Letter to the Chairman from Nigel Griffiths
MP, Parliamentary Under-Secretary for Construction, Small Business
and Enterprise, DTI
REGIONAL PRODUCTIVITY ENQUIRY
I am writing further to your request for written
evidence from the Small Business Service on the availability of
venture capital and loans to small firms in the regions in advance
of the Committee's evidence session to be held on 9 November 2004.
The enclosed paper considers the markets for
debt and equity finance, and their operation across the regions
of the UK. It describes the areas in which the Government has
identified specific market failures, considers whether there is
any regional dimension to these failures, and discusses the main
policy interventions managed by the Small Business Service.
To ensure continued growth of the UK economy
it is important that we seek to reduce the disparities that exist
in growth rates between the regions and make certain that sustainable
improvement is made in the economic performance of all English
regions over the long term. I welcome the Committee's inquiries
into this important area and look forward to seeing its findings.
NOTE ON REGIONAL ASPECTS OF "ACCESS
TO FINANCE"
1. OVERVIEW
1.1 Financial markets are key to the proper
allocation of resources within the economy, ensuring that businesses
can access the external finance they need to achieve their full
potential. The discipline of the market is also important in ensuring
that scarce resources are channelled to viable businesses: it
is in nobody's interests that propositions with little prospect
of success should receive finance.
1.2 The UK is widely acknowledged as possessing
one of the most efficient financial markets in the world, and
survey evidence shows that the financing needs of a clear majority
of businesses are met. Nevertheless, a small but important minority
of firms—typically innovative, growth-oriented businesses—continue
to face difficulties in attracting external funding, providing
a case for targeted government intervention to assist markets
where these difficulties create a barrier to enterprise and innovation.
1.3 This note considers the markets for
debt and equity finance, and their operation across the regions
of the UK. It describes the areas in which the Government has
identified specific market failures, considers whether there is
any regional dimension to these failures, and discusses the main
policy interventions managed by the SBS.
2. SUPPLY OF
DEBT FINANCE
2.1 Banks are the principal source of debt
finance, either in the form of overdrafts or term loans, but smaller
businesses are increasingly making use of alternative sources
of debt: leasing, invoice discounting and factoring and other
forms of asset-backed finance are becoming increasingly well used.
2.2 Evidence suggests that the availability
of debt finance has improved significantly over the past decade,
reflecting increasing economic stability and the increasing sophistication
of the business banking market. Research by the Bank of England
has emphasised the role of credit scoring systems in helping to
improve the supply of debt finance, and the Bank concluded in
2003 that there was "no real evidence of firms having difficulties
accessing bank finance".
2.3 However, while most viable businesses
appear able to access debt finance, lenders often rely on collateral
to support lending to SMEs, especially where the borrower lacks
an established track record in business. Not all business owners
are able to offer suitable security, and the availability of collateral
will be lower in regions where house prices and rates of home
ownership are low. Where no collateral is available to support
a commercial loan, and regardless of location, the SFLG offers
a government guarantee of 75% of the value of the loan, in exchange
for a 2% premium paid by the business to the DTI.
2.4 The SFLG has just been the subject of
an extensive independent review, led by Teresa Graham OBE of Baker
Tilly. The review confirmed that there is a strong ongoing rationale
for the SFLG—but, among other things, identified significant
geographical variations in the take-up of the scheme (see Chart
below). It made various recommendations to encourage a more consistent
availability of SFLG so that more firms can access the programme,
regardless of their location. Further information is contained
within the interim and final reports of the Graham review. The
Government has welcomed the review's recommendations, as has confirmed
that it will implement its proposals in full.
2.5 Where enterprises are unable to access
finance from mainstream lenders, often due to falling outside
lender credit risk parameters—even with SFLG—the Phoenix
Challenge Fund (PCF) has been able to help by providing finance
for enterprises through Community Development Finance Institutions
(CDFIs). This has been targeted at enterprises and entrepreneurs
in disadvantaged communities, both geographic and, thematic. Over
60 CDFIs are in receipt of over £40 million from PCF, mainly
capital finance for loan fund on lending but also including revenue
and some loan guarantee support.
2.6 To enable CDFIs to raise additional
finance from the private sector for on lending (and/or investing
if in social enterprises), Community Investment Tax Relief (CITR)
was introduced in 2003. The first 22 accredited CDFIs hope to
raise over £80 million over the next few years. A number
of Banks have also provided some capital and revenue support (and
made referrals) to some CDFIs, which helps share risk and enhances
joint working.
