The plans, which are open to consultation envisage a new public-private partnership arrangement whereby both public funds and money from institutional investors is used to help UK businesses achieve their growth potential. The government said that its investment fund “would likely need to be on equal terms with private investors” to comply with EU state aid rules.
The consultation is being run as part of the ongoing patient capital reviewcommissioned by the UK government. The Treasury has defined ‘patient capital’ as “long-term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses”.
According to the Treasury’s paper, while “UK firms receive about the same levels of funding at their early stages of development compared to the US and the rest of Europe”, funding thereafter often dries up in comparison to US counterparts.
To address the issue, a new investment body could be set up to replace and build on the role currently performed by the European Investment Fund (EIF), the Treasury said. The EIF currently invests approximately £900 million into UK businesses each year. The Treasury said, though, that it has yet to be established whether the EIF will continue to invest in the UK post-Brexit. It said it is “exploring the potential for a mutually beneficial relationship with the EIF once the UK has left the European Union”.
Other options could see the UK follow Canada’s lead where the government would “invest in a series of new UK-specific fund of funds”. Under that model, the government would make an initial investment which would be “time-limited” and complimented by additional private sector money. After a period of time, the institutional investors would be able to “reallocate capital to the most productive fund or fund of funds by themselves”.
The government said that, to address a potential lack of investor appetite, it may have to “increase its own direct investment into venture capital funds” as a means of supporting innovative UK businesses.
Specialist in corporate transactions in the technology sector Andrew McMillanof Pinsent Masons, the law firm behind Out-Law.com, said: “There is a definite need for funding at this level in the market. The EIF has denied that it is pulling out of the UK, but has stated that due diligence on UK projects ‘needs to take into account a wider range of factors’. This may indicate a reluctance to invest further in the UK in the current climate, so it is welcome that the government is considering active steps along the lines proposed. It should also be taking steps to encourage non-EU investment into the UK.”
Russell Booker, a specialist in corporate transactions at Pinsent Masons, earlier this year said he hoped the patient capital review would prompt the creation of an additional form of tax advantaged venture capital or other scheme to incentivise long term investment in UK science and technology companies.
According to the Treasury’s consultation paper, though, those leading the patient capital review are not “currently minded” to propose new tax incentives to “support greater retail investment in listed patient capital funds”.
Booker said: “I can see why they wouldn’t give tax breaks for investment in listed companies who invest in the area but investors are taking a long term view and there should be some recognition of the fact that they are putting equity capital at risk on a long term basis. If that does not happen there is a real risk that investors will invest in shorter term opportunities.”
The Treasury said, though, that it could take steps to make it easier for pension funds to be invested as patient capital, and that it is keen to hear from stakeholders on how it might help “increase investment into university spin-outs“.
McMillan said: “The tech sector relies upon an ecosystem being in place. The level of investment into university spin-outs will be academic if we can no longer attract the talent to the universities in the first place. So, funding for universities, in particular, science funding, feeds directly into the health of the tech ecosystem within the UK. I think these are the two weak points in the UK ecosystem: universities – currently strong but a potential weakness in light of Brexit; and scale-up funding – already difficult, but likely to become more so in light of anticipated reduction in UK activity by EIF.”
The government’s consultation is open until 22 September.
UK chancellor Phillip Hammond said: “Britain is an innovation powerhouse and it’s vital that we make sure our cutting-edge firms have the funding they need to meet their potential and conquer new markets. Meeting this challenge will boost our productivity and enable us to create more well paid jobs across the UK.”
Daniel Morgan, director of regulation and policy at Innovate Finance, a UK trade body which represents hundreds of businesses in the financial technology (fintech) industry, said: “Currently the lack of effective supply of capital continues to hold some UK firms back from scaling and commercialising this innovation successfully. As we exit the European Union’s funding frameworks such as the EIF, having the right tax incentives and policy leavers will be more important than ever. This review should use this opportunity to look at the entire funding escalator to ensure UK firms can scale here and compete globally.”