President of employers' body the CBI Lord Bilimoria says the Ƶ Government needs to drive the creation of new sources of long-term patient equity funding to ensure more firms realise their growth potential.
The founder and chairman of Cobra Beer said just with the establishment after WW2 of the Industrial and Commercial Finance Corporation, which later became 3i, the current Westminster government should also provide new sources of equity, with leveraged private sector investment, to support the recovery from the economic fallout of the pandemic.
It comes as the executive chairman of the Business Growth Fund, which provides equity funding of between £2m to £10m with the the backing of high street banks, Stephen Welton, has proposed a £15bn national Ƶ renewal fund with equal backing from listed investment vehicles, private companies such as insurers and a role for the Ƶ Government with an extension of its Covid response Future Fund.
The representative body for the financial services sector, The CityƵ, estimates that firms, half being SMEs, will have amassed £70bn of unsustainable borrowings by March, underlining the need for more patient forms of capital in equity.
Lord Bilimoria said: "One of the initiatives we have been encouraging government [to adopt]is the way after WW2, what is now 3i was formed, with the government actually kick starting the equity funding.
"We should have a similar scheme now and there are organisations like 3i and the Business Growth Fund, that have the ability and the reach to go out all over the country and deploy this money.
"This is not a donation, but the government would make an investment and the private sector would invest alongside. This should be a good way of providing that equity funding, not only for start-ups, but funding to survive as well as funding to grow."
Lord Bilimoria believes the vast majority of applications for funding under the various Ƶ Government backed Covid-19 loans schemes were legitimate and it was too early to talk of potential loan default levels.
The National Audit Office last month said that up to 60% of loans made under the Bounce Bank Loan Scheme, which provides funding of up to £50,000 via accredited lenders with a 100% government guarantee, may never be repaid.
They have projected a potential lose to the taxpayer from default and fraud, of £26bn.
The CBI president said: "Yes, there will always befraudand it is a criminal offence and we have to come down very strongly on anyone who has committedfraud. There is no question about that.
"But on the whole they are genuine and one of the indicators that they are genuine is that the maximum is £50,000 [Bounce Back Loans], but the average loan is about £30,000, so people don’t want to take on debt unless they have to and they will only take on what they really to.. and that gives me assurance.
"Secondly, the repayments don’t start until next year and it is at a very low interest of 2.5%, repayable over six and now extendable up to 10 years.
So, there is time and you don’t have to worry at this stage about percentages that have been quoted that are going to go bad like student loans. This is nowhere near at that stage yet and we have to wait and see and it depends on the recovery as well."
In Wales the Welsh Government-owned Development Bank of Wales has an established track record, as well as it predecessor Finance Wales, of investing equity into high growth potential firms. It can make equity investments of up to £5m per deal.
It is currently looking at new funds, as a follow on to its £100m Covid response loan scheme launched back in March.
This could see:
- Extended debt repayment holidays.
- Long term patient capital with scope for elements of debt restructuring
- new equity opportunities.
- Targeted provision for sectors deemed less attractive by other lenders
- Performance related returns that have the ability to adapt the offer over time
A Welsh Government spokesperson said: “We are exploring options for futureDevelopmentBankof Wales funding and where it could be deployed to make the greatest difference. There is more work to be done and detailed information will be announced as the gaps in provision are better understood and Ƶ Government supported schemes draw to a close.
“A number of factors are shaping thisdevelopmentwork including the availability of CBILS and Bounce Back Loans schemes, as well as any emerging needs of Welsh businesses stemming from long term economic impacts of Coronavirus and the effects of the Ƶ leaving the EU.
“While we recognise that some sectors are experiencing particulardifficulties, we need to balance this with the need to support companies across the economy. As Welsh Government we want to position theDevelopmentBankto be agile and nimble in response to changing market conditions and business needs.
“Schemes such as the Wales Flexible Investment Fund already have significant flexibilities available within them so it’s important to get the balance right between ensuring existing funds are well capitalised and deciding where any additional, more narrowly targeted funds, are needed to address identifiable market gaps.”
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The Ƶ Government-owned British Business Bank also has a number of equity funds, including those in England that are regional specific.
However, it currently has no plans for a specific fund for Wales, saying: "TheBankis always open to new ideas for how it can support SMEs in the devolved nations but has no immediate plans to implement a specificequityfundfor Wales."
