Rescue to recovery
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
We continue to have to face the consequences from the biggest financial crisis in generations, but we are now moving from rescue to recovery
As part of the Spending Round 2013, the Chancellor announced that £11.5 billion of savings would be found from government budgets in order to continue along Britain’s path to deficit reduction.
This will allow a further £3 billion per year to be spent on capital from the year 2015 to 2016, boosting investment in infrastructure and supporting economic growth, at the same time as ensuring a sustained reduction in the deficit.
Alongside our strategy for deficit reduction, we are determined to ensure that business is successful. This is the key to the recovery. Our consistent ambition has been to make the UK the best place to start and grow a business.
We are also seeing the benefit of successful businesses, like those you have invested in:
- firstly, the employment rate recently reached its highest level since records began (1971): 29.76 million, a 24,000 increase since the last quarter
- secondly, Companies House records show that there were 450,000 new incorporations in 2011/12 (latest data), the highest on record
- thirdly, the UK remained Europe’s top recipient of foreign direct investment projects in 2012
But, we are not resting on our laurels - our aim continues to be for the UK to be the best place in Europe to start and grow a business.
Overview of government support
Today I firstly want to outline how government is helping small and medium sized companies grow and fulfil their potential. And it really is important that they do grow because:
- they employ 14.1 million – nearly 60 per cent of the total private sector workforce
- they had a turnover of £1,500 billion - this accounts for nearly 50 per cent of the total turnover in the UK private sector
- they contribute about the same as large business to UK output and private sector turnover
Now, we all know that it has been much harder for some businesses to access appropriate forms of finance since the financial crisis. One of the lessons from the financial crisis was also that the economy has been too reliant on only one source of finance – that is debt finance from the Big Four banks. About 85 per cent of the SME current account market sits with the big four banks – RBS, Lloyds, Barclays and HSBC.
We are acting on this lesson.
To start with, we are working with the market to increase the diversity of finance available to businesses. We announced the creation of the government-backed Business Bank last September, with £1 billion of new public funding and the bank will become fully operational next year.
We have already launched its first phase - a £300 million Investment Programme. Through this, the government will invest alongside private investors to provide diverse sources of debt funding for SMEs. Since we launched the Investment Programme, we have already received an encouraging number of early stage proposals from a diverse range of lenders. The programme remains open for proposals and the first investments are expected by the end of this year.
To give you an idea here about how this £300 million will be invested, we ran a similar scheme, the BFP, last year targeting new and innovative lenders. After running a competitive process, we are investing through a number of different platforms, including peer-to-peer lenders (Funding Circle, Zopa), invoice financing (Urica and Market Invoice) and other new providers such as BOOST&Co. and Beechbrook Capital. This is not business as usual for financing UK businesses – this is strong and radical diversification to complement the traditional, established forms of finance.
But many of you will know the limitations of debt financing and that equity financing is often needed for the most exciting, longer term investments.
We have already committed £200 million to Enterprise Capital Funds over the current Spending Review period. So far over £100 million of new investment has been made available for high growth SMEs in the software and cloud computing, science, technology and engineering sectors.
At Budget we went further and announced an extension to the Enterprise Capital Funds programme through the £25 million VC Catalyst Fund. The VC Catalyst Fund is designed to co-invest in funds that specialise in early stage venture capital and are near to close, so that more investment can rapidly be made available for SMEs.
This government has also taken a number of significant measures to improve companies’ access to funding from the public equity markets. These measures include:
- firstly, we announced on Monday that we will be widening the range of eligible shares for ISAs. This change should benefit SMEs. For example, over one thousand companies listed on the Alternative Investment Market (AIM) will now be eligible for direct ISA investment. This could provide a major capital injection for SME equity markets
- secondly working with the London Stock Exchange to develop its new ‘high growth’ segment
- thirdly the announcement in the March Budget to remove stamp duty from the trading of shares on growth markets
EIS and VCTs
The Enterprise Investment Scheme (EIS) and the Venture Capital Trust scheme (VCT), have since their introduction in the mid-1990s helped small companies’ raise in excess of £13bn of investment.
I think most people here today would agree that these schemes deliver vital finance to small companies.
