for time. What is the range in the cost per job for the individual investments, and what benchmark or benchmarks do the Welsh Government and the development bank typically use to assess value for money from a cost-per-job perspective?

So, to be very brief, I think the figure of £87,000 is probably just a straightforward arithmetic calculation based on a loss of £27 million versus the number of jobs created. We don't think this is particularly helpful from a benchmark perspective, because the fund is so specific, and for all the reasons that we've set out is probably not—. Well, it's quite unique, I think, and therefore, it's difficult to say. In terms of ranges, it depends on what you're after and that's a little bit back to the point about what the fund is for; it's part of a wider life sciences strategy and a contribution to what we're trying to achieve for the sector as a whole. So—

I totally agree with you, Mr Slade, but we have to look at it also from a cost perspective—that's our job here.

No, no. I understand.

We wouldn't be doing our job if we weren't asking you these questions, because it is public money that we're dealing with here. So, we have a responsibility to ask the questions, hence I'm asking.

Of course.

So, also with regard to the range in the cost per job, as I just asked, the individual investments, what benchmarks do the Welsh Government and also the development bank typically use to assess value for money from a cost-per-job perspective?

I think benchmarks are quite difficult, because most of our provision, as Andrew has mentioned, is grant provision. So, in effect, I can tell you that a Business Wales job created is in the region of £2,500. The aim of this fund, obviously, is a zero cost per job, as is everything that the bank does in that we intend to get a return. But what we're reporting to you, obviously, is the fact that this fund, in isolation, has lost £27 million, hence the cost-per-job equation. But I think what we take into account in setting up these funds with the bank, or any other entity, is the whole suite of data. So, cost per job, absolutely. So, in a more simple service, like Business Wales, as I mentioned, they're more straightforward. In a bank fund, we're looking at a suite of measures from investment induced, the value added aspects, increasingly decarbonisation and other areas, including the cost-per-job metric. If we were doing a more standard loan-type provision, micro loans, we can use applicable benchmarks in a more straightforward way. But, like I say, each scheme, we have to look at its factors and uniquely assess how it's going to work.

So, you assess every single scheme, every single group, organisation or business that comes to you on an individual basis; it's not a set process. Because I think all of us, many of us who've come from financial backgrounds, we have certain measures that you have to—

So, there are clearly measures we do and we would benchmark against, but I think this is a particular fund that we've had to deploy a different way of thinking around. And likewise, if we were doing tech seed or whatever else in the bank, we apply the range of metrics, including cost per job. Now, clearly, with Rob putting forward a case to us for assessment, we would be applying things like Business Wales, innovation and all the other benchmarks we use, traditional grant, to assess where that value hits. But I think this fund in particular is quite difficult to benchmark for the reasons that were just set out.

And the bank wouldn't necessarily look at it from a cost-per-job perspective.

It's investment.

No, we would look at it as investment per job, yes, because the ultimate aim, and, actually, across the portfolio we would expect the cost—. It should be zero, because we would expect, across the portfolio, to receive that money back. So, when we're putting business cases forward, ours always show an investment per job to the Welsh Government.

Okay.

Mike Hedges was to have come in now. Do you want to ask something succinctly?

I've got one question in two parts, and nothing else at all.

Thank you.

The first one is: has the investment had any positive effect on the life sciences sector in Wales? Secondly, what has happened to the intellectual property and patents?

I think we'd say something of the order of 60 patents driven. Those will rest with the company. I think we will argue that the fund has had a bearing as part of the life sciences strategy on the sector and its place in the Welsh business ecosystem.

But if one of those patents does well in the future, and what have you got, 60 of them, or a large number of intellectual property—? If one of them does well, do you get a return on it or does somebody else get a return on it, who is the patent or intellectual property rights holder?

Well, it entirely depends—

It depends.

If they're in the businesses that we still hold, and they then become successful, obviously, we're still investors in those businesses and will benefit from them. I couldn't tell you what happened to the patents in the businesses that were liquidated, as to whether they—. But, generally, there are patent companies that buy untested patents and they sit on them forever, and you've seen litigation between various organisations when somebody pops up with a patent that they bought by chance many years ago.

Yes, but—. Sorry, I thought it was very straightforward, what I asked for. Somebody's got a patent, let's say, to print paper here more efficiently. The company has now gone out of existence. The patent hasn't disappeared—

No, the patent won't disappear, but it will be an asset of the company that would have then been sold by the administrator or the receiver. So, it would entirely depend on who ended up receiving that.

Fine.

Thank you very much indeed. Time has caught up with us. I'll have a very short closing question and then, as we've indicated, we'll write to you with the residue of unanswered questions. In July, the Minister addressed a question about the rationale for an external fund management model as opposed to the fund being managed by Finance Wales. What is your take on that issue and on what might happen in similar circumstances today, and when might an external fund management model still be appropriate, and what would you do differently in setting one up?

The principle of having specialist fund managers is completely standard in the industry. So, all of us will have pensions, investments or individual savings accounts that will be invested in different parts, and you'll think that Aviva is investing your money, but, unfortunately, when you actually look behind the scenes, there'll be multiple fund managers investing parts of that money, with each sector specialisation, whether it's far east equities or commercial property, et cetera. So, there will be circumstances—. The principle of having a specialist fund manager for a specific task is quite standard, and if the Welsh Government came to me and asked me to make a proposal in relation to a very specific economic objective for Wales, we would have to consider whether we had the requisite skill set to deliver that or if there was somebody better to do so, and that's effectively what happened with the Welsh life sciences fund.

Okay, thank you. Thank you, all, for attending today and answering our questions. As always, a transcript of today's meeting will be published in draft form and shared with you for you to check for accuracy before final publication.

We are going to go into private session in a moment. Would it be possible if Mr Slade could just stay—

Yes, Chair.

—for a few short minutes just to touch on another point related to another matter?

I propose in accordance with Standing Order 17.42(ix) that the committee resolves to meet in private for the remainder of today's meeting. Are all Members content? Thank you. In which case, I'd be grateful if we could be switched into private session.