Struggling pubs have lost a lifeline under new rules which ban venture capital from investing in existing business.
Rules preventing venture capital trusts and enterprise investment schemes from buying out the management of failing businesses or undertaking acquisitions came into effect before Christmas, as part of the Finance Act 2015. They came from the European Union, which believes venture capital should only invest in new companies under a certain age.
“One of the things it hated about the UK was that our venture capital industry was able to support management buyouts. That was the evil that European bureaucrats didn’t like,” says David Kaye of Puma Investments, a venture capital firm.
Pubs are the sector likely to be hardest hit by the changes, as venture capital investment has proven invaluable for the flailing industry in the last decade. Pubs facing stiff competition from supermarkets selling cheap booze have been forced close to bankruptcy, and specialist investors have clubbed together in enterprise investment schemes to turn them around. Investors would spend hundreds of thousands on re-fitting the premises and installing mod-cons such as microbreweries, which would attract a different crowd when the pub re-opened.
But that kind of investment is now closed off. “Even if a pub is on its knees, is doing terribly and dying, it is considered a trading asset,” explains Steven Kenee of enterprise investors Downing, adding that this would likely make it ineligible for investment to save it. “This change is going to be massive. Enterprise investment was a route that an awful lot of pub companies used. It brought life and soul back into high streets that were dying. There is going to be a huge gap in the market for funding.”
Although the rules came into effect before Christmas, they are yet to be tested, leaving uncertainty over how they work in practice. “Today, under the rules, there is a grey area,” says Kaye.
Kenee adds: “The rules say enterprise investors are not allowed to approach a trading business. But we just don’t know how they are going to be taken in practice... It’s a new world.”
£ Annabelle Williams is deputy money editor at City A.M.