We are delighted to feature, as this week’s European Funds Comment, a guest post from our European private equity blog, written by Michael Moore, the new Director-General of the British Private Equity and Venture Capital Association (BVCA).
Private Equity and The Need To Sustain The UK’s ‘Competitiveness Trinity’
To paraphrase one of the United Kingdom’s former Prime Ministers, there are three things that matter to businesses wherever you travel in the world: competitiveness, competitiveness and competitiveness.
Unpacking the different layers of that mantra, there are three essentials at stake: is the country’s business environment competitive, in particular to attract and sustain mobile global investment of whatever kind? Is the business sector competitive, with appropriate incentives and a proportionate regulatory regime? And is the business itself competitive, given the demands and opportunities in its market?
Private equity and venture capital in the UK have routinely been able to respond in the affirmative to each of these questions and as a result have grown significantly in recent years. As a positive consequence for the UK economy, billions of pounds of investment have been made and hundreds of thousands of jobs have been created and sustained. As such, we are a great British success story and proud of it.
In the heart of London, as with other globally significant cities, much of the broader economic success might be taken for granted by the casual observer. The City, and the wider UK economy, have been internationally competitive for centuries, the finance sector has thrived within it, and many globally significant businesses count it as ‘home’. The ‘competitiveness trinity’ is secure, it appears.
And yet, closer study quickly reveals that the persistent success of London and the UK has co-existed with creative and destructive tensions throughout its existence. Battles with politicians and regulators on the one hand and market developments on the other have never been far from the surface. And when we have experienced deep trauma, such as the financial crisis, it is all there in sharp focus right in front of us.
There has been a decade of convulsion as a consequence of the financial crisis, the effects of which still impact communities and businesses across the country. Add in to that the impact of mega-trends such as the tech revolution and the energy transition, and the recent political fallout in terms of Brexit is plainer to understand (quite apart from the fundamentals of the arguments about EU membership).
Whether or not we are on the cusp of a Halloween departure from the EU, or may yet see a further extension to the negotiations, the competitiveness debate looms large. We may speak confidently of the ‘competitiveness trinity’ – but for how long?
First off, we cannot assume that our understanding of the competitive environment is shared by our stakeholders in government, Parliament, the regulators and the media. The comprehension gap between politics and business generally, and relating to our sector specifically, is wider than we should like. To address that, we need to keep repeating why financial services are competitive, reminding everyone that it is the result of a complex and finely-balanced ecosystem: the interaction of the UK’s legal, tax, and regulatory approaches, augmented by a deep talent pool of individuals and firms, catalyses the capital markets and economy in an unrivalled way.
Secondly, this part of the dialogue is necessary, but not sufficient, to ensure the ‘competitiveness trinity’ remains intact for financial services and our sector. Indeed, stakeholders may get the importance of the ecosystem without recognising venture capital and private equity’s place, or value, within it.
That issue of value is highly sensitive. The asymmetric after-effects of the financial crisis, alongside the lopsided impact of the mega-trends (disfiguring everything from retail to how we travel), has created a more questioning attitude. This is most obvious amongst consumers and politicians, but it extends to civil servants and regulators, to whom politicians delegate oversight and economic management responsibilities, and the media.
Setting out our economic value is the first and most obvious step - in a metrics-driven sector, this is reasonably straightforward, too. Nevertheless, we need to work harder and smarter to set out the best available case.
But again, while essential, this is no longer enough. The scrutiny of business by stakeholders is focused on a broader measure of value now. Alongside economic value there are questions about social value, too. Whether it’s climate impact, gender pay gaps or the employment status of those working in an enterprise, questions abound. And it is clear that the stakeholder questions simply mirror those being asked by consumers or others in business. And in our own sector, pension fund investors are not the only ones expecting answers to their queries on these subjects.
Where in the past we knew what was expected of us, we now need to be agile to maintain our balance on a shifting landscape. In relatively simple terms, we are now being judged on our value to the country as a whole, where the assessment is based on the simple formula of public value = economic value + social value.
If our economic value should be straightforward to explain, our social value is undoubtedly harder, not least as the measurement criteria are not settled or applied consistently. Some will wish to disregard the subject completely, as irrelevant, impractical or with limited opportunity cost for failure to comply. That risks being a strategy with a short shelf life. And in the regulatory uncertainty of a post-Brexit world, accentuated perhaps by a change to a government with a very different business agenda, it could be very short indeed.
The great news is that we have an impressive story to tell: the long-term investment partnerships which characterise the sector and the responsiveness of portfolio businesses to changing consumer and societal demands are the foundation blocks of what can be made into a world-class narrative for private equity and venture capital.
Personally, I am excited to be engaged on this – here at the BVCA, we are very focused on creating and telling that story, as it is a fundamental part of serving our members. It will be at the heart of our efforts as we continue to develop our role as the forum where the sector debates and builds its future, a centre of excellence for venture capital and private equity which is seen as best in class.
We look forward to our collective efforts as a sector making an important contribution to the maintenance of the UK’s ‘competitive trinity’ and to the continued success of private equity and venture capital.