Be Patient, a new investment opportunity is coming, says Hugi Clarke, Director at Foresight Group:
“This month Her Majesty’s Treasury launched a consultation on ‘Financing growth in innovative firms’ part of the ‘Patient Capital Review’ launched last autumn. This is designed to promote investment into small UK enterprises, power the innovative companies of tomorrow and drive the productivity of UK Plc. The notes below provide a summary of the key points in the consultation.
Overview
- The review was launched in August with responses due by September 22nd.
- The consultation seeks to explore ways to promote “long-term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses”
- There is also a desire to replace investment from the European Investment Fund (EIF) that may be lost post Brexit
- The premise of the consultation is that there is a lack of supply of patient capital available to small businesses with the ability to scale
Observations
- The main proposals to address the perceived lack of patient capital involve the creation of new investment fund(s) focused on patient capital, finding ways to promote retail investment into patient capital and encouraging pension funds (DB and DC) to invest in patient capital.
- The British Business Bank (BBB) looks set to be a central pillar of any fund based solution
- There is a general intent to make existing government schemes deliver greater flows of investment to small, innovative companies. In particular, VCT and EIS investment focussed on ‘capital preservation’ are highlighted as unhelpful in this respect.
- Creating additional tax advantaged investments appears to be ruled out although creation of a ‘patient capital ISA’ has been mooted.
- ‘Venture Capital Lending’ is also explored and may lead to a new vehicle for investment
Oversights
- Despite the recognition that retail investment may be central to any increase in the availability of patient capital, the importance of advice in this process is not acknowledged. It’s difficult to see how the potential of retail investors to support patient capital can be met without effective engagement with financial intermediaries and it is telling that there is no intermediary representation on the consultation panel
- Given the importance of advice is not acknowledged, it is perhaps unsurprising the role of the FCA in creating an environment that supports investment into patient capital is also omitted
- The comments on VCT and EIS fail to acknowledge the steps taken in November 2015 to focus investment in small, innovative companies with ‘capital preservation’ VCT and EIS all but extinct in the current market
- The consultation also misses the importance the support small businesses require beyond capital, in particular the knowledge, network and expertise gaps prevalent in small businesses that are attempting to scale.
The outcome of the consultation and review are still some way off, though it seems likely both will lead to new investment opportunities for retail investors.
You can find the full report here: here.
