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Business Growth Fund: we reserve our judgment

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As previously reported, the Business Growth Fund will target businesses with an average turnover of between £10m and £100m and funding requirements from £2m to £10m.

But how will the Business Growth Fund work in practice? We already know that investment will be in the form of Dragons’ Den-style equity capital, and will be complemented by loans and trade finance offered by the banks.

In a report published yesterday, “Supporting UK business“, the British Bankers’ Association (BBA) outlined more key details of how the business growth fund will work:

  • the minimum equity stake in any business would be 10 per cent
  • the average duration of the investment is expected to be five years
  • the fund would operate through a distribution network of regional offices
  • it will be managed by an independent board and chairman

The banks involved in the business growth fund so far include Barclays, HSBC, Lloyds, RBS, Santander and Standard Chartered; which have pledged to “build up” an investment portfolio capped at £1.5bn over a number of years.

“As banks, we have an obligation to help the UK economy return to growth,” commented Barclays CEO John Varley, who is also chairman of the BBA’s taskforce. “The private sector will play a key role in the recovery and it’s our job to help viable firms to be successful.”

Of course it is.

The real question is whether the scheme will actually help the right businesses. It’s obvious that the fund is targeting established medium-sized businesses – with a £10m turnover barrier to entry, the fund isn’t looking for small businesses.

To be fair to the BBA taskforce, centralising the banks’ commitments to the fund is a wise move – it will strengthen the firepower of the fund, and give mid-sized businesses a central point of reference to seek investment.

And the fact the banks want to get the fund up and running fairly quickly – their target date for starting to assess investments is April 2011 – is promising too.

But, as Stephen Campbell of independent VC Panoramic Growth Equity told Real Business, the banks will have to take a hands-off approach for it to work.

“The banks should make their commitments and then step back to allow professional fund managers to administer the fund,” he explains. “People who are expert in sourcing, structuring, executing and realising these types of investments will de-risk the investments made by the banks, and should maximise the potential for making strong returns.”

Indeed, despite assurances that an independent board will manage the fund, which will be run through regional offices, it’s far from clear who will make the investment decisions.

Until the i’s have been dotted and the t’s crossed, we’ll reserve our judgment on the fund’s potential usefulness to British SMEs.

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