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The Business Growth Fund, plugging the lending gap

It was hailed as the answer to British firms’ long-term lending problems – a billion-pound pot of bank-backed equity that could bridge the financial gap for hundreds of companies. But as it prepares to launch this year, experts are wondering just how effective the Business Growth Fund (BGF) is really going to be.

The innovative new body has already promised to make more than £1.5 billion available for small to medium-sized companies in 2011. But despite the hype, commentators and industry are already divided about how well the equity system, backed by the high street banks, will work and what it can realistically achieve.

What is the Business Growth Fund?

So what exactly is it and how will it work? Why might it be so important for kick-starting expansion for businesses and the economy as a whole? And why are critics urging caution?

The idea of a bank-sponsored BGF was first raised last year, by then Chancellor, Alastair Darling, in response to the general downturn in lending. With net lending down six per cent in the last 12 months, he hoped making funds available in this way would stimulate future growth – and have a lasting, positive effect on the economy.

Darling proposed working with the major high street banks to establish an investment fund for small and medium-sized businesses to tap into. Signing up Lloyds, Santander and Clydesdale, Darling created a £200 million resource that aimed to reach £500 million of capital. Other banks were less keen to get involved – saying that civil servants’ preference for distributing monies to existing venture capital firms would not build capacity in the market.

Then in July, while coming under political pressure to increase business lending from the new Coalition Government, the major banks took on the project for themselves.

What’s the thinking behind it?

Explaining the thinking behind it Chancellor, George Osborne, and Business Secretary, Vince Cable explained: “This government has always insisted that banks need to increase lending to our essential small businesses, in order to support economic growth, while also restoring customer trust.”

So, which banks have signed up?

The new fund, backed by Barclays, HSBC, Lloyds, Royal Bank of Scotland, Santander and Standard Chartered, aims to invest in individual companies with a turnover of between £10 million and £100 million, in return for an equity stake of at least ten per cent.

Managed by an independent investment company based in London and a range of regional offices, banks will put £350 million into the pot over the next two years – spreading the rest of the total £1.5 billion contribution between now and 2020.

As Fund Chairman and Barclays Chief Executive, John Varley, explains: “As banks we have an obligation to help the UK economy return to growth. The private sector will play a key role in the recovery and it’s our job to help viable firms to be successful.”

What can the fund achieve?

But Angela Knight, chief executive of the British Bankers Association, says and her members are still cautious about how much the fund can achieve – and says its scope could be limited.

“The anticipation at the moment is it will do about 75 companies a year, a bit like where 3i (an international investment company) used to be when it was in this sector,” she explained. “That figure will also depend on what businesses want and we are hopeful that others will come in and commit to the fund.”

The BBC’s Business Editor, Robert Peston, agrees – urging a seasoned, measured view of what the BGF can hope to achieve.

“It is important not to get too carried away,” he says. “I calculate that it will be able to provide risk capital to around 250 middling companies over a number of years (based on the banks’ assertion that they’ll provide £1.5 billion of equity finance in individual lumps of between £2m and £10m).

“That will be seen as a useful contribution to the growth potential of a segment of the economy that has typically found it hard to raise capital. But it won’t be transformative.”

It may not be the cure-all solution that the Coalition originally hoped for but with such a large amount to invest, the BGF’s contribution will at the very least represent step in the right direction.

Steve Porter, Accountants Division


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