The UK has long been a start-up factory, with impressive rates of business births. However, we have lagged behind the US in terms of transforming those start-ups into the unicorn businesses of tomorrow.
The year-long Patient Capital Review, led by the Treasury, showed that a lack of longer-term investment was holding back the development of these young innovative firms. This ‘patient capital gap’ slows firms’ growth, dampens their ambition and means that some are sold to trade buyers rather than growing to maturity in the UK. And with many firms not fulfilling their economic potential, it has a knock-on effect on the country’s productivity too.
The root causes of this ‘patient capital gap’ are influenced by low historical returns on venture capital investment. Despite performance improvements over the past decade, institutional investors remain wary and haven’t developed the expertise, access and scale required to successfully capture attractive returns.
At British Business Investments (BBI), the commercial arm of the British Business Bank, we have been tasked with addressing this institutional investor challenge as part of the government’s action plan to unlock over £20bn of new investment in UK scale-up business.
That is what last week’s announcement – a new £500m Managed Funds programme – is all about.
We know we can do this because we’ve done it before. BBI already manages the UK Innovation Investment Fund (UKIIF), an earlier generation of funds-of-funds, to produce attractive returns for the taxpayer. Venture capital funds, backed by UKIIF, have already invested in a large number of outstanding UK businesses such as Revolut and Purple Bricks, through VC funds Balderton and DN Capital respectively.
Our new Managed Funds programme will invest commercially to attract private capital and expand investor diversity for venture and growth capital in the UK – we expect our initial £500m to catalyse an additional £1bn of funding from other institutional investors.
Over the life of the Programme, this will result in £1.5bn being invested in UK companies. That means more British firms able to scale up and compete both here in the UK and overseas.
Too often it is the most innovative companies – those that require significant capital – who suffer from the UK’s patient capital gap. The UK provides a fertile ground for innovation to thrive, but a lack of access to patient capital continues to hold back some UK companies from scaling up and fulfilling their commercial potential
Our new programme will begin to change that, allowing prospective investors access to high quality venture and growth capital funds that will be investing in the success stories of tomorrow and helping to build the UK’s innovation economy.
Catherine Lewis La Torre, CEO, British Business Investments
This article previously appeared in Business Voice, the CBI magazine.