Friday, 6 November 2015

A LibDem initiative that the Conservatives have not killed - yet

The Business Growth Fund has been a success. As this article in the Indy last September described, the BGF was set up by Vince Cable in his first few days in office. It is bank-financed, but state-backed.

In 2011, the BGF, launched with £2.5bn from high-street banks, was criticised as a figleaf to spare the blushes of banks that were refusing to lend to small and medium-sized enterprises. Others worried that the BGF represented a return to the days when the state tried to pick private-sector winners. The rest of the private equity and venture capital industry fretted that the BGF would provide unwelcome competition, cherry-picking the best investments.

Four years later, those fears look unfounded. For one thing, the fund was given a mandate to invest between £2m and £10m in the businesses it backed, relatively small investments compared to the private equity houses. Moreover, it has been run at arm’s length from the Government and the banks, sourcing deals through a regional network of financiers, accountants and other agents. The BGF also takes minority stakes in the businesses in which it invests, rather than taking control. Sometimes, it invests alongside other partners, [...] but in other cases it is the only backer. Either way, it sticks to minority stakes.

For many entrepreneurs, that is hugely attractive. Young businesses often find that equity funding is required to take the business to the next stage, but their founders are reluctant to give up control of the ventures they have built from nothing.

For all these reasons, BGF has proved popular with growing businesses. After a slow start, [...] the pace quickened. Today, the fund’s portfolio includes almost 100 businesses, representing most economic sectors and every region of the country. [...]

The biggest achievement of Mr Cable’s initiative, however, may be to re-establish the idea of growth capital as a mainstream option for small and medium-sized businesses looking to grow. The banks themselves walked away from this type of investment years ago, while it is fair to say the private equity sector comes with a little baggage. Equity investment, however, has an enormous amount going for it, for both sides, as BGF is now beginning to prove.

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