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Is the National Investment Fund the best solution?

02 August 2017|by Pedro Madeira

The National Investment Fund, if it went ahead, would be yet another chapter in the periodic anxiety the UK government and banks feel about the long-term capital funding shortfall faced by companies. But is it the best possible solution?

In 1945, 3i (which along the years mutated, acquired other funds and changed names several times until it eventually listed in the ‘90s) was created to plug that shortfall.

In 2006, Enterprise Capital Funds were created to unlock private sector funding via partnerships. They mostly targeted companies that were past the seed-stage but not quite growth-stage yet.

In 2011, the Business Growth Fund was created with £2.5B from five big banks. It has deployed around £1B to date.

In 2017, the Patient Capital review again brings these anxieties to the fore, and again the answer is to create a new fund,  The National Investment Fund, which the Treasury says will help create more British unicorns. But unicorns require significant – and expensive – nurturing. We looked at our historic (and current) data on any British company that reached unicorn status, and saw that on average they raised over £200m, across around seven rounds.

New money for growing UK companies is always something to be welcomed, particularly given the current need to compete with extremely well-funded American companies. But, as the government admits, the new fund may end up being sold off to the private sector once it reaches a certain stage. As these anxieties will bubble to the surface every time the economy is going through a rough patch, one can only imagine similar funds would be established in the future – only to be sold off or listed.

A bolder, longer-term idea would be to establish a UK sovereign wealth fund that invested heavily in unlisted companies. The Tory manifesto promised several infrastructure sovereign wealth funds funded by shale gas and public asset sales. That would be good, but infrastructure investment is not all we need. UK companies need consistent firepower to compete in the world-stage. Firepower that is there when the next economic crisis comes around.

  

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