Some 90 years ago, a government committee set up to examine the health of the British economy identified a persistent shortfall in funding for small and medium-sized businesses.
This shortfall was termed the Macmillan Gap — named not after the politician but after the Scottish lawyer, Hugh Macmillan, who chaired the committee.
As the saying goes, the more things change the more they stay the same.
According to a new report that I have co-authored with Stephen Welton, the executive chairman of growth investor BGF, there is still a persistent lack of funding for growing businesses across the four nations of the UK. Worryingly, it seems that as a result of the Covid-19 crisis, this gap will become a chasm, with dire consequences for innovation and job creation in the future.
The companies that particularly concern us are the roughly 21,400 businesses that report turnover of between £2.5–100m. In collaboration with PwC, we have shown that these “growth economy” companies are the essential, dynamic midsection of the economy, growing at twice the pace of GDP in recent years.
These businesses are among the most exciting and innovative in the world. They include the likes of M Squared, a pioneer in quantum technology, and Genedrive, which develops portable gene testing devices to diagnose life-threatening diseases.
Growth economy companies are regionally dispersed, with two thirds based outside Greater London. They are the global champions of tomorrow, reflecting everything that’s great about the four nations of the UK.
The problem is simply one of support. Unlike very early-stage (or “micro”) businesses, which can access seed capital from angel investors or crowdfunding platforms, and in contrast to large, listed businesses that fund themselves in public markets, growth economy companies are often overlooked by investors. Equity finance, in particular, is often denied them, because they are too small to attract the attention of conventional private equity funds.
Lacking equity funding, many growth economy companies resort to bank loans, saddling themselves with debt at precisely the stage of their journey when they need to be free of constraints and able to grow to their greatest potential.
This challenge has been exacerbated by the Covid crisis. Due to the worsening trading conditions of the past six months, many growth economy companies have had no choice but to rely on government measures such as the Coronavirus Business Interruption Loan Scheme (CBILS). As a result, it has been estimated by industry group TheCityUK that small and medium-sized businesses will have shouldered between £33-36bn of unsustainable debt by March 2021.
It would be a disaster if the growth economy were constrained by debt and a lack of funding. We must not settle for bonsai businesses when we could grow oak trees.
That’s why I’m calling for a £15bn National Renewal Fund to support the growth economy. The fund will be made up of contributions from the pensions industry, insurers, quoted investment vehicles and government support, in the form of an effective extension of the Future Fund.
This is not a bailout. Nor is another indiscriminate measure to protect jobs in the short term. Rather, it is a pool of capital — a fund of funds, if you will — that will provide long-term, patient support to the companies with the greatest potential. The fund will make investments solely on commercial terms, and will deploy its capital through a network of local specialists in all regions of the UK, reflecting the fact that the growth economy is itself regionally dispersed.
As we have explained in the report published on Monday, the capital needed for this effort is already available. What is needed from the government is the power to convene and incentivise, and only to co-invest when appropriate. A crucial aspect of this measure is liberalisation of the pensions industry to make it easier for defined contribution pension holders to allocate part of their pension pots to fund the growth economy. Some flexibility around rules concerning the charge cap for these schemes would be invaluable.
NatWest, through its private banking arm Coutts, is making the first move. In partnership with BGF, it is launching the UK Enterprise Fund, a vehicle to allow Coutts’ clients to invest in diverse and high-potential growth economy companies. I applaud this venture and hope to see other actors, such as insurance companies and defined benefit pension schemes, joining our effort.
Together we must close the funding gap facing the growth economy, kickstart an investment-led recovery, and ensure the future dynamism, creativity and prosperity of the UK.
Main image credit: Getty