3. SUPPLY OF
EQUITY FINANCE
The equity gap
3.1 The UK has the largest and most developed
private equity market in Europe, through growth of the market
has been accompanied by an increasing concentration on larger
investments in well-established businesses. However, structural
features of the market have resulted in an ongoing, and indeed
worsening, shortage of equity finance to support smaller-scale
investments—the so-called "equity gap". Features
of both the supply and the demand sides of the market contribute
to the gap.
3.2 There are significant costs involved
in making equity investments. These include search costs (the
costs of identifying investment opportunities), the costs of due
diligence (appraising the quality of the investment opportunities
received), legal and other transaction costs, and the ongoing
costs of post-investment monitoring. These costs contribute to
an equity gap for smaller businesses because they contain a large
fixed-cost element: they do not vary proportionately with the
value of investment being made.
3.3 When the Regional Venture Capital Fund
programme was being designed, some five years ago, the consensus
was that the equity gap was a significant constraint for businesses
seeking up to around £½ million of equity finance. Although
there were tentative signs that the gap was widening, it was unclear
at the time whether this was for cyclical or structural reasons.
Subsequent evidence shows that the gap has widened significantly,
reflecting a structural consolidation in the VC industry towards
ever-larger funds, the economics of which clearly favour making
larger investments.
3.4 Evidence of an equity gap, which is
now generally a significant constraint for businesses seeking
up to £2 million of equity finance, was, presented in Bridging
the finance gap—next steps. [9]However,
as that paper also discussed, the severity of the equity gap does
not just depend on investment sizes: it will vary according to
various factors—including the amount of investment being
sought (smaller investments face. proportionately larger transaction
costs) and the characteristics of the company seeking investment
(information costs may be higher for businesses at an early stage
of development, and especially those seeking to develop unproven
technologies, products and markets).
How does the equity gap vary between regions?
3.5 The structural causes of the equity
gap are generic, and are not specific to particular regions or
geographic areas: the gap is therefore a feature of all regions
of the UK. However, the severity of the equity gap will vary according
to various factors: as noted above, these include the amount of
investment being sought and the characteristics of the company
seeking investment.
3.6 But the location of a company seeking
investment will also be important: the costs of making equity
investments will increase with distance between the investor and
the business. The presence of well-developed venture capital and
business angel communities will therefore be an important determinant
of a firm's ability to access equity finance.
3.7 Data from the British Venture Capital
Association show that there are substantial geographical differences
in the concentration of VC activity: table 1 below shows this
at a regional level, but the availability of equity finance can
also vary within regions. For example, internal research by HM
Treasury (based on a small sample of venture capital deals) suggested
that disadvantaged areas may attract only half as much venture
capital per head of population as the rest of the UK.
3.8 Likewise, the supply of equity finance
from business angels appears to vary substantially between regions.
Although robust estimates of the regional distribution of angel
investment are not available, given the informal and often invisible
nature of such investment, it is well known that most business
angels invest within a relatively short radius of their home.
More prosperous regions are therefore likely to have a greater
supply of business angel finance. Data on usage of the Enterprise
Investment Scheme (EIS) tax incentives, which are widely used
by business angel investors, are consistent with this view (see
table).
| Region | Number of companies receiving EIS investment (FY2002-03)
| Number of VAT-registered businesses (thousands, end-2002)
| Companies receiving EIS investment, per thousand VAT-registered businesses
|
| North East | 45 | 43.8
| 1.0 |
| North West | 187 | 169.7
| 1.1 |
| Yorkshire and Humber | 116 |
124.4 | 0.9 |
| East Midlands | 98 |
120.5 | 0.8 |
| West Midlands | 128 | 146.3
| 0.9 |
| South West | 187 | 163.5
| 1.1 |
| East of England | 194 | 177.9
| 1.1 |
| London | 634 | 280.8
| 2.3 |
| South East | 443 | 277.5
| 1.6 |
| Wales | 57 | 76.3
| 0.7 |
| Scotland | 179 | 124.2
| 1.4 |
| Northern Ireland | 35 |
56.1 | 0.6 |
| Total | 2,303 | 1,761
| 1.3 |
| | |
|
Sources: Inland Revenue, Small Business Service. EIS figures
may not be fully complete, due to delays in receiving EIS claims.
The Government's approach to addressing the equity gap
3.9 The Government's approach is to develop targeted
interventions that work with the market to stimulate increased
investment activity where there is demonstrably a shortage of
capital. Harnessing market forces, with investment decisions taken
by private-sector participants facing clear financial incentives
to maximise financial returns, is the most effective way to ensure
that government support is channelled to commercially viable businesses
with good prospects of success.
3.10 The SBS has developed a number of national solutions
to market imperfections that cut across regional boundaries,[10]
and so its interventions have not been targeted at specific regions:
— The Regional Venture Capital Funds are a
national programme, comprising nine regionally-based funds that
together provide England-wide coverage. The RVCFs are able to
make investments of up to £500,000 in two separate funding
rounds, and each Fund is underpinned by a subordinated Government
investment of up to 30% of the total fund size. The Devolved Administrations
operate their own schemes to address this part of the equity gap.
