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Patient Capital Review – How do we fund our companies of tomorrow?

The UK Government’s ‘Patient Capital Review’ may not be your idea of a “good read” but the results of the Consultation are likely to have far reaching consequences for the UK’s entrepreneurial community and how companies can be funded and successfully scale.

Leaving aside all of the technical detail, there are some fundamental issues to consider:-

  • It would appear that the European Investment Fund provides about 30% of the capital which is committed to the UK’s Venture Capital Funds. The effects of Brexit are already being felt and this tap is already being turned off.  The most important task of our policy makers therefore is to ensure that, in the worst case scenario, our Venture Capital and entrepreneurial community is left no worse off than it was before.  This means that other sources of finance will need to be found to replace the capital which up until now has been provided by the EIF.
  • The Review quoted the results of an important piece of research which reviewed a cohort of start-up companies and the number of jobs which they had each created after a fifteen year period. Some 40% of all of the jobs created by all of these companies were created by only 0.05% or 1 in 200 of these companies.  The high potential/high growth companies are of course the ones which tend to rely disproportionately on external capital.  It is therefore vital for the health of the economy that our high potential/high growth companies continue to have access to the capital they require to provide the jobs of tomorrow.
  • The Enterprise Investment Scheme (“EIS”) is now a major component of our early stage Venture Capital mixed with some £1.9 Billion being investment annually. According to Treasury figures for 2016/17, about £746 Million was raised by EIS funds of which over £450 Million was raised by funds classified as “capital preservation” schemes representing some 62% of the market.  The Review is putting the spotlight on whether this tax relief and other tax reliefs are appropriate and whether they should continue.   

The Consultation involved asking participants a number of key questions such as where is the funding gap most acute in relation to lack of access to finance in the UK, how are the various tax reliefs working and what is the best way of replacing EIF investment. 

MBM submitted a detailed response to the various questions from UK Government and details of this along with the Consultation questions are available to view via the links at the end of this article.

Our headline summary responses to the Consultation were broadly as follows:

  1. The funding gap is most acute at the £0.5 Million to £5.0 Million range.
  1. Many companies raising finance in the UK tend to ask for what they think they will get rather than what they actually need. This results in numerous financing rounds which are a distraction of management time and result in sub-optimal performance.
  1. SEIS, EIS and VCT tax reliefs have been and continue to be very important policy initiatives without which the early stage investment into high growth companies would simply not happen.
  1. EIS in particular is the biggest single and most effective policy intervention which should be further developed and we would encourage the Government to look at how EIS funds are structured. It should not be removed.
  1. Until UK companies can properly secure long term growth capital there will be a tendency for UK companies to exit earlier than American ones because of the challenges associated with subsequent rounds of funding and IPOs.
  1. There may well be a good case to be made for a new National or Regional Investment Fund(s) to be run by the British Business Bank to replace the funding gap left by EIF and possibly bring additional funding into the market. However, we do not believe that there is a “one size fits all” solution.

We also met representatives of the Treasury during the Consultation process to discuss some of these issues with them and we hope we have helped play our part to help highlight the key issues as we see them.  

We may expect proposals in the Chancellor’s Autumn Statement followed up by appropriate legislation in the next Finance Act to disqualify “capital preservation” schemes promoted by financial intermediaries of one kind and another and ensure that EIS is used only for the purpose for which it was originally intended – high risk companies with high growth potential.

Sandy Finlayson OBE and Stuart Hendry

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