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The government has revived the idea of launching its own venture capital investment trust through the British Business Bank as part of plans to unlock £20 billion of capital for cutting-edge British start-ups over the next decade.
Announcing its response to the Patient Capital Review chaired by Sir Damon Buffini, the Treasury has proposed a series of measures aimed at leveraging the skills of asset managers and encouraging investors to make high-risk investments in unquoted companies and infrastructure projects.
Chancellor Philip Hammond promised his action plan would ensure the UK economy was ‘fit for the future’ with new businesses accessing the long-term investment they need.
Hammond said wealthy investors would be incentivised to back knowledge intensive companies such as those engaged in medical science by doubling the investment limits in enterprise investment schemes (EIS), although he promised a clampdown to ensure they were not ‘used as a shelter for low-risk capital preservation’.
As part of the plans the government-owned British Business Bank will ‘incubate’ a £2.5 billion investment fund that could be floated on the London Stock Exchange or sold to a fund management group once it had a sufficient track record.
The Treasury believes the fund could become a leading deployer of long-term patient capital, releasing £7.5 billion through co-investments with the private sector.
In addition, the bank, which is chaired by Lord Smith of Kelvin, chairman of Alliance Trust (ATST), would initially invest £500 million of public money through a series of private sector ‘fund of funds’. Through further tranches of investment it reckons it could attract institutional investors to put up to £4 billion in high-growth digital businesses.
A further proposal in the government’s ‘Financing growth in innovative firms’ consultation paper, would see the BBB ear-mark £1.5 billion of investment in first-time and emerging fund managers under its Enterprise Capital Programme.
The panel of experts reporting to Buffini, a former chief of Permira, the venture capital firm, has told the Treasury that more need to be done to help businesses outside the ‘Golden Triangle’ around the universities of London, Oxford and Cambridge. Again, the BBB has been tasked with backing groups of business ‘angels’, or wealthy individuals looking to help local entrepreneurs in the regions.
Plans for a National Security Strategic Investment fund to invest in advanced technologies were also announced, alongside measures to ease the way for pension funds to invest in small, unquoted businesses.
According to the Patient Capital Review, which picks up on a term popularised by fund manager Neil Woodford's Patient Capital (WPCT) investment trust, the UK venture capital sector does not have the strong track record of its private equity rivals.
Consequently, pension schemes, which are seen as a natural provider of long-term capital, have been reluctant to invest in unquoted, smaller companies or in the construction of infrastructure projects where returns are uncertain.
In response the Treasury said the Pensions Regulator would clarify guidance on how pension scheme trustees could invest in illiquid assets as part of their general portfolios.
This received short shrift from former pension minister Steve Webb, now a director at pension provider Royal London. ‘If we want to see serious money being invested by pension funds in infrastructure we need a supply of projects that pension funds can invest in, not minor tweaks to rules and guidelines.’