British Business Bank aims to become ‘government growth fund’

British Business Bank wants greater independence to become a UK “sovereign growth fund” that can reinvest the proceeds of its venture capital investments, according to its new chief executive.

In an interview with the Financial Times, Louis Taylor called on ministers to make key decisions about the future of the state-owned economic development investor, including whether to extend its venture capital arm beyond 2028.

Used by government to support commercial policy options, BBB invests in venture capital that in turn provides funding to companies in fields such as technology and life sciences. The BBB also oversees regional investment and seed capital funding, and administers state-backed loan programs to help businesses during the Covid-19 pandemic.

British Patient Capital, the BBB’s venture capital arm, launched in 2018 with a 10-year mandate and £2.5bn of initial government funding after the Treasury identified a lack of access to long-term funding was holding some companies back. BPC is now the UK’s largest domestic venture capital investor.

Taylor said the BBB is “now at a size that could usefully be self-sustaining outside of the government’s budget process. . . Not that we should be given much more capital, but the capital we have should be recycled and increased.

“It should be seen as the state’s development fund with long-term infrastructure. If we can’t reinvest the income from what we have, the real value goes down,” he added.

Politicians and financial services executives have long talked about creating a British sovereign wealth fund. Nicholas Lyons, the veteran investment banker and insurance executive, said when he became Lord Mayor of London last year that he was working with City institutions to raise money from pensions for an investment fund of up to £100bn, which would compete with SWFs such as those of Saudi Arabia or Norway.

Taylor argued that the BBB’s “100 percent growth agenda” matches the government’s “growth plan.” After the creation of a Department for Science, Innovation and Technology in a Whitehall reshuffle this month, he said, it “will look bigger on the balance sheet as a proportion” of the reduced business department.

However, he warned that if ministers wanted more investment in areas outside of existing programmes, “then we need a bigger fund”, pointing to the need to support industries focused on areas such as net zero.

He added that there is “room to do a lot of it [investing] in a relatively fiscally neutral way through loan guarantees’.

The former banker – who joined BBB late last year from the UK’s export credit agency – said he also wanted to expand the bank’s remit to cover additional funding gaps for UK companies.

This could address areas outside of its existing programs by providing funding for larger, fast-growing startups that would otherwise be at risk of being acquired or having to seek money from abroad, Taylor noted.

“Right now, we’re pretty programmatic with all the different requirements and we have a primary mission that we should actually be able to serve better than we can through programs alone. . . The more money there is in the UK, the longer companies will stay in the UK.”

In an assessment of the BPC published Monday, the BBB said the companies it supports have grown their workforce by an average of 55 percent, which translates to about 4,600-5,000 additional jobs.

In the 2021-22 financial year, the bank delivered an adjusted return of 18.2%, beating its target by 0.06%. Profit before tax was £604.8m, up from £293.5m in 2020-21, mainly due to an increase in net investment gains.

However, given her portfolio’s weight in the technology sector, which has suffered steep declines in valuations, Taylor admitted that “some of the gains over the last couple of years will unwind.”

“Clearly valuations are coming in. But the view on the business outlook now is more positive than it was just three months ago,” he said.

The BBB was allocated £1.6bn in the Government’s 2021 Spending Review to expand regional funds such as the Northern Powerhouse and Midlands Engine, which support companies in different parts of the UK.

In total, the bank had £4.1bn of assets under management at the end of March last year, which included £2.2bn of corporate debt funding and £1.9bn of equity funding.

Taylor pointed to the funding gap for companies looking to raise more than £50m, describing it as “an area where we could play usefully, but that will require some resources”.

He added that the “halo effect of a small portion of tangible government support” was huge for industries where companies often took riskier bets on new technologies and innovation.

“And it comes without the stigma of government ownership, statism or picking winners because we invest on a purely commercial basis,” he said.

The BBB’s role in managing Covid support schemes has raised its profile, although billions of pounds of fraud have since been uncovered – notably in relation to the ‘bounce’ loan scheme – after borrowers were subject to only light checks.

But Taylor, who took over after the programs ended, said the losses were “just the nature of [bounce back] program, which was intended to make a quick buck.”

The government also committed more than £1 billion to start-ups through convertible loans under the Future Fund, which was aimed at protecting promising technology and early-stage businesses at the height of the pandemic. However, companies that received taxpayer money through this program have similarly failed.

Taylor admitted that as a “Covid venture capital portfolio, the level of discretionary diligence was relatively low”. The fund is now being depleted, he said, by selling off its stakes in new fundraising rounds or through company sales.

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