— The High-Technology Fund was established
to stimulate institutional investment in venture funds targeting
early-stage, high-technology businesses across the UK. Again,
there are systematic nation-wide market imperfections here: the
due diligence and other costs involved in investing in these kind
of companies are particularly high because of the unproven nature
of the technologies, products and product markets involved.
— Early Growth Funding was developed to test innovative
methods of providing of risk capital in amounts averaging between
£50,000 and £100,000 to business start-ups and other
businesses in the early stages of growth. Funds were established
following an England wide competitive bidding process that sought
innovative models that showed a promise of making commercial returns.
These returns should help attract future investors. Six of the
seven funds operate as business angel co-investment funds. One
of these is a nationwide technology fund the others will tend
to operate regionally as they focus on particular business angel
networks. The remaining fund offers loans with a royalty charge.
— The Bridges Community Development Venture Fund
has-a specific remit to invest in businesses located in the most
disadvantaged 25% of wards in England. Again, this reflects the
fact that the market imperfections leading to the equity gap are
likely to be more severe in these areas, as borne out by the research
on the supply of venture finance in disadvantaged communities,
mentioned above. The focus on these areas is part of the Government's
wider strategy to help overcome the barriers to enterprise in
the Enterprise Areas, where the social benefits of stimulating
business formation and growth are likely to be particularly high.
3.11 Further details of the SBS supply-side interventions
are annexed to this paper: these details were prepared for another
purpose during July 2004.
3.12 Where there are market imperfections that are peculiar
to a particular region or sub-region, and that are not addressed
by existing national programmes, the Devolved Administrations
(DAs) and the Regional Development Agencies (RDAs) now have the
flexibility to implement their own solutions in accordance with
regional priorities. Currently the North West, Yorkshire and the
Humber, South West and North East have all used ERDF Objective
1 and/or Objective 2 fund monies to develop additional specific
solutions for their regions. It is understood that the Treasury
Select Committee will be hearing from some of those involved in
these funds when it holds its evidence session on 9 November 2004.
SBS maintains a role working with the RDAs to ensure that regionally-based
measures complement existing nationally-managed interventions,
and in disseminating best practice across the regions. SBS meets
regularly with the RDAs.
4. DEMAND FOR
FINANCE
4.1 There is a growing realisation that boosting the
quality of demand for finance is at least as important as increasing
the supply of funds in improving the flow of growth capital to
SMEs. Many businesses lack awareness of sources of finance and
may also be not properly prepared for that finance; prospective
investors report that many business proposals they receive are
of low quality. Improving the quality of these proposals would
help to reduce the information costs involved in making loans
or equity investments, so helping to increase the efficiency of
the market.
4.2 The Government is therefore taking action to help
ensure that measures to boost the supply of risk capital are backed
by effective demand. The SBS supported a number of investment
readiness, "demonstration projects", the outcomes of
which have been evaluated and the findings disseminated to RDAs
and others to inform them as they develop regionally-based interventions
with their local partners. The projects demonstrated the importance
of having networks of key players at regional level to support
the delivery team. The SBS will continue to play an important
role in helping RDAs drive forward this agenda through sharing
best practice across the country and ensuring that RDAs are well
placed to learn from each other's experiences.
4.3 In September 2004, a joint Government-Accountants
working group, chaired by Michael Snyder, Senior Partner of Kingston
Smith, made a series of recommendations to help SMEs access the
advice and support they need to maximise their prospects of raising
finance. The group did not identify a specific regional dimension
to the demand side of the market. The recommendations included
a self-accreditation scheme for funding advisors, financial health-checks
for small businesses and "no-nonsense guides" on small
business finance. The Government will shortly be publishing two
"no-nonsense guides", tailored respectively to the needs
of start-up and high-growth businesses, under the SBS's Business
Link brand.
5. FUTURE DEVELOPMENTS/POLICY
DIRECTION
5.1 On the debt side, the Government's key priority is
now to implement the recommendations of the Graham review of the
Small Firms Loan Guarantee.
5.2 On the equity side, following an extensive consultation
with the business and SME finance communities and other interested
parties, the Government has announced that it will be launching
a "pathfinder" round of Enterprise Capital Funds (ECFs).
These will be launched as soon as possible after European state
aid clearance is received. ECFs are broadly based on a variant
of the US Small Business Investment Company programme, which has
channelled over $25 billion of finance to "smaller, growing
companies in the past ten years.
