AAA The UK’s new Business Growth Fund

The UK’s new Business Growth Fund

In July, six of the UK’s largest banks joined forces with the British Bankers’ Association (BBA) to form the Business Finance Task Force. The Task Force – consisting of Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, Santander and Standard Chartered – was set up to examine how banks can do more to help Britain return to sustainable growth.

Their report, "Supporting UK Business", was published this week.  It acknowledges the "special responsibilities" that banks must assume if the UK economy is to emerge strongly from the financial crisis. The report is also, no doubt, an attempt by the Task Force to counter the current tide of damaging public dissatisfaction with banks and their remuneration policies. In recent months, UK banks have been dogged by media-fuelled accusations that they are filling their bonus pools at the expense of UK businesses by restricting the supply of reasonably priced credit to viable companies.

The report combines a recognition by the Task Force that a private sector led economic recovery must be spearheaded by small to medium-sized entities (SMEs), with an understanding that, if these businesses are to be as active as the economy needs them to be, then banks need to facilitate their growth by offering financing solutions. The report commits the Task Force to a quick implementation of seventeen key initiatives that are designed to address three broad areas: improving customer relationships, ensuring better access to finance, and providing more information on and promoting increased understanding of business finance.

The Task Force has also proposed the establishment of a new £1.5bn ($2.4bn) Business Growth Fund, which is aimed at bridging what they perceive as an equity gap for businesses. The report identifies a gap in the traditional equity funding landscape – the availability of long term equity growth capital for businesses requiring between £2m and £10m. This is, of course, not a new idea: the so called "Macmillan Gap" was identified in 1931 and gave birth to the Industrial and Commercial Finance Corporation, founded by the Bank of England and UK banks [and now called 3i], and the equity gap has provoked a number of state sponsored interventions across Europe ever since.

The Business Growth Fund now proposes to do its bit by offering equity capital to businesses with a turnover of between £10m and £100m. This equity capital, they say, can then be used to stimulate other means of finance – traditional debt financing or trade finance – and so provide a suite of options to businesses. The details of the fund’s operating parameters and investment strategy are in the formative stages, but the report highlights several key aspects: the minimum equity stake that would be taken in any investee business would be 10%, with an average duration of five years, and the fund would seek to structure its investment through what it calls "innovative equity-like products" (such as redeemable preference shares), with a panel of lenders providing additional debt facilities.

The fund will operate with a two-tier approach to management that mirrors a traditional private equity fund structure. An operating board of executives will handle the investment and operational decisions, with a main board composed of representatives from the Task Force members and the Government, overseeing the fund’s infrastructure, internal governance and investment strategy.

However, with reports suggesting that the actual size of the fund in the first two years will be £300m to £350m, the headline figure of £1.5bn is by no means set in stone. The report itself casts some doubt on the fund’s final size by stating that the intention is to "build a substantial investment portfolio over a number of years which is expected to reach a total of £1.5bn, subject to rolling review as the initiative progresses".  The Task Force intends to invite outside investors to participate.  With the current hesitancy in the fund raising market, this may prove to be an ambitious aim.

www.sjberwin.com

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