Bank aims to help ambitious businesses access long-term capital.
Many of the measures to help SMEs scale up will be introduced via the British Business Bank, with the bank taking on the implementation of an innovative package to increase patient (ie long-term) capital in the UK. This derives from the recommendations of the Treasury’s patient capital review. Over time, the measures are expected to boost UK productivity by helping businesses with the ambition to scale up to access the capital they need to fully achieve their growth potential.
Expanding patient capital
Patient capital will be increased through three means:
- A new £2.5bn British Patient Capital entity will be incubated within the British Business Bank. It will invest commercially in venture and growth capital. The key innovation is that it will be designed from the outset with a view to future sale to the private sector – subject to a value for money assessment – once it has built its portfolio and track record.
- British Business Investments – the bank’s existing commercial arm – will cornerstone a small number of large-scale funds of funds managed by the private sector. This will in turn catalyse patient investment into high-potential businesses. A request for proposals to manage the first phase of these funds (up to £500m) will be issued early next year, and two subsequent phases are possible subject to the market response.
- Government has committed to maintaining the bank’s enterprise capital funds (ECF) programme with up to £1bn of commitments over the next 10 years through British Business Finance, which would be expected to support at least £1.5bn of new investment. This will provide stability in the market, and publicly recognises the central role this programme plays in the bank’s equity offering.
Alongside the Treasury, the bank will be exploring whether to introduce a new guarantee programme designed to enhance returns in debt/mezzanine investments but targeted at funds rather than banks. This would likely be similar to the small business investment company programme already operated by the Small Business Administration in the US.
The overall aim of this package of measures is to increase access to longer-term finance for innovative, high-growth smaller companies so they can achieve their full growth potential. This will be done by crowding in private capital, expanding investor diversity, and utilising and developing private-sector fund management expertise.
The goal is to leverage the British Business Bank’s own position as the second largest limited partner in UK venture capital to demonstrate the attractiveness of this market. In the longer term, the bank’s ambition is to support the development of sustainable private-sector expertise in the UK, reducing the need for a permanent public-sector intervention.
In addition to these measures around patient capital, there are some other important areas to highlight in today’s announcement that will further enhance its role.
- The bank has been asked to create and deliver a regional angel investment programme. It says its research has clearly demonstrated an imbalance across regions, most markedly in equity finance, and this is one step to help tackle that imbalance. The scale of the programme will depend on demand.
- Enterprise finance guarantee
Funding for the bank’s successful enterprise finance guarantee (EFG) programme has been extended for four more years and expanded to £500m a year, enabling the bank to guarantee £2bn of lending over that time. The programme will be taking on new lenders and offering a new asset finance option, which will enable it to further diversify the lending available to smaller businesses that want to invest and grow.
The bank has undertaken to carry out research in two areas of policy interest to the government. This reflects the bank’s being increasingly seen as the centre of expertise on SME finance for government. The bank has committed to:
- Exploring how intellectual property (IP) could be used as security to help innovative businesses with IP to raise finance.
- Undertaking behavioural research into how to overcome the specific barriers faced by female-led businesses in accessing venture capital.
Article from ACCA In Practice