Wednesday 19 August 2020 9:27 am Apater Capital Talk

Mind the gap? Financing scale-ups takes sharper focus

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City A.M. contributor

‘There is a risk… of a lost generation of innovative businesses unable to access the right capital to scale and go global’: so warns an analysis published this month entitled The Future of Growth Capital.

The report – co-produced by Innovate Finance, the ScaleUp Institute and Deloitte, in collaboration with industry, investors and the recently formed Business Action Council – is among the growing number of publications likely to be winging their way to Whitehall departments laden with suggestions about how Britain could ‘build back better’ post-pandemic.

Addressing an emerging £15bn shortfall in growth capital – the financing that enables fast-growing, innovative companies to mature – will help the economic recovery, ‘generating future prosperity and boosting regional economies, productivity, innovation and internationalism’, the research says.

The scale of scale-ups’ funding challenge

The growth capital gap is not a new issue, predating the 2008-2009 recession, as well as COVID-19, as the report acknowledges.

But its importance takes on a sharper focus as established businesses flounder and government’s focus shifts from short-term bailouts and loans to longer-term structural priorities.

Though the pandemic has knocked many small firms’ (and investors’) ambitions for six, it has created short- and longer-term opportunities for others. How these quick-growing enterprises – scale-up companies – can be better financed is the report’s focus.

Scale-up businesses are defined as those that have increased their turnover and/or employee numbers annually by more than 20 per cent over a three-year period. Office for National Statistics data showed that there were 33,860 such businesses generating more than £1 trillion to the economy in 2018.

Nurturing those that survive and have even thrived during the past few months will be increasingly important and indeed urgent.

Recommendations to optimise capital flows

The report makes five overarching recommendations, which are: the creation of a ‘National Blueprint for Growth’ to champion more consistent growth across different sectors of the economy and regions; to accelerate the unlocking of institutional and corporate funding; to ‘expand and build upon’ the state-owned British Business Bank (BBB) by strengthening its regional presence; to expand the role and scale of Innovate UK; and a ‘Future Opportunity Fund’ for emerging sectors.

These five points straddle more specific recommendations – for example, that the UK should more effectively apply the Organisation for Economic Co-operation and Development’s Frascati Manual (a methodology for collecting and using R&D statistics) to track R&D spend ‘to ensure we are applying our institutional capabilities effectively’.

A further suggestion is to ‘transform British Patient Capital into a joint-venture vehicle with the private sector.’

British Patient Capital (BPC) was created by the BBB two years ago with £2.5bn to invest over 10 years into venture and venture growth capital funds, working alongside institutional investors to unlock an additional £5bn of patient capital investment.

“We have read the report with interest, and remain focused on delivering our programme, which as of 31 December 2019 has committed over £1bn to venture capital and venture growth funds, with approximately a further £4bn committed alongside us by other institutional investors,” a BPC spokesperson told City AM. “We regularly share market insight with the government, and any decision on the future direction of British Patient Capital is a matter for government.”

Financing Britain’s future stars

Government continues to be focused on reaction to the pandemic, including the schemes launched to help businesses during the crisis.

But as lockdown measures ease, breathing space is emerging for initiatives with longer-term horizons: for example, the recent green light for the Fintech Strategic Review, first announced in March’s Budget.

The Comprehensive Spending Review (CSR), which should be published this autumn, is broader and more significant.

The headlines – even yesterday, as Marks & Spencer announced a whopping 7,000 job losses – lay bare the struggles of so many big companies and, sadly, will likely keep coming. But they also serve indirectly to highlight the importance of having the best funding infrastructure possible in place to enable the corporate stars of the future to fulfil their potential. The Future of Growth Capital, then, makes for timely reading.