No doubt conscious of the challenges posed by Brexit, and aware that there is a continuing funding gap for high growth companies in Europe, the UK government has been seeking views on ways to encourage longer-term (or “patient”) capital for British businesses. As the industry association for the British private equity and venture capital industry, the BVCA was well placed to respond – after all, most of its members exist to find, and partner with, high-potential businesses. Not surprisingly, therefore, the BVCA has now delivered a clear set of suggested actions in response to the government’s latest consultation last month.
Of course, policymakers around the globe are all aware of the need to stimulate innovation and growth in their economies, and many want to emulate the US’s success. As the BVCA notes, venture capital firms in the States are more likely than their UK counterparts to follow their early-stage investment in subsequent funding rounds, facilitated by larger venture and growth capital funds. This leads the BVCA to suggest ways to stimulate investment from both institutional and retail investors, including relaxing the artificial constraints on fees that some pension funds are allowed to pay – which tend to encourage passive investment – and offering additional tax incentives. The BVCA confirms that there is a market failure to justify this government support, and suggests that giving tax relief of up to 30% of an institutional investor’s commitment to a patient capital fund would help to address that.
Clearly, Brexit also creates challenges. One of those is the likely loss to British-based firms of the EU-wide marketing passport currently provided to EU venture capital fund managers (if they meet some qualifying criteria and accept some additional regulation). But even more imminent – and potentially catastrophic for some venture, growth and smaller buyout funds – is the possible withdrawal of funding by the European Investment Fund (EIF). As reported previously, there have already been problems for UK funds seeking to access this vital pool of capital, and the UK government has recognised the need to provide replacement finance if that funding stream dries up. In its consultation response, the BVCA examines four options presented by the government and argues that an increase in resources for the British Business Bank – which already provides capital to UK funds, albeit on a smaller scale than the EIF – would be the preferred route. The BVCA also stresses the scale of the additional resources needed: between 2011 and 2015, the EIF supplied €2.3 billion in UK equity finance.
But alongside additional tax and financial support, the BVCA offers a series of constructive suggestions for tax authorities and policymakers which could make a big difference without costing the taxpayer very much. For example, a stable legal and tax environment would be welcome, especially following a period of rapid and complex change. New laws should be designed to operate more simply, and recent question marks raised about limited partnership structures should be resolved quickly and with minimal additional administrative burdens. The regulator and tax authority should streamline their authorisation and clearance procedures. Perhaps above all, any new restrictions on immigration will need to reflect the needs of UK businesses, and visa schemes should operate efficiently.
As a series of policy prescriptions, the BVCA’s consultation response is an interesting read, and not just for UK lawmakers. As governments look to promote growth, they have much to learn from the venture capital and private equity sector. A dialogue based on mutual trust and a common set of objectives is likely to be a fruitful one.