This government recognises the key role EIS and VCT schemes have to play in providing finance, and has improved them:
- increased the rate of income tax relief given under EIS from 20% to 30%
- increased in the size of qualifying company for both EIS and VCTs to fewer than 250 employees
- increased in the size of qualifying company for both EIS and VCTs to having no more than £15million of gross assets before the investment
This package of measures has made investing in small companies even more attractive and allowed more companies to benefit. But, we wanted to do more…
It is well known that small and early stage companies often struggle to raise the finance they need to grow. We recognise this difficulty. This is why we launched the Seed Enterprise Investment Scheme (SEIS).
SEIS takes many of the elements of the popular EIS scheme, such as income tax relief for purchasing shares - but increases it from 30% to 50% to reflect the special circumstances of small, early-stage companies. It’s a scheme which has more than a few envious glances from the USA. Certainly, investors that I have spoken to wish they had it over there.
It’s a fantastic scheme to help raise finance, and one which we are keen to make sure SMEs and the right investors know about. For example we have put on a series of events for SMEs around the country to help explain options for raising finance and highlight SEIS, and have also undertaken a digital marketing campaign.
In the 2013 Budget, to continue to encourage investors to take up SEIS, the Chancellor announced a limited extension of the capital gains tax holiday. Any investors making capital gains in 2013-14 will receive a 50 per cent capital gains tax relief when they reinvest those gains using SEIS in either 2013-14 or 2014-15.
It’s too early for any official data on take-up of SEIS, but the research by Deloitte and the UKBAA published today indicated that it is having an effect:
- 74% of respondents said EIS or SEIS were significant or highly significant to their investment decision making
- 58% of respondents said they would have invested less or not at all if EIS or SEIS was not available
SEIS was used in 12% of the angel deals in their sample.
Business Angel CoFund
One scheme I haven’t yet talked about is the Business Angel Co-Investment Fund.
Launched at the end of 2011, the CoFund makes initial equity investments of between £100,000 and £1 million in SMEs alongside syndicates of business angels. It works to encourage greater levels of business angel investment and syndication, providing companies with experience and expertise alongside capital to help boost their growth.
And it has been a success. In just over 18 months since it launched it has helped 27 innovative and entrepreneurial British companies secure £50m of investment. Every £1 invested by the CoFund (£10 million) has so far leveraged £4 from business angel syndicates and other investors (£40 million).
One of the companies backed by the CoFund is YPlan. YPlan is a ‘going out app’ so people can find and book tickets for events at the last minute. It has been downloaded 200,000 times from the UK App Store, with the company estimating it’s now installed on more than 10% of iPhones in London. This success has led to YPlan recently raising $12 million in Series A funding and will now be expanding into the USA.
Another is Micrima, a Bristol University spin out which is revolutionising screening for breast cancer. Their approach is far more effective and safer than existing technologies and, due to its high responsiveness to certain physiologies, is of particular interest in South Asian healthcare markets. In short a great commercial opportunity, and one which is helping in the fight against the leading cause of death for women, aged 35 to 55.
At Budget in March we announced that the Business Bank will be putting an additional £50 million into the Business Angel Co-Investment Fund. This will double its size and enable it to continue to meet strong demand. This is a real vote of confidence of the value of your work.
I wanted to do more though…
Today I am delighted to announce that we removing the CoFund’s current geographical restrictions. SMEs in all areas of the UK are now eligible to receive CoFund investment.
This means that the business angel syndicates will be able to propose the most promising and entrepreneurial small businesses, wherever they found in the UK, to the CoFund for investment. This will give growth and jobs a real kick-start across the country.
Of course, there is still more that we can do to help businesses, which is why we are establishing the Business Bank. In addition to increasing the supply and diversity of finance, it will bring together existing finance schemes, enabling greater flexibility and responsiveness in the way they are managed. By taking this joined-up approach, vital resources can be channelled to those initiatives that best support growing businesses.
It is vital that small businesses and entrepreneurs have access to range of finance options, to give them the choice and flexibility that suits their needs. And you, the business angel community, have a key role to play here.
Investment is crucial for those companies that do want to grow and are, or could be, the ‘Vital 6 Per Cent’ - the small number of fast-growing businesses that create the lion’s share of employment growth.
We are operating in a world where many of today’s global companies did not exist a few years ago. This will no doubt apply in the future too. It is those countries with the entrepreneurial spirit to start a business, and back a business, that will succeed. We have both of these in Britain.
The journey will not be easy, but the most important things never are. We can win this global race. And government is right behind you.
I thank you for your backing of small businesses, and I wish you every success with your future investments.