Today in Birmingham the BBA Taskforce banks are launching the Business Growth Fund (BGF), providing equity investments for growing SMEs with turnovers of £10-£100 million, looking for £2-10 million.
For the avoidance of doubt this is the banks’ fund, which they committed to as part of their Taskforce commitments in October. The Merlin agreement in February bumped it up from £1.5 billion to £2.5 billion (viz Cable on the radio this morning not a representative of the banks) but there is no government money in here, not even the £50 million previously set aside for the idea that preceded the BGF, the Growth Capital Fund.
We’ve welcomed the intent to address the growth capital gap, identified most recently in the 2009 Rowlands Review, that is holding back some promising UK companies from growing.
Even though this is funded by the banks, it does go towards supporting an increase in sources of finance outside of traditional bank lending – especially important for fast growing companies where bank lending is not appropriate.
This is an area where we have previously called for progress. And we’re further encouraged by positive noises about the BGF’s board including people with real business (even manufacturing!) expertise, again something we’ve been looking for in the financial sector.
However, the launch of the fund again highlights the limited progress being made in increasing the provision of mezzanine debt finance that the Rowlands Review recommended as the best way to address the growth capital gap.
This is important because often growing SMEs have an aversion to giving up an equity stake in their business and the control that goes with that. The BGF will take a seat on the board in the companies it invests in with stakes ranging from 10-50%.
How much this impedes the progress of the Business Growth Fund i.e. by discouraging take up will need to be closely monitored.
With the launch of the BGF all 17 of the Taskforce banks’ commitments set out in October are underway. And of course we have the government’s ‘Project Merlin’ agreement with the banks to increase lending to UK businesses.
However, signs of an improving landscape, particularly for SMEs have been slow to emerge following the financial crisis.
So now we get to the point of all this – improving access to finance. We need to see it happen – and sooner rather than later. And we need to start hearing from the government what that improvement looks like and by when.
The Prime Minister said on Tuesday that Merlin was very much his. While I couldn’t follow his logic on gross v net lending targets, I do agree with him that, so far, results in lending trends have been disappointing. Cable said this morning there's PwC analysis out on Monday looking at performance so far, my hunch is that this too will disappoint.
However, the PM believes the performance of banks needs to judged over the full year of the agreement not off partial data. Fair enough.
But the clock is nevertheless ticking for the actions of both the banks and the government to deliver results. And the benchmark isn't some number on gross lending, which could turn out meaningless if net lending is withdrawn from the economy. The benchmark is meeting the government’s own ambition set out in the Plan for Growth to see ‘more finance for start ups and business expansion’ and inadequate access to finance no longer holding back growth.
With the actions announced so far we’re hopeful of seeing access to finance improve but progress is far from guaranteed.
We need to be thinking now about what more could be done if present measures prove insufficient. Growing companies looking for credit and the UK recovery more generally cannot afford to wait.