5.3 ECFs will be managed by private-sector fund managers
on a fully, commercial basis. Subject to state aid clearance,
ECFs will be able to participate in investment rounds of up to
£2 million: a higher limit than for RVCFs, but reflecting
the structural widening of the equity gap Since the RVCFs were
introduced. The government's investments in ECFs will be on less
subordinated terms than in some previous interventions;"
the ECP structure will attract private capital by enhancing reward
to investors in successful funds, but public capital will not
be exposed to greater risk of loss than the private investors'.
5.4 At this stage, the government has committed only
to introducing a "pathfinder" round of ECFs, in order
to inform the development of a longer-term programme. Pathfinder
ECF managers will be selected through a competitive bidding process.
Depending on the applications received, this pathfinder round
is likely to comprise between three and five ECFs, sufficient
to test the viability of the model and to gauge the likely level
of market appetite for a longer-term programme. ECFs are to be
demand-driven (ie they will be established only where prospective
ECF managers can demonstrate a viable market opportunity), and
so the likely regional impact of the pathfinder round cannot be
judged until the successful applicants have been selected.
5.5 A key objective for the pathfinder is to demonstrate
the commercial viability of the ECF model, which will require
maximum flexibility for participants to take fully commercial
investment decisions within the equity gap. There is no specific
objective for the pathfinder round to achieve regional or social
policy objectives, as the emphasis is on demonstrating the commercial
viability of the model. No decisions have yet been taken as to
the selection criteria for future rounds of ECFs beyond the initial
"pathfinder" round, and such decisions will be taken
in the light of early experience with the pathfinder process.
DELIVERY OF
SME FINANCE MARKET
INTERVENTIONS
5.6 The SBS is currently in the process of establishing
a company limited by guarantee to deliver all of DTI's SME-focused
debt and equity programmes. The new company will maximise the
commercial focus and professionalism of management of the Government
small business finance programmes.
6. RELATED PAPERS
Bridging the finance gap—a consultation on improving
access to growth capita/for small businesses, HM Treasury
and Small Business Service, April 2003, www.sbs.gov.uk/financegap.
Bridging the finance gap—next steps in improving
access. to growth capita/ for small businesses, HM Treasury
and Small Business Service, December 2003, www,sbs.gov.uk/financegap.
Early evaluation of the Regional Venture Capital Funds—Summary
of findings, August 2003, http://www.sbs.gov.uk/finance/venturecap.php.
Graham Review of the Small Firms Loan Guarantee—Interim
Report, June 2004, http://www.hrn-treasury.gov.uk/independent
reviews/ graham review/ review graham index.cfm.
Graham Review of the Small Firms Loan Guarantee—Recommendations,
September 2004, http://www.hm-treasurv.gov.uk/independent
reviews/ graham review/review graham index.cfm.
REGIONAL VENTURE CAPITAL FUNDS
SUMMARY OF
PROGRAMME
Regional Venture Capital Funds (RVCFs) are an England wide
programme to provide risk capital finance in amounts up to £500,000
to SMEs in order to address an acknowledged "equity gap"
at the lower end of the market. There are 9 RVCFs, one in each
English region. The funds are managed by private sector venture
capital fund managers and are operated on a purely commercial
basis.
The Government's investment in the funds is as a subordinated
cornerstone investor with funds providing a hurdle rate of return
to investors before a capped Government return. Government takes
first loss.
PROGRAMME BUDGET
£80 Million
EXPENDITURE
(a) Total Expenditure to date:
As at 30 September 2004, the nine funds had drawndown £41,962,500
from the DTI since the first funds launched in January 2002.
NUMBER OF
FUNDS IN
OPERATION
Funds are operational in all nine English regions and are
of the following sizes:
| Total since 1981
(to 31 Dec 2003)
| 2002-03
(full year)
|
2003-04
(full year)
|
|
| | |
| |
Number of loans guaranteed |
88,496 | 3,916 | 5,966
| |
| Value (£m) | 3,602 |
269.5 | 409.258 |
|
| Cost (£m net) | 482.8 *
| 40.8 ** | 53.7 |
|
| | |
| |
NUMBER OF
FUNDS IN
PIPELINE
N/A—the aim of the programme was to establish a fund
in each English region. This has been achieved.
NUMBER OF
COMPANIES RECEIVING
SUPPORT
As at 30 September 2004, the nine funds had made 192 investments
in 134 SMEs since the first launch in January 2002. Of these 134
are initial investments and 58 are follow on investments.
RESULT OF
ANY ETHNICITY
OR SEX
MONITORING
The funds are managed on a purely commercial basis. No specific
ethnicity or sex monitoring has therefore been undertaken.
