Speech by the Financial Secretary to the Treasury, Mark Hoban MP, at the Lord Mayor's Private Equity and Venture Capital Dinner
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by the Financial Secretary to the Treasury.
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My Lord Mayor, ladies and gentlemen.
As I stand here in the Mansion House I cannot help but think about how the City’s history reflects the forces that have shaped our economy.
When Henry Fitz-Ailwyn, a draper, became the first Lord Mayor, Norman London was divided into Guilds trading at home and abroad. Each of your predecessors, my Lord Mayor, has seen the City grow, evolve and contribute to the wealth of our nation.
At its best the City finances trade, industry and enterprise. For no sector is this more true than private equity.
My Lord Mayor, as you know well from your own experience, private equity has contributed funds and expertise to business in both the UK and abroad.
And London has become a major centre for private equity and venture capital and associated professional services such as accountants and lawyers.
If you were to ask me why the City and the economy succeeded, I would say that it is because they have embraced change - never stood still.
So this Government’s role is to do all it can - with the fiscal constraints we have inherited - to encourage change and foster dynamism.
The private equity and venture capital sector have played a vital role in this over the last 30 years.
We want to see this continue in the future.
Private sector led recovery
Tackling the record deficit that this Government inherited and laying the foundation of economic growth are the most important challenges we face.
The crisis in the eurozone shows the consequences of not tackling the deficit are severe.
Greece in particular serves as a warning. As the Chancellor said a few weeks ago, what began as a crisis of liquidity and then solvency in banking systems has been followed by market fears about the solvency of some of the governments that stand behind them.
This is why in the Budget we set out action to pay for the past, and plan for the future.
We set out a model that achieves balanced economic growth in Britain. Growth that is not driven by the unsustainable accumulation of debt, but by a new economic model which learns from the mistakes of the past.
A model built on saving, investment and enterprise, based on the conviction that a genuine and long-lasting economic recovery must have its foundations in the private sector.
We have to show the world that Britain is open for business.
And in the Budget we have made a start.
We set out a roadmap to reduce corporation tax over the next four years, from 28 per cent today to 24 per cent by 2014 - keeping it the lowest rate in the G7 and one of the lowest in the G20.
We have opened Britain up for business by agreeing a long-term approach to the taxation of foreign profits.
And this work will continue over the summer and we will discuss with business how best to make the UK corporate tax system more competitive within the current fiscal environment.
There are many challenging and complex issues in this space and we want to work with you and take the time to get this right.
Importance of Private Equity
As we look to drive the recovery with business at the helm, private equity will play an invaluable role in providing the capital and the expertise needed to help businesses to grow.
In the UK we are traditionally more open to private equity and venture capital than our European neighbours and culturally we are more likely to accept investment.
Indeed, BVCA figures confirm this.
The UK hosts 60% of Europe’s Private Equity and Venture Capital industry.
I am delighted that London’s pivotal role as the leading centre for private equity in Europe has been confirmed by Avista Capital Partners’ decision to set up its first overseas office here in London.
This confirms to me that people still have trust in the City and its expertise.
The accountancy and advisory firm Grant Thornton polled 100 private equity executives - probably including some of you here this evening - who reported that in total they are likely to invest over £5bn in the next year.
It is encouraging to see that you have the resources to invest and I hope you will hear the very clear message from this Government that Britain is open for business and that you should invest here.
This is also true for venture capital as high-growth, innovative companies are essential to the economy. Having read the Nesta report I hope that firms not only find existing opportunities, but also go out and make some.
I have already touched on restoring the balance between the public and the private sector, but there is another crucial balance that needs to be restored - the balance across the different regions of Britain.
Again, private equity and venture capital can play a vital role.
I am aware that almost two thirds of UK private equity investment was in London and the South East last year.
And as with all financial services, people tend to associate private equity and its investment to all be focussed within the M25.
But the reach of private equity investment is far more widespread and diverse.
I know that in my own constituency of Fareham on the south coast, Hertz, Pets at Home, and TGI Friday’s are all private equity backed companies.
And these companies alone have outlets across the whole of the country.
It demonstrates the broad reach that private equity already has and the potential for it to seek to drive growth across all regions.
As we seek to spread growth more widely across the country, I urge you to look beyond the Greater South East for those opportunities.
Spreading prosperity beyond London and the South is just an example of the way we need to diversify the economy.
In the years preceding the financial crisis the economy had become too dependent on bank lending.
This needs to change. We need greater diversity in the sources of business funding in the future to avoid repeating the mistakes of the past.
That is why we are publishing a business finance Green Paper at the end of this month to consider the broad range of finance options available to businesses of different sizes - including equity.
