The Development Bank of Wales has been up and running since the middle of last month, blessed with £440m to invest and a further £100m of borrowing available to it. A welcome development which will carry high hopes that as the successor to the largely unloved Finance Wales it can really make a difference in all those areas identified for action by the nine different named Funds it manages.
All the deficiencies that are considered to have held back Welsh entrepreneurial initiative over decades are assumed to have been covered. Lack of capital at initial concept stage? There’s the £7.5m Wales Technology Seed Fund. No-one for the retiring owner to hand the business on to except perhaps the management? How about the £25m Wales Management Succession Fund. Sole trader seeking to expand? Try the £18m Wales Micro-Business Loan Fund. And so on.
It appears comprehensive: it’s well funded; it has private sector partners; there will be 54 people in the offices where the various assistance packages will be decided; and the railway lines between Cardiff and Wrexham, where it will be headquartered in a nod to intra-Wales devolution, will be gaining a lot of new passengers. But necessity being the mother of invention it is very much a public-sector body dependent on Welsh Government finance, even if the partners range from Santander and Barclays to Oxford Capital, venture capitalists Venrex, and the British Growth Fund.
So far, so good but It would be even better, if, as both a competitor and a bureaucracy benchmark, the private sector venture capital industry could be persuaded to become more involved independently in financing Welsh growth businesses. This does not, however, mean the big US and UK venture capital houses buying up and trading Welsh businesses with no discernible long-term benefits to the Welsh economy. There is a different vehicle, the Venture Capital Trust (VCT), that does offer an alternative approach, providing benefits to both investors and investees, but conspicuous by its absence in Wales.
VCTs have over the best part of 20 years built up a powerful record of supporting some of Britain’s brightest new start-ups in Aim- and non-Aim-listed companies across a range of businesses from retailing and restaurant chains to high tech, from recruitment to the oil service industry. They are run by professional managers who are paid to get it right, picking companies that are going to be successful, from which they can at some point make a successful and profitable exit. They ensure this by good judgment and close supervision of the investee companies, offering them non-executive directors, where appropriate, and advice and consultancy.
Hundreds of millions of pounds are raised annually by these trusts – names such as Baronsmead, Amati, Mobeus, and Foresight – from private individuals keen to take advantage of the tax breaks offered in return for accepting a higher risk than is carried by money in savings accounts or shares. The breaks have indeed been very good – tax-free dividends, and tax relief on the initial investment of 30 per cent (reduced only in the past few years from an original 40 per cent. This means that an initial investment of say £10,000 will have an effective cost of £7,000 so that if a dividend of 5p is paid the yield will be 500/7000ths or 7.14 per cent, not the taxable 500/10000ths or 5 per cent that would be gained on such a sum in a savings account which would then itself be subject to tax.
The disadvantages are the risks run when investing in small companies and start-ups, and the lack of liquidity – VCT shares can generally only be sold at a discount and must be held for a minimum of five years by law to preserve the tax advantages. Nevertheless, the gains investors have been able to make usually result in new offers being quickly taken up and oversubscribed. Moreover, the managers of these funds have over the years honed their skills in selecting companies and have kept their failure rate within bounds.
Yet, while the sector now occupies a sizeable niche as a provider of “patient capital” to unquoted and Aim-listed companies, they have done nothing to narrow the North-South divide. Indeed, in some ways they are simply perpetuating it by helping modern, often higher technology, high productivity businesses in relatively limited areas of the country to prosper. |
A quick analysis of the portfolios of some of these VCT providers shows a heavy concentration on the south east of England and a total absence of Wales as a location for investments. Of the 70 investee companies held by Baronsmead, 28 were in London, a further 11 in the rest of the South-East, and 31 in the rest of the country, mainly the Midlands and South. In Foresight’s case 60 per cent were in London and the rest of the south east. Mobeus has a more promising 60 per cent away from the capital and its surrounds but in none of these examples is there evidence of support for companies from Wales. With some variations this pattern is reflected in the investment preferences of other leading VCTs.
Now there could be an element of chicken and egg here. Is the absence of Welsh investee companies due to a lack of start-ups and growing companies worth investing in (a possibility that should not be discounted instantly as outrageous) or is the relative dearth in Wales of highly successful quality start-ups itself the result of the lack of private sector backing and in consequence a much greater dependence on the public sector?
It is a difficult question to answer without detailed research but let’s think positively. How can we persuade VCTs to examine more Welsh businesses with a view to increasing their representation in portfolios? Perhaps this is too tough an ask. If they can find enough opportunities closer to London, why devote time and energy to Wales? If there are prejudices against Welsh businesses as investment opportunities, they are not going to be easily overcome.
So why not a Welsh VCT, raising funds in Wales or more widely, with an objective of investing say perhaps 75 per cent of funds in Wales with the rest going to promising businesses elsewhere. Again, it may be argued that the expertise does not exist in Wales for such an exercise or if it does it is already housed in the new Development Bank of Wales.
There is one option, however, that might be best of all. Why not a Welsh VCT run out of an existing VCT house by one of their investment teams. In this way it could draw on experienced VCT professionals in London (and Edinburgh) who had been invited to pitch to run a Welsh VCT. Its own success parameters could be set for such a VCT (recognising the likely higher risk), which the appointed managers could help to set and have as their target.
We rely too much on the public sector to lead in Wales. Here is an opportunity to start something outside its hegemony. Any takers?
Rhys David
rhys.david@btinternet.com
http://www.clippings.me/rhysdavid
May 2018