At the end of this month, the third of the British Business Bank’s ‘Investment Funds’ is launched in Cornwall and the Isles of Scilly. This follows the launch of similar (but somewhat larger) Funds in the Northern Powerhouse and Midlands Engine areas, and adds to the suite of programmes that the Bank has on offer. This is great news for Cornwall and the Isles of Scilly (CIoS) – and follows a long and rather tortuous journey in proving market demand and viability to deliver a fund of this type in a sparsely populated, peripheral area like CIoS. If you aren’t aware of these Funds visit www.british-business-bank.co.uk to find out more. I’m really excited that the Bank, in partnership with the LEP, has extended this type of non-grant investment (loan and equity) outside of city regions in the north and midlands. There is now potential to realise a major cultural shift for business to access finance beyond the previous (perhaps over-) reliance on grant funding. Alongside this, I hope that CIoS can also act as a real catalyst for investors to look beyond our cities for great investment opportunities.
Why do I think this is so important?
Well, with the austerity agenda at the fore, the public sector is clearly moving away from driving economic growth through an emphasis on grants. For many years we have seen this as the response to solving ‘market failure’. In the last 30 years or so, the largest investment of this type has come from EU Programmes. With Brexit and continued austerity, there is a likelihood that grants in their current guise will disappear from the funding landscape. This would be bad news indeed for the places and communities who need investment of this sort. Many aspects of the economic development agenda will never generate a direct financial return – public realm, affordable housing, access to employment training and business grow on space where there is a cost-value gap. I would argue they generate valuable indirect financial return, including savings in benefit costs to the state, and perhaps most importantly, economic impact through improved quality of life for people.
However, whilst prioritising investment in this sort of ‘economic inclusion’ has been a much needed focus, it has almost certainly been diluted through a proliferation of grants across a wider agenda. An over-reliance on grant funding has generated a ‘grant culture’ for some. This is not meant to be a pejorative statement, although I’ve been on the receiving end of businesses and organisations who, frankly, have an expectation of getting some ‘dosh’ just because they think they’ve had a great idea. There aren’t many investors (private or public) who would want to invest in something that had limited hope of ever achieving any economic/social impact or financial return. The grant ‘re-bounders’ (those who keep coming back for more every three years or so when the money runs out with little to show for it) cannot be a sustainable means of promoting economic prosperity.
You might be able to tell that I’m a bit of a fan of non-grant public investment. But, as with grants, other forms of investment need a careful and considered approach if they are to act as catalysts for growth. The example of some UK Local Authorities using their capital budgets to buy commercial property (often retail) in other parts of the UK to gain a regular revenue income is, frankly, only a policy of ‘a means to an end’. There are some who are investing their capital locally to support growth in housing and commercial land and property – with a concurrent expectation of financial return (for example, through rent and rates). There is a danger here though that the focus will be on a ‘bricks and mortar’ approach to growth and little in the way of support for what happens inside buildings to generate financial return and economic impact.
Government Departments and their Agencies (such as Innovate UK) are increasingly using the language of a ‘pull’ rather than ‘push’ investment approach, such as through the Industrial Strategy Challenge Fund. What does this mean in practice? Simply, rather than a focus of public investment in creating new research or new intellectual property and then hoping that at some point in the future such investment will act as a ‘push’ towards commercialisation – the investment is instead focused on achieving commercialisation to act as a ‘pull’ for new innovation. The pull is also meant to achieve commercial return far quicker. The reward is commercial success rather than the generation of new ideas alone. This is also why the investment is targeted through business (including SMEs) rather than through universities and other research institutions.
This gradual shift in approach towards a commercial focus from public investors will have its challenges to the business community – in particular smaller business. It will often take different skill sets from within a business to drive innovation/new ideas than to drive commercial return and manage potentially complex financial arrangements. This sort of expertise can be difficult and expensive to bring into a business – particularly one that is small and at the early stage of growth. Collaboration with research organisations, financial intermediaries or with the right focus of skills on a Board may prove helpful, but will take time and resource to establish for some companies.
Back to the British Business Bank CIoS Investment Fund for a moment… All this talk of non-grant investment highlights one of, actually, singularly the most important factor for success: private investment. It is private investment which will need to underpin any shift away from grants. One of the real benefits that the Investment Fund will trigger is that the Fund can ‘blink first’. In other words, the public investors can, and should, have a stronger appetite for (managed) risk. Public investors can better balance the economic as well as financial return on any investment. It is public money after all. Therefore, the Fund should help attract more private investment sources into SME businesses by taking on more of the risk – which in turn could generate significant reward. I really hope that investors who so rarely leave the confines of the City will begin to see the opportunities in places like Cornwall. In times to come, with less public resource, it is going to be critical that they do venture away from tried and trusted markets. But that’s a big ask.
Of course, the optimum solution to all this is to have a mixed approach to investment – some grants, a focus on inclusion where it’s needed and getting a return on public investment. Sounds easy doesn’t it? To be honest, I’m not sure why it’s not that simple – because it certainly isn’t.
There’s a big gap in our knowledge of the future investment landscape: what, if any, investment will follow once we leave the EU? I’m not going to repeat my last Blog on this one (“The Brexit Vacuum”) – but suffice to say there’s a lot of expectation riding on the ‘Shared Prosperity Fund’ when it emerges at some point after March 2019. How it will compete for limited Government funds alongside all the other priorities (NHS+) is anyone’s guess, but the shift in language following the Industrial Strategy must point to an increased focus on investment-return rather than wholesale grant.
The UK needs some real leadership to ensure the future funding landscape doesn’t become overly complex, but rather a balanced investment approach to growth, maximising what are likely to be scare public resources for quite some time to come. While we’ve still got EU funding and some other national economic growth programmes – let’s make sure we get the most out of them. It will also be important that the business community feeds back on the success or otherwise of the ‘pull’ approach of the Industrial Strategy Challenge Fund.
The British Business Bank Investment Funds are a great place to start to change the culture away from a reliance on grants – but I think it will be important to recognise that this cultural shift won’t happen overnight if as many businesses as possible are to benefit and become ‘investment ready’ and not ‘grant re-bounders’.
Here at ROTHWELL. we do NOT provide financial advice for businesses. However, we DO work with and support companies and organisations who want to understand how public investment of any kind may lead to growth, new products, services and other development. Contact us at hello@rothwellpoint.com