In an interview with Real Business ahead of tonight’s London Funding Conference, Mark Prisk, the enterprise minister, has disclosed several schemes the government is working on to encourage more private investment in SMEs.
One of the headline schemes under consideration will see the government co-investing with angel investors.
This model would be based on Enterprise Capital Funds, which saw the government co-invest with VC funds, and would help to boost early-stage investment by high net worth individuals.
When asked whether the government was looking to set up a mechanism to co-invest with angel investors, Mark Prisk confirmed that it’s on the table and plans are already under discussion.
“The question is how we do that effectively, making sure that the government supports good investment decisions but doesn’t confuse or duplicate those decisions. It’s quite a fine balance to strike,” he admitted, “but hopefully we’ll be able to settle on that model.”
In terms of timescales, Mark Prisk said the government would have more to say about it in “the next few weeks or months”.
The equity gap for SMEs is currently very much at the angel level, so a co-investment scheme for angels would be hugely helpful, says William Robins, partner at Keystone Law. “If the government allocates some funds for angel co-investment, this will be of immediate and direct assistance. But the devil is in the detail: who will control these co-investment funds; will risk be shared equally between private and angel money; will the government require special rights or restrictions?
“We’ve seen this before with the Enterprise Capital Funds, and it was interesting to note that many fund managers weren’t able to raise their 50 per cent from the private sector.”
During the interview, Mark Prisk also acknowledged that there is currently too much red tape holding back private investors.
“There’s a lot of bureaucracy that doesn’t need to be there. Whether you’re looking at the Enterprise Investment Scheme or some of the VCT rules, we’ve been thinking about how we can best strip those out, particularly some of the rules that relate to the type of people that can invest. We think it’s very important to make it simpler, and also to attract more people of high net worth, to look at this as an area to invest.”
This is good news for entrepreneurs. EIS relief is currently the most effective and targeted form of government assistance, but a number of conditions means it isn’t available to all businesses. A relaxation of these conditions would boost investment and appetite amongst investors.
Another change that the government is mulling over includes how to encourage more family investment in businesses.
“We’re all familiar with the idea of the bank of mum and dad, people willing to invest for their next generation into property,” said Mark Prisk.
“We need to think about how we could mirror that approach and widen that so that people also think about investing in family members’ businesses in a more significant way than what happens at the moment.”
He added that this ethos of family investment already exists in different communities. “I was in Leicester last week with many fantastic Asian businesses, and there, it’s entirely natural for businesses to be family-invested – this is something we need to think about,” Prisk said.
William Robins comments: “The friends and family round is the single biggest source of external investment in pre-revenue companies, but it’s surprisingly complex, with a significant chance of the investors overpaying or losing their capital. The market has developed a hybrid instrument called the ‘convertible loan’ to address this, but it doesn’t qualify for EIS relief. It will be interesting to see what the government proposes here.”