EVALUATION PLAN
An Early Assessment Study (phase 1) of the RVCF programme
was completed in June 2003. This initial study was designed to
check if the Funds are on track to meet their short term objectives
for the programme, as well as making progress towards the longer
term objectives. The Summary Report for this study is available
at www.sbs.gov.uk/finance/venturecap,plip.
RVCFs will be included in the development of a long term
evaluation strategy for venture capital programmes.
UK HIGH TECHNOLOGY FUND
SUMMARY OF
PROGRAMME
The UK High Technology Fund (UKHTF) was established to encourage
institutions to invest in early-stage, high technology venture
capital specialist companies and to increase the amount of finance
available for investment in technology-based businesses.
The Fund was established on a "fund of funds" basis,
investing in existing high technology based venture capital firms
instead of directly in high technology companies. Its aim was
to raise £105 million from private sector investors alongside
£20 million of Government investment. The Fund has actually
raised £126.1 million in total (£106.1 million from
private sector investors and the Government's £20 million
investment). All investments are made on a strictly commercial
basis and decisions on those funds invested in are made solely
by Westport Private Equity Ltd, the appointed fund manager.
The Government's investment in the fund is as a cornerstone
investor. Private sector investors will receive a minimum rate
of return on their money before any Government return.
PROGRAMME BUDGET
£20 million
EXPENDITURE
(a) Total Expenditure to date
The Government has invested, as a commercial investor, £20
million into the fund. £3 million was invested in 1999-2000
and £17 million was invested in 2000-01. The £20 million
was a "one-off" investment and no further Government
funds will be invested in the fund.
NUMBER OF
FUNDS IN
OPERATION
One
NUMBER OF
FUNDS IN
PIPELINE
N/A—see above
NUMBER OF
COMPANIES RECEIVING
SUPPORT
As at 31 December 2003, £124 million of the £126.1
million raised by the Fund had been committed to nine specialist
venture capital funds. These venture capital funds have in turn
made investments in over 158 technology-based companies.
RESULT OF
ANY ETHNICITY
OR SEX
MONITORING
The Fund is managed on a strictly commercial basis. No specific
ethnicity or sex monitoring has therefore been undertaken.
EVALUATION PLAN
No formal evaluation currently planned. Fund was set up to
encourage pension funds to invest in early-stage technology funds.
The investor profile of the UK High Technology Fund confirms this
goal has been achieved.
COMMUNITY DEVELOPMENT VENTURE FUND (BRIDGES FUND)
SUMMARY OF
PROGRAMME
The Community Development Venture Fund (CDVF), more commonly
known as the Bridges Fund, is a £40 million venture capital
fund which aims to widen and deepen the provision of venture capital
finance and entrepreneurial support to viable SMEs, capable of
growth that are located in, and have economic links with, the
25% most disadvantaged wards in England. The Fund was launched
on 14 May 2002 and became operational after a fourth and final
closing in September 2002.
The Fund is made up of £20 million from institutional
and private sector investors and £20 million from the Government.
It is split into two separate funds:
Fund "A"—£28 million composed as follows:
— Private sector investors—50%
— Government subordinated (first exposure and capped
return) funding—35%
— Government "pari passu" (treated on
the same basis as other investors) funding—15%
Fund "B"—£12 million does not contain
any subordinated government funds and can focus on larger investment
deal sizes (eg up to £2 million). It is composed as follows:
— Private sector investors—50%
— Government "pari passu" (treated on
the same basis as other investors) funding—50%
Although capable of being used to co-invest commercially
alongside or following on Fund A investments, Fund B will not
be able to enhance its returns or mitigate its risk as a result
of any earlier subordinated funding under Fund A.
The Fund is a commercial venture capital fund, proposed and
managed by Bridges Community Ventures Ltd, rather than a government
led programme.
PROGRAMME BUDGET
£20 million
NUMBER OF
FUNDS IN
OPERATION
The Bridges Fund was launched in May 2002
NUMBER OF
FUNDS IN
PIPELINE
No further funds proposed at this stage.
EXPENDITURE
(a) Total Expenditure to date
As at 30 September 2004, the Fund had drawndown £10,690,255
in total from the DTI since it was launched in May 2002.
NUMBER OF
COMPANIES RECEIVING
SUPPORT
As at 30 September 2004 the fund had invested in 14 SME's
since it became operational in September 2002.
RESULT OF
ANY ETHNICITY
OR SEX
MONITORING
Bridges Community Ventures Ltd provided the following social
impact statistics, as at 31 March 2004:
— Proportion of portfolio woman-managed—20%
— Proportion of management from ethnic minority—10%
— Proportion of workforce female—24%
— Proportion of workforce from ethnic minority groups—7%
EVALUATION PLAN
The SBS attends two Investor Partner meetings each year,
held in June and December each year. The meetings are attended
by all investors in the Fund, including private sector and institutional
investors. It is likely that a formal evaluation will be undertaken
at a future date.
