➤ The bank wants to fill a gap in later-stage venture capital for U.K.-based businesses identified by a 2018 review.
➤ £200 million additional funding has been made available to the BBB to fill gaps left by the European Investment Fund.
➤ Investors should take a long-term view when considering opportunities in the U.K.
The British Business Bank PLC, or BBB, is a state-owned economic development bank that was set up in 2013 to increase funding to small and medium-sized businesses in the U.K. CEO Keith Morgan spoke to S&P Global Market Intelligence about what Brexit means for businesses, investors and managers, and discussed the BBB's £2.5 billion long-term investment program, called British Patient Capital, founded last year following a review of barriers businesses face accessing finance.
The following is an edited transcript of that conversation.
S&P Global Market Intelligence: What has followed on from the BBB's patient capital review?
Keith Morgan: I think the patient capital review did a really good job in identifying where there are gaps. The biggest issue that we felt needed to be addressed is a relative lack of later-stage venture capital because that's the stage where you take promising companies and they turn into world-class, world potential companies.
One of the measures we've looked at is what I would call equity intensity of the economy, how much equity, how much risk capital is available to fuel the growth of high-growth potential companies. If you look at the U.K. and you adjust for the size of the economy, roughly speaking we've got half the equity intensity of the U.S., but double the equity intensity of other large European markets like France or Germany. What that reflects is, we've got a marketplace which works in terms of access to finance for high-growth companies, but could do better.
At this point in time, you have a heightened level of uncertainty. But notwithstanding that, and notwithstanding that nobody knows what will happen if there is a hard or a no-deal Brexit, the underlying fundamentals of the economy are actually quite strong: the equity intensity, the [U.K. as a source of] unicorns, and the intellectual property that is developed in the U.K.'s universities.
Increasingly, there are opportunities for capital to recognize the potential of that intellectual property and to develop the companies that we're talking about. We are at a very interesting point where the patient capital review can have a real impact.
Brexit obviously throws up a lot of questions for U.K.-based private equity funds. What sort of environment do you expect to see for U.K. private equity in the near future?
I think there remains good potential for investment. In the short-term, the uncertainty around Brexit probably feeds through in a couple of different ways: one is that we have witnessed a much lower level of activity from the European Investment Fund, or EIF, [an EU agency that provides finance to SMEs via commercial banks] investing in the marketplace. They have been an important limited partner investor in venture capital and in growth capital. The question remains what their role will be in the U.K. market post-any solution of the Brexit.
The second way it feeds through is at this point in time, it would be very natural for institutions to think about their asset allocation and wonder about their preference for U.K. assets versus other assets in the world.
What role do you see the BBB playing post-Brexit in private equity?
The Chancellor [of the Exchequer, Philip Hammond,] has very helpfully said that he believes that the BBB should be capitalized to backfill any gaps that the EIF leaves if they are not operating in the marketplace post-Brexit. At the last budget, in autumn 2018, the Chancellor did make available £200 million additional funding for the year 2019/2020 contingent on the EIF not having a role. That itself is just for one year, but then the government has what it calls a spending review that it will be doing some point this year which will consider future funding.
There are some investors and general partners who do see opportunity post-Brexit vote. How do you sell the opportunities in the U.K. when we're facing Brexit?
It's important for investors to take a long-term view. The review we completed recently was the patient capital review because this is about investing with patience and thinking about opportunities that could be developed over a 10- or 15-year period. If you're investing in the early-stage companies that are developing new technologies, new businesses models, challenging the old way of doing things, then you are looking at a time frame which might be 10 years. Of course, that's different to the traditional private equity time frame.
What would you advise small businesses to be doing across the next three or four months as they ride through Brexit uncertainty?
The important thing for businesses is to get the best source of information that they can. There is information that's been made available by the government, so you can dig into that to understand if there are particular facets of your business that are going to be impacted by whatever the outcome of Brexit. It's worth doing that research.
I'd also say that if companies are in any way concerned about their finances, then now is the time to speak to their financial provider, anticipating what it is you might need.