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The good growth blog: Smart policymaking can drive growth

The good growth blog is written by BGF’s Executive Chair, Stephen Welton.


I recently addressed the annual banquet of the Worshipful Company of International Bankers at the Mansion House, one of the more recent additions to the long and worthy line of livery companies of the City of London – a proud tradition showing the enduring power and relevance of the City. It was a privilege to be asked. Previous speakers at the company’s formal dinners have included Alison Rose, chief executive of NatWest Group, and the Archbishop of Canterbury. I wanted to give the audience of sense of something much smaller, something local and topical, and crucially outside the Square Mile, namely the challenge facing growth-stage businesses and what investors and policymakers can do about it.

I began by discussing something the UK and the City does extremely well, which is provide funding to quoted companies. The UK is one of the best places in the world to raise capital if you are a large, listed entity. We have deep, liquid capital markets. We have incredible expertise concentrated in the City of London.

In recent years the UK has also become far more effective at providing funding to very early-stage companies too, thanks in part to supportive tax treatment for private investors. In particular, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS), and various other initiatives aimed at promoting entrepreneurship. The latest statistics from EIS show the number of deals, and amount raised, continues to rise, demonstrating that this is a valuable and enduring means of supporting small businesses.

So, if you’re a company raising funding in the UK, and you’re very big or very small, we’ve got you covered. That’s especially true in and around London – particularly in places like Shoreditch – and in the so-called ‘golden triangle’ that connects London with Oxford and Cambridge.

What we’re not so good at is supporting companies in the middle stage – if you want, once the toddlers start to run not just walk. These businesses are sometimes called scale-ups. At BGF we call them growth-stage, from which we take the term ‘growth economy’.

Growth-stage businesses are interesting because they in are in a transitional state. They probably started small – a couple of researchers spinning out an idea developed in a university lab, perhaps – but through hard work they have proved the feasibility of their bright ideas and are now operating as fully fledged businesses.

They employ a meaningful number of staff. They have moved out of the bedroom or garden shed and into their own offices, factories, warehouses. Whatever the sector, and we invest in practically all of them, from e-commerce to life sciences and advanced manufacturing, these growth-stage businesses are the inventors, the innovators, the disruptors.

Crucially, they are regionally dispersed. Growth economy businesses are found in all areas of the country, in each of the four nations of the UK. They are also found in other similar economies such as Ireland, so this is not just a local trend.

They are businesses like Gousto, which delivers millions of recipe boxes around the UK every week, or like Bramble, the hydrogen fuel start-up, or like Orbex, a company in the remotest North East of Scotland that makes rockets for sending small, low orbit satellites into space.

The good news is that there are lots of businesses like these. According to research that BGF did in partnership with PwC, there are more than 21,000 businesses in the UK that fit our definition of a growth economy business. They are the beating heart of the economy.

The problem is that these companies tend not to be large enough to access those deep reserves of liquidity that are available to listed entities. So, where do they turn when they want to accelerate their growth to the next stage, to go up the escalator, so to speak, and where debt and banking is not the right answer? A refrain we hear again and again at BGF is, “I have built my business to a stage where it is turning over £10 million a year. But I don’t want to stop there. I want to turn this into a £100 million business. But I don’t want to sell out. How do I do it?”

The truth is that in the UK, it is hard for businesses to bridge the funding gap between big and small. The needed sources of funding just aren’t available at scale in this country for growth-stage businesses, firstly because these businesses are typically private, so they can’t access public market funding, and secondly because banks cannot provide enough funding to these businesses at scale – quite rightly, because they cannot be built on debt alone.

This shortfall of bank financing is understandable when you consider the centralisation of banking expertise in the City of London and the regulatory trends that have affected the sector. Banks, and the regulators that oversee them, are understandably cautious of too much lending to higher risk, growth-stage businesses, and certainly loathe to lend the kinds of sums that would be transformative for very rapid growth. That was part of the thinking behind the US Volcker Rule – that banks should not be involved in ‘casino capitalism’ and that principal investments by banks were to be discouraged. We can see the clear thread from Volcker to our own, homegrown ring-fencing rules, so gold-plated they may have had more unintended consequences in making UK banks less competitive. The review currently underway on this is an opportunity to reset and level the playing field.

My point is that, for long term and transformational sums, you need an equity investor, not a lender. You want someone who is in it for the long term – an investor who is big enough to have a large, diversified portfolio. You want an investor who will go on the journey with you, through the ups and the downs.

At BGF, we have done our best to tackle this problem. So far, we have invested over £3 billion in more than 450 businesses in the UK and Ireland. We are by some margin the most active growth capital investor in the country. However, speaking frankly, we have only made a small dent in a large problem. The shortfall in funding for growth-stage businesses is much larger than BGF alone can address. In fact, it has been estimated to be at least £15 billion a year and there are reasons to think it has grown even larger during the pandemic.

So, what should we do at a national level to solve this challenge? The pension sector is one place to start. The government has conducted a consultation that could lead to a relaxation of the so-called fee charge cap, which acts as a barrier to defined contribution funds investing in unlisted equities. There are over £1 trillion of assets already in DC schemes. Allocating 5% of that sum to growth-stage companies would unlock £50 billion of investment and unleash the vibrant economic potential of the whole economy.

I am also hopeful that reform of Solvency II regulation, now that the UK is out of the EU, will increase the ability of insurers to invest in these types of businesses. There is also the ring-fencing review I have already mentioned, where some loosening of the rules could yield a great deal in terms of additional capacity for the UK banks. All these options go to show that immense possibilities are within the grasp of policymakers. If government and the City can work together, using their combined expertise and clout, we can make the UK a truly competitive global capital market for scaleups.

So, there are many reasons to be hopeful. I have no doubt that the benefits of investing in growth-stage businesses are understood at high levels in government. The challenge, as ever, is to make this message land when there are hundreds of other messages being thrown at the Treasury every day. But we at BGF are determined and given the progress we have already made in solving this problem, I believe that we will make meaningful progress in the years ahead. My optimism stems from the talent and experience we have as a country, but critically the talent to come and to nurture. The entrepreneurs, supported by bankers and investors, really are tomorrow’s world, and what an exciting one it promises to be.

BGF Insights 03.17.2022
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Stephen Welton, executive chair, BGF
Stephen Welton Executive chair

Before taking on the role of executive chair, Stephen was the founder CEO of BGF between 2011 and 2020.