EARLY GROWTH FUNDING
SUMMARY OF
PROGRAMME
The Early Growth Funding (EGF) programme was developed in
order to encourage the provision of risk capital in amounts averaging
between £50,000 and £100,000 to business start-ups and
other businesses in the early stages of growth.
Two models have been developed:
— Business angel co-investment—Government
invests into a business on equal terms with business angels through
funds specifically established for this purpose. Government expects
a hurdle rate of return before sharing surplus with fund managers.
— Mezzanine loan fund—Government investment
is leveraged by bank borrowing and then invested in high growth
SMEs. Equity "kickers" on lending to SMEs used to cover
gap between risk profile and rates of interest charged.
PROGRAMME BUDGET
£31.5 million
EXPENDITURE
(a) Total Expenditure to date:
To date £5,772,777 has been spent on the programme.
(b) Expenditure in FY 2004-05 to date:
As at 30 June 2004, the funds have drawndown £2,229,574
from the DTI.
NUMBER OF
FUNDS IN
OPERATION
Seven. These consist of six co-investment funds and one mezzanine
loan fund.
NUMBER OF
FUNDS IN
PIPELINE
None.
NUMBER OF
COMPANIES RECEIVING
SUPPORT (FIGURES
AS AT
30 JUNE 2004)
(c) result of any ethnicity or sex monitoring
Information on this is gathered annually as part
of the funds' reporting process. Currently ethnic minorities founded
6% of investees receiving investment.
EVALUATION PLAN
The funds are monitored on an ongoing basis with at least
one formal meeting a year being held with SBS officials. When
all the funds have been operational for a suitable period of time
an external evaluation will be considered.
COMMENTS
Figures from the first fund to complete a year's investment
show the ratio of private to public sector funding within Early
Growth Fund deals is running at 3.1:1 with no subordination of
HMG funds. The quality of deals done appears good with four of
the investments made by one fund manager making it into the annual
"50 to Watch" list compiled by RealBusiness/Real Deals
magazine.
Those networks with co-investment funds are also reporting
increased activity (over expectations and their knowledge of how
others are doing).
LESSONS LEARNED
Early Growth Funding kicked off with a very wide competition
for proposals. This competitive process had some very useful elements;
it encouraged some innovative thinking and was useful for State
aid compliance. However it also had some drawbacks that will need
to be considered if a similar activity is undertaken again. It
was a very long process and was resource intensive in appraising
bids, giving feedback and getting approval for each round of winners.
It then required further resource to negotiate and contract with
each project, as no two were the same.
ENTERPRISE CAPITAL FUNDS
SUMMARY OF
PROGRAMME
Enterprise Capital Funds (ECFs) will be broadly based on
the US Small Business Investment Company model. They will target
the equity gap facing SMEs seeking to raise up to £2 million
of equity-based finance. ECFs will be privately-managed funds,
though up to two thirds of the capital available for investment
by each ECF will be sourced from the government. In contrast to
RVCFs, public capital will be placed at no greater risk than private
investors', with a view to making an ECF programme broadly cost-neutral
over the medium term.
At this stage, the government has committed only to launching
a "pathfinder" round of funds, whose early progress
will inform the decision on whether and, if so, how to proceed
with a longer-term programme. ECF managers for the pathfinder
round will be selected through a competitive bidding process,
which will select the applicants whose propositions represent
best overall value for money for the government's investment.
PROGRAMME BUDGET
To be determined in the light of the applications received
for the "pathfinder" round. But it is envisaged that
between three and five pathfinder funds, with a maximum government
commitment of £25 million each, would be sufficient to demonstrate
the viability of the ECF model.
EXPENDITURE
No expenditure to date.
NUMBER OF
FUNDS IN
OPERATION
None yet.
NUMBER OF
FUNDS IN
PIPELINE
See "programme budget" above.
NUMBER OF
COMPANIES RECEIVING
SUPPORT
None to date.
EVALUATION PLAN
The design phase of the evaluation plan for Regional Venture
Capital Funds will inform the development of a full evaluation
strategy for ECFs.
SUPPORT FOR COMMUNITY DEVELOPMENT FINANCE INSTITUTIONS
SUMMARY OF
PROGRAMME
Community Development Finance Institutions (CDFIs) are organizations
that lend to start-ups and established enterprises that traditional
lenders consider too risky, often for reasons such as lack of
business experience or security to offer to the lender. Businesses
supported by CDFIs nevertheless need viable business plans and
should also have a positive impact on the community in which they
operate, for example, in terms of creating enterprise and employment
opportunities.
Most CDFIs operate in a specific disadvantaged community,
whether defined geographically or thematically, and they generally
support start-ups, or developing for-profit businesses and social
enterprises.
