Speech by the Financial Secretary to the Treasury.
It’s a pleasure to be here this morning and to talk about the Government’s plans for the economy.
The role that private equity has to play.
And our approach to European financial regulation.
As the Minister responsible for financial services, I’m well aware of the issues your industry is currently facing.
That private equity markets have suffered over recent years.
That on the one hand, you hear Government calling for greater private investment.
But on the other, the impact of the financial crisis has led to a general re-pricing of risk… and that investment opportunities are not as clear cut as they used to be.
From a policy-making perspective, this is perhaps one of our greatest challenges.
Because investment and growth are one of the same.
They’re mutually reinforcing.
To the extent that you struggle to have one without the other.
And this is a dilemma that any Government faces in the wake of a recession.
Where growth has taken a hit, confidence has suffered, and investment prospects are more difficult to forecast… what’s the solution?
Well, our answer has been to set out a clear and credible plan for the growth.
After a period of turmoil, what investors need is some certainty.
And that’s what we’ve provided.
We’ve made it clear that tackling the deficit is our chief priority.
Because uncertainty surrounding the public finances is just a recipe for failure.
It would risk spiralling interest rates, rising inflation and higher taxes in the future to compensate for wasteful expenditure today.
So yes, we’ve had to make difficult judgements about how we spend our money. But the alternative - to do nothing - would have damaged the economy for years to come.
Indeed, we need only look across at the Euro area - and the recent turbulence in Ireland - to understand the cost of delaying difficult decisions.
Which is why we’ve set out our fiscal mandate - to eliminate the structural deficit over the next five years; return debt to a falling path over the same period; and place our public finances on a stable footing.
Last year’s Spending Review saw us take a big step towards delivering this promise - and it’s a promise we fully intend to keep.
But let’s be clear.
Returning our public finances to a stable footing is not enough.
There’s also a role for Government in supporting the private sector… by creating a stable and competitive tax system.
That’s why we’ve set out our long-term plans for corporation tax - cutting the rates in each of the next four years.
Set up the Office of Tax Simplification, to help improve business taxation.
And are working with industry to address some of your concerns - in areas such as the rules for taxing offshore funds.
We want to create a simpler, more competitive, and more stable tax environment.
And be a Government that interferes less…
…that gives businesses more freedom to make their own decisions and seize new opportunities as they arise.
In a global, mobile economy, we want people to see the UK as an excellent place to locate, to invest and to grow.
SME access to finance
But on the path to sustainable growth, access to finance remains an obstacle.
Financial institutions have retrenched; weathered the financial storm; and looked to rebuild their balance sheets…
Credit has become harder to come by; investment has suffered; and the flow of cheap money has all but dried up.
Small and medium-sized enterprises in particular are finding it difficult to secure affordable funding.
And if we want a private sector led recovery, this is something we have to address.
Because in the UK, SMEs represent almost 99% of all businesses.
They’re easily the nation’s largest employers. Within the financial services sector itself, up to one half of jobs come from SMEs.
Ultimately, it’s the success of SMEs that defines growth in the economy.
So we’ve been looking at how to create the right incentives to promote responsible and sustainable lending…
…not just to help the small businesses we have today, but to also invest in the industries of tomorrow.
Whether it’s green technologies, advanced manufacturing, pharmaceuticals, engineering or whatever the future may hold, it will be largely built on the back of private finance.
Now I recognise that the Venture Capital climate has been difficult - and that big buy out houses have had to survive the collapse of debt markets.
But we are seeing mid-market firms plough through these testing times.
In the last three years, mid market Management Buy Outs have invested £4.5bn in UK companies.
And their contribution is hugely significant - reaching 55% of total fundraising for 2009.
A thriving SME sector must be built on a diverse collection of funding options.
As the financing of SMEs is something of an ecosystem - one that must have the resources and tools to nurture every firm, from the smallest start up to more established companies. These tools must be varied and the resources plentiful.
And Mid market plays a crucial role in this ecology- but I feel you could achieve even more.
While the IPO market remains largely stagnant - Mid market can help to get finance flowing again.
And, as a Government, we’re also taking action.
In our July Green Paper - Financing a Private Sector Recovery - we looked ahead to the future price and availability of business finance in a recovering economy, in particular for creditworthy SMEs.
And as part of our response to this paper, we’ve announced a series of measures to increase the flow of resources such as:
- The £1.5 billion Business Growth Fund - to provide equity investment to established and growing businesses- a modern day 3i
- £200 million of additional funding - for the Enterprise Capital Funds;
- And continued support for the Enterprise Finance Guarantee - to enable over £2 billion of lending to small business.
