Proposal on state risk capital has potential for life sciences

The government's investigator Hans Rydstad has submitted a proposal on how state venture capital should be organized. Properly implemented, the proposal has the potential to give extra impetus to the life science sector in Sweden.

The life science sector has a strong tradition in Sweden and is well placed to compete globally. In order for us to remain strong, however, strong investments are required and the government has shown a clear ambition to strengthen life science in Sweden.

A more efficient use of government risk capital is an important part of this ambition.

In spring 2015, government investigator Hans Rydstad conducted a review of state venture capital. The commissioner’s task was to make proposals on how the government’s financing solutions should be changed. The report “A fund structure for innovation and growth” (SOU 2015:64) proposes a new structure for state venture capital.

Summary of the proposal

The report proposes the creation of a new state fund called Fondinvest. The capital of Fondinvest will be partly invested in funds together with private capital. Investments are made according to a fund-of-funds principle, whereby state venture capital matches private investments in funds. It is then these funds that invest in companies. The funds that Fondinvest is proposed to invest in will focus on early-stage development of Swedish innovative companies with high growth potential. The business investments made by the funds are proposed to be in the range of SEK 5-50 million per project.

Of the 3 billion that Fondinvest will initially manage, 1.5 billion is proposed to go to a demonstration plant fund. This fund will make direct investments in new technologies or processes where production facilities or production units will produce and prove themselves on a commercial scale. The report mentions, for example, plants to use biomass to produce fuels or solar power technologies.

Initially, 1.5 billion will be invested in growth funds; together with matching private capital, these funds will have 3 billion to invest in growth companies. According to the report’s proposal, Fondinvest will invest in six to eight funds over time. The focus of these funds is not specified, but life sciences are mentioned as a priority area. The proposal states that no fund should be less than 500 million in total, and for life sciences it states that any fund should not be less than 1 billion in total.

SwedenBIO welcomes fund-in-fund solution

The fund-in-fund approach is largely in line with the proposal previously presented by SwedenBIO on how state venture capital should be organized. SwedenBIO sees a great need for market complementary capital that can bridge the investment slump that growth companies in life science need to get through. In life sciences, market-complementary capital is required in both the earliest phases (investments around 5 million) and in later phases (investments between SEK 50 and 100 million).

To ensure that investments are made professionally, they should be managed by established life science investors. The fund-in-fund solution is therefore preferable. Properly implemented, the fund-in-fund solution can also result in new funds, which is good for increasing the diversity of investors. The proposed risk asymmetry, where private investors have a more favorable return profile than public investors, is also necessary to attract private capital to the early growth companies in which the funds will invest.

If Fondinvest is implemented according to the proposal presented by the inquiry, it could be a capital injection that growth companies in life science in Sweden are in great need of. But this requires that sufficiently large sums of the 3 billion that Fondinvest has to invest are invested in funds focused on life sciences.

SwedenBIO’s working group for Business Development and Financing is now further analyzing the proposal for consultation.

Do you have questions or comments? Feel free to contact us.

Ingrid Heath, Vice President and Head of Policy SwedenBIO
0701 74 76 33

Mårten Winge, Chair of the Business Development and Finance Working Group.
0706 57 59 27