The British Business Bank wants greater independence to become a UK “sovereign growth fund” that can reinvest proceeds from its venture capital investments, according to its new chief executive.
In an interview with the Financial Times, Louis Taylor called on ministers to make key decisions on the future of the state-owned economic development investor, including whether to extend its venture capital arm beyond 2028.
Used by the government to support policy choices commercially, the BBB invests in venture capital funds that in turn provide financing for companies in sectors including technology and life sciences. The BBB also oversees financing for regional investment and start-up funds, and administered state-backed loan schemes to help businesses during the Covid-19 pandemic.
British Patient Capital, the BBB venture capital arm, was launched in 2018 with a 10-year mandate and an initial £2.5bn of government funding, after the Treasury identified that a lack of access to long-term finance was holding back some companies. BPC is now the UK’s largest domestic investor in venture capital.
Taylor said the BBB was “now of a size where it could usefully be self-sufficient outside of the government budgeting process . . . Not that we should be given a lot more capital, but the capital we have should be recycled and it should accrete.
“It has to be seen as the sovereign growth fund with long-dated infrastructure. If we can’t reinvest the proceeds of what we have, the real value is down,” he added.
Politicians and financial services executives have long talked of the creation of a British sovereign investor. Nicholas Lyons, the veteran investment banker and insurance executive, said on becoming lord mayor of London last year that he was working with City institutions to bring together pension money for an investment fund of up to £100bn, which would rival SWFs such as those of Saudi Arabia or Norway.
Taylor argued that the BBB’s “100 per cent growth agenda” fitted with the government’s “plan for growth”. After the creation of a Department for Science, Innovation and Technology in a Whitehall reshuffle this month, he said, it would “loom larger on the balance sheet as a proportion” of the slimmed-down business department.
But he cautioned that if ministers wanted more investment in areas outside existing programmes, “then we need a bigger envelope”, pointing to the need to back industries focused on areas such as net zero.
He added that there was “scope to do quite a lot of this [investing] in a relatively fiscally neutral way through loan guarantees”.
The former banker — who joined BBB at the end of last year from the UK’s export credit agency — said he also wanted to expand the bank’s remit to plug additional funding gaps for British companies.
This could address areas outside its existing programmes by providing finance for larger, fast-growing start-ups that would otherwise be at risk of being acquired or needing to seek money from overseas, Taylor noted.
“At the moment, we’re quite programmatic with all the various requirements, and we have an overarching mission that we actually should be able to serve better than we can just through the programmes . . . The more UK money there is, the longer companies will stay in the UK.”
In an evaluation of BPC published on Monday, the BBB said companies backed by it had on average increased their workforces by 55 per cent, translating to about 4,600-5,000 extra jobs.
In the 2021-22 financial year, the bank made an adjusted return of 18.2 per cent, exceeding its target of 0.06 per cent. Profit before tax was £604.8mn, up from £293.5mn in 2020-21, driven mainly by an increase in net gains on investments.
However, since its portfolio is heavily weighted towards the tech sector, which has suffered sharp falls in valuations, Taylor admitted that “some of the gains over the last couple of years will unwind”.
“Clearly valuations are coming in. But the view on business prospects now is more positive than it was just three months ago,” he said.
The BBB was allocated £1.6bn in the government’s 2021 Spending Review to extend regional funds, such as the Northern Powerhouse and Midlands Engine, which back companies in different parts of the UK.
In total, the bank had £4.1bn of assets under management at the end of March last year, comprising debt financing to businesses of £2.2bn and £1.9bn of equity financing.
Taylor pointed to a funding gap for companies looking to raise more than £50mn, describing it as “an area where we could usefully play but that will require some resources”.
He added that the “halo effect of a small slice of tangible government support” was huge for industries where companies were often taking riskier bets on new technologies and innovation.
“And it comes without the stigma of government ownership, statism or picking winners, because we’re investing on a purely commercial basis,” he said.
The BBB’s role in administering Covid support schemes raised its profile, although billions of pounds of fraud have since been uncovered — notably in relation to the “bounce back” loan programme — after borrowers were subject to only light checks.
But Taylor, who took the helm after the schemes ended, said the losses were “just the nature of the [bounce back] programme, which was intended to get money out quickly”.
The government also committed more than £1bn to start-ups through convertible loans under the Future Fund, which aimed to protect promising tech and early-stage businesses at the peak of the pandemic. But companies that received taxpayer money through that programme have similarly failed.
Taylor admitted that as a “Covid venture capital portfolio, the level of discernment of curation was relatively low”. The fund was now being run down, he said, selling out of its stakes at new fundraising rounds or through company sales.