But it’s also apparent that many SMEs still feel shut out of the equity financing market.
That they’ve become over-reliant on bank lending as their primary source of external finance, when other types of funding would better suit their needs.
And this is something we’re keen to address.
Because… with over 70% of the European equity market…and a vast array of specialist services and expertise… we should surely be leading the way?
And as Europe’s equity capital, we have stay vigilant when it comes to the Commission’s busy regulatory agenda.
There’s no doubt that European regulation is playing an increasing role in financial services- and will shape the role and remit of private equity.
Our priorities in this regard are clear.
We would like to see evidence based and proportionate regulation.
Regulation that is considered, thorough, and addresses real and tangible problems.
But let me clarify, it’s far more important to be doing what’s right, than to be seen to be doing a lot.
Most importantly, European legislation should not entrench Member States or build a fortress around our financial markets.
Rather, the promotion of growth should be a priority.
In a global financial world, we cannot afford to bow to protectionist agendas.
This risks unravelling the progress that the Single Market has made over the past decade… and diminishing - rather than increasing - the immense benefit it has brought to London, the UK and Europe as a whole.
We only need to look to the Alternative Investment Fund Manager Directive - which has a direct impact on the Private Equity industry - to see the importance of these principles.
As the Chancellor himself said, when we came to power the previous Government had left us with ‘something of a hospital pass when it came to a negotiating position’.
But in the space of only a few short months we negotiated a complete reversal of the Council’s position.
First, we managed to resist proposals that looked to bring acquisitions of SMEs into scope; ban leveraged buyouts; or introduce disproportionate reporting requirements on Private Equity firms.
Second, we reached an agreement where hedge funds and private equity managers would be regulated in an internationally consistent and non-discriminatory way.
And third, we got the EU passport included as part of the Directive - completing the single market - which will allow third country funds that meet EU standards to be sold freely across all Member States.
This is of huge significance to the UK…
…it will introduce greater competition, open up new markets, and create new investment opportunities.
Most importantly, it’s signalled that the EU is open for business and will not close its borders and restrict free movement of capital.
Part of our success can be attributed to the assistance I received from the BVCA - and the private equity industry - during the AIFMD negotiations.
Industry support and engagement is absolutely crucial in Europe.
And I look to companies of all sizes in the private equity sector to take an active interest in European directives.
For there are many more on the way.
Some will not directly affect your sector.
But others, such as the MiFID Review, will have a profound impact on how you operate; what you can achieve; and how successful you’ll be in the future.
Done well, the Review offers great opportunities for the European Union…
…especially in the area of SME access to capital markets.
Europe already has some of the most dynamic growth markets in the world - AIM in London with almost 1200 companies, New Connect in Poland with 185, and Entry Standard in Germany with 132… to name just a few.
We should build on this success.
And the Commission’s recent proposals for an “SME market” regime - to meet the needs of smaller companies - is an excellent place to start.
But I’d encourage the Commission to go further, and consider a wide range of initiatives to stimulate demand for investment in small, growing, innovative companies.
Initiatives that recognise the true breadth of financing options .
That examine the SME ecosystem, and take action to ensure businesses have what they need to grow, and to grow sustainably.
Equally, I’d encourage you to help us make this case…
…to demonstrate the value private equity adds to the European economy, and make recommendations on the best way forward.
Because, as a Government, we’ve made a good start in Europe.
We’ve protected the national interest.
Campaigned vigorously for robust and proportionate regulation.
And successfully represented the financial sector.
But now isn’t the time for complacency, or to reflect on past achievements.
There are many more financial directives just over the horizon.
So I’d call on you to join us in being pro-active.
To be ready with ideas about how to shape financial directives, even before the Commission has published its own proposals.
And help us compile the rigorous evidence needed to justify our positions.
And we also need you to broaden the scope of your engagement… moving beyond discussions on the domestic front and turning your attention to other interested parties across the EU.
I know that, to a certain extent, the BVCA already does this… but I feel more could be done to get our messages across.
Just as we engage with our international partners, you need to do so too, with your opposite members.
So as we progress into the New Year, we should build on the progress we’ve already made.
Look at how best to finance growth in 2011.
Support the recovery.
And continue to shape the argument in Brussels.
Those of us involved in these debates know this can only happen through consistent engagement and application.
That as a government, we won’t achieve this alone.
That if we’re to be successful, we’ll need your support.
And your ideas for reform.