It will invite views from business, investors and lenders on priorities and approaches to enhancing access to finance - across the spectrum - to viable businesses.
A key part of this will be broadening the use of equity finance, particularly among smaller businesses with growth potential.
Currently, only 1 to 2 per cent of small businesses use equity finance at any one time.
That is a drop in the ocean and a missed opportunity for the UK’s small businesses, and for our economy.
We are all familiar with the so-called ‘equity gap’ - the missing market in equity finance in the range of £250,000 for start-ups, to £10 million for growth businesses.
But there are now a number of public/private funds that have been created to fill this gap and to incentivise investment here.
Most recently, this includes the additional £37.5m Enterprise Capital Fund and the commitment to the Growth Capital Fund - both announced in the Budget.
However, there is also a demand-side problem that we need to acknowledge.
Many small businesses still have an aversion to using equity, whether through a misunderstanding of what is involved or a lack of knowledge about how to seek it.
I would particularly welcome your views on market-led education and information initiatives that could increase equity awareness and improve investment readiness for small businesses.
We are committed to doing whatever we can to boost the competitiveness of UK companies to help drive the private sector recovery.
But as we do so at a domestic level, we want to ensure that European and international measures support our national initiatives and encourage capital to flow into the UK.
And this brings me to the second area I wanted to cover with you today - the AIFM directive and our engagement within the EU and internationally.
I should like to repeat my thanks to the BVCA and to those of you in the industry who have been engaged and lobbying in Europe.
It has helped us to foster a greater understanding from our EU partners of the important role that private equity plays.
But there is still some way to go and we have a number of important objectives to secure as negotiations on the AIFM Directive progress.
There are two that are of perhaps greatest relevance to the private equity industry.
The first is attaining a workable third country passport without closing the EU to managers who cannot attain this passport.
It is important that we do not limit investor choice and access, and maintain national regimes that operate in parallel alongside any passporting regime.
Secondly, progress needs to be made on the provisions on firm disclosure and capital adequacy in target companies.
We believe that EU private equity should not be at a competitive disadvantage to funds from other jurisdictions and that requirements should apply proportionately to the size of the business.
We will continue to press these points, and we are still in negotiations with the Parliament, Commission and the Council on these issues.
The trilogue process is ongoing, and we expect the Belgian Presidency to make the Directive a priority when Brussels returns to business in September.
I have raised the UK’s concerns with Commissioner Barnier and MEPs, and my officials continue to push the case at a technical level for a proportionate, workable and non-discriminatory outcome.
But we must not think for a minute that when the Directive is finalised this is game over. The level 2 negotiations are equally important and good work done finalising the Directive can be undone.
Equally issues where there are still difficulties that can be finessed.
I am pleased to see that the BVCA continue to update their members on progress, and that they have taken such a leading role is ensuring the views of private equity and venture capital are well promoted in these negotiations.
And I assure you we will continue to work closely with the BVCA and other industry leaders on the directive.
Importance of EU
It is important that we take this approach elsewhere in Europe and internationally as we continue to shape financial services.
London is an open market place and inseparably joined to world markets, not least to European markets.
We benefit hugely from open markets - people, capital and business are mobile and this Government will work hard to maintain the UK as an open economy.
You all have first hand experience of this.
In the City, KKR, Blackstone and PAI Partners jostle for business alongside Barclays Private Equity, Hermes Private Equity and Amadeus Capital.
We believe this only serves to enrich the UK economy and we are strong believers in the European single market.
It is for this reason EU regulation is, and will continue to be, hugely important when it supports and strengthens the single market.
Global regulatory frameworks that respond to the challenges that an interconnected financial system presents will be just as important as getting regional and national level regulation in place.
And the UK should have a huge influence in shaping the international regulatory architecture, whether regulation be small in its design or vast in its scope.
This Government will make sure this will happen.
But this will not be just about Government, this will be about Government and industry working together.
We have a large financial sector, we have great expertise, and we must use the full force that this carries.
But we need to get the regulatory framework right for the future strength of the UK, European, and global economy.
My Lord Mayor, the challenge this Government faces is twofold - tackling the deficit and laying the foundations of growth.
In our Budget we have laid out our plan to encourage growth, but realising our plans relies upon the energy, enthusiasm and commitment of business and the City.
Private equity and its portfolio companies can play a key role in this.
This is why we support the sector and want it to flourish -whether it’s private equity and venture capital businesses based here or the growth of your portfolio companies.
Both you and they can be at the heart of the change that has helped sustain the growth in the UK economy in the past and will help sustain it in the future.
And together we can all help build a new model of economic growth that delivers the change this country needs and lays the foundation for its future prosperity.