The £146 million Phoenix Fund is the Government's main
funding instrument for promoting enterprise in disadvantaged communities.
Just over £40 million of this has been committed to the CDFI
sector, through the Phoenix "Challenge" Fund strand,
to stimulate its development and growth. This support is mainly
provided through capital (for on lending), revenue and a loan
guarantee mechanism.
PROGRAMME BUDGET
£48.9 million. (CDFI element from 2000 to 2006).
EXPENDITURE
(a) Total Expenditure to date:
(b) Expenditure in FY 2004-05 to date:
NUMBER OF
FUNDS IN
OPERATION
Currently 63.
NUMBER OF
FUNDS IN
PIPELINE
Round 3 bids for 2004-06 closed last year and the successful
winners now notified. (Many "building on the best").
However, bids for exploratory awards or loan guarantee mechanisms
remain open. SBS is assessing CDFI activity to maximise financial
take up of the Phoenix Fund in line with objectives.
NUMBER OF
ENTERPRISES RECEIVING
SUPPORT FROM
CDFI ON LENDING:
(c) In comparison with last year:
Total for FY 2003-04 was 857.
(d) Result of any ethnicity or sex monitoring:
Approximately 25% ethnic minority and 40% women.
EVALUATION PLAN
Evaluation has been completed. While recognising that the
majority of CDFIs supported are still relatively young organisations
the evaluation confirmed the value of supporting CDFIs with regard
to their impact on the businesses they provide finance to.
COMMENTS
£500,000 Phoenix Fund also provided to support first
three years of operation of a trade body, the Community Development
Finance Association (CDFA), to represent CDFIs and support their
development.
SBS has worked closely with CDFA to support its development
work with Banks, Social Enterprises, OGDs, RDAs and BLOs.
COMMUNITY INVESTMENT TAX RELIEF (CITR)
SUMMARY OF
PROGRAMME
CITR is a collaborative project between HMT, Inland Revenue
and the SBS. It enables duly accredited CDFIs to raise finance
from the private sector through the issue of CITR certificates
to individuals and corporate bodies that loan to, or invest in,
the accredited CDFIs for an intended five-year period.
The CDFIs, in turn, must on lend or invest in a qualifying
profit distributing or community enterprise. The tax relief available
to the investor in the CDFI is 5% per annum of the amount invested
and may be claimed in the tax year in which the investment is
made, and in each of the four subsequent years.
PROGRAMME BUDGET
N/A—tax relief measure. (Estimated that for every £100
million, potential cost to the Government in lost tax revenue
over five-year period is £25 million. Original thinking was
for a tax loss ceiling around £250 million but subject to
review.)
EXPENDITURE
N/A—see above.
NUMBER OF
"CITR ACCREDITED" CDFIS
IN OPERATION
Since CITR was launched in March 2003, 22 CDFIs have been "CITR
accredited". Collectively, they hope to raise over £80
million over the next three years.
NUMBER OF
"CITR ACCREDITED" CDFI
APPLICATIONS IN
PIPELINE
Three. (Rolling programme).
NUMBER OF
COMPANIES RECEIVING
CITR FINANCED SUPPORT
123 loans advanced totalling almost £6.9 million.
EVALUATION PLAN
Awaiting first year's results before deciding on the design of
the evaluation.
Close monitoring will take place to ensure CITR monies raised
are on-lent in accordance with 25%, 50% and 75% requirements over
first three years.
COMMENTS
Pleased by take up response from CDFI sector as use of CITR seen
as important to embedding long term commercial sustainability
of CDFI loan funds. Early returns indicate variations in performance
of capital raised and initially on lent.
INVESTMENT READINESS
SUMMARY OF
PROGRAMME
The SBS established six demonstration projects to test a
range of approaches to helping SMEs with growth potential to become
investment ready. We also provided funding to enable an existing
investment readiness service, fit4finance, to be rolled out to
other Regions. The six projects and fit4finance have been subject
to a full evaluation in order to assess their effectiveness and
to identify good practice that might be replicated more widely.
PROGRAMME BUDGET
£1.7 million.
EXPENDITURE
£1.3 million.
NUMBER OF
FUNDS
Six (plus Fit4Finance).
NUMBER OF
FUNDS IN
PIPELINE
N/A—SBS funding for the pilots has now ceased.
NUMBER OF
COMPANIES RECEIVING/RECEIVED
SUPPORT
Around 1,100 SMEs/entrepreneurs attended information/awareness
raising seminars 500 received diagnostic reviews.
180 made presentations.
At the time of the evaluation, 96 participants had obtained
finance (mainly equity) and a substantial number of others were
still in the process of negotiating a deal.
EVALUATION
SQW Ltd were chosen by competitive tender to carry out the
evaluation and their report was published in July.
COMMENTS
The SBS will be working with the RDAs to build on the good
practice identified by the evaluation in order that this kind
of support can be made available to many more SMEs/entrepreneurs.
SMALL FIRMS LOAN GUARANTEE
Purpose
Guarantees loans from the banks and other financial institutions
for small firms that have viable business proposals but who have
tried and failed to get a conventional loan because of lack of
security.
Started in 1981. Eligibility criteria widened and other changes
in April 2003.
Main terms and conditions
— UK wide, available to both new and existing
businesses.
— Loan terms two to 10 years.
— Staged drawdown and capital repayment holiday
possible.
Minimum—£5,000.
Maximum—£250,000 for established business trading for
two years or more.
—£100,000 for all other businesses.
— Guarantee: 75% for all businesses.
— Premium: 2% pa on the outstanding loan for all
lending.
— Businesses: Sole Traders.
Partnerships.
Limited Companies.
— Activities: Many business activities are eligible,
but there are exclusions.
— Size: Overall maximum of 200 employees:
Turnover £5 million pa maximum for manufacturers.
Turnover £3 million pa maximum for all other eligible
sectors.
— Purposes: Most business purposes are eligible,
except buying shares, buying out members of a partnership, replacing
existing borrowing and finance solely for export purposes.
— Applications: Direct to one of the lenders who
are responsible for all commercial decisions.
SUMMARY STATISTICS
Notes:
* Costs to 31 March 2003 only (cash cost)
** Cash cost
*** Forecast cost at year end (31 March 2004) is c £53
million. Change in accounting regime from April 2003. Previous
year's costs were cash only—current year costs will be full
resource costs—net cash plus non-cash resource elements
applied at year-end to account for movement in provision and cost
of capital credits (non-cash costs are dependent on final year-end
take-up and estimates of forward default rates).
CURRENT DEVELOPMENTS
— Exercise underway to add further lenders (first
new lenders to become operational during 2004-05).
— SBS will also seek to increase awareness and understanding
of SFLG and simplify administration.
— Independent review led by Teresa Graham announced
10 December 2003. Interim report published 17 June 2004 and final
recommendations on 4 October 2004 (both available on www.hm-treasury.gov.uk).
Existing lenders and small business representative bodies were
fully engaged with the Graham Review.
DETAILED APPLICATION
STATISTICS (SEPTEMBER
2004)
| Number in
Month
| Number
Cumulative | Loan Value in
Month (£m)
| Loan Value
Cumulative (£m)
|
| | |
| |
National: |
| | | |
| Total Guarantees Issued: | 664
| 3,784 | 46.531 | 255.325
|
| Established Businesses: | 227
| 1,189 | 11.976 | 58.989
|
| Existing Businesses: | 227 |
1,189 | 11.976 | 58.989
|
| New Businesses: | 192 | 1,185
| 10.996 | 63.293 |
| Fixed Interest Rate: | 29 |
142 | 1.466 | 8.098
|
| Variable Interest Rate: | 635
| 3,642 | 45.065 | 247.227
|
| Loans over 100k | 81 | 479
| 14.967 | 82.837 |
| Loans over 30k up to 100k | 419
| 2,211 | 27,904 | 147.324
|
| Loans up to 30k | 164 | 1,094
| 3.660 | 25.165 |
| Regional: | |
| | |
| East Midlands | 37 | 237
| 2.273 | 14.112 |
| Eastern | 62 | 358
| 4.417 | 25.495 |
| Greater London | 108 | 506
| 7.366 | 37.414 |
| Merseyside | 10 | 70
| 0.917 | 4.449 |
| North East | 24 | 130
| 1.704 | 8.097 |
| North West | 58 | 37
| 5.001 | 26.243 |
| Northern Ireland | 3 | 19
| 0.352 | 2.107 |
| Scotland | 52 | 349
| 3.562 | 23.783 |
| South East | 102 | 569
| 7.272 | 39.687 |
| South West | 66 | 386
| 4.840 | 23.490 |
| Wales | 29 | 189
| 1.725 | 11.540 |
| West Midlands | 53 | 341
| 3.125 | 20.962 |
| Yorks and Humberside | 60 |
293 | 3.979 | 17.948
|
| 26 October 2004 | |
| | |
9
Bridging the finance gap-next steps in improving access to
growth capital for small businesses, HM Treasury and Small
Business Service, December 2003, www.sbs.gov.uk/financegap Back
10
The UK government and the devolved administrations have concurrent
powers in this area: the DAs operate a number of measures in their
respective territories, while some SBS-managed interventions operate
on a UK-wide basis and others are specific to England. Back
|
