As the UK coalition government years fade into history, one legacy from the Liberal Democrats' brief period in government is the British Business Bank (BBB). The brainchild of then business secretary Vince Cable, its mandate is to help provide UK-based small and medium-sized enterprises (SMEs) access to different sources of funding outside of traditional bank lending.
Established in 2014, the BBB has steadily gone about the task of entering the space from which traditional bank lenders have retreated. As restrictions on bank lending were introduced in the wake of the financial crisis, SMEs have found themselves struggling to find the capital from traditional banks to finance growth.
Between March and September 2015, the BBB completed £610 million (€772 million: $879 million) of investments and surpassed its target return rate, achieving a 6.3 percent gross return on capital and 5.2 percent post costs, according to an interim report. In the six-month period, the BBB provided financial assistance to 11,000 UK SMEs.
Keith Morgan, the BBB's chief executive, says that the bank's mission is to simply see “marketplaces working better for SMEs”. “We think that takes two things: one that there is more finance in the marketplace, particularly in areas where we don't see the market working effectively, and two, more choice. We think more choice for SMEs in the marketplace is a good thing.
“If you look at the banking environment, the bank lending market is reasonably concentrated with the top four or five combined having a significant market share. We would like to bring more competition into the marketplace.”
The BBB is owned entirely by the British government, but operates at arms-length, making decisions that are commercially focused. It does not directly lend to SMEs, but instead works with more than 80 professional fund managers across the UK. These range from private debt funds to small asset-finance providers, investment banks and technology platforms, such as peer-to-peer lenders.
“We felt that the best way of getting our resources to the market was through the marketplace; not to re-create it, but to distribute through existing partners. The benefit to this approach is that they have a better reach and more knowledge of the marketplace. It is also an important opportunity to leverage our taxpayer funds because if we can invest in a partner at the same time as the private sector is investing in the partner, more of the taxpayer funds are used, leveraging the impact of the BBB,” Morgan says.
On the private debt side, the bank has worked with large debt fund players such as Alcentra, ICG and M&G, committing £863 million overall in UK SMEs employing up to 500 workers.
For SMEs with a turnover of around £100 million per annum, the BBB has worked with Muzinich, Beechbrook, Cordet and Presidium, committing $150 million to them. Typical investments from the BBB range between £30 million and £50 million and across the risk spectrum, including majority senior and unitranche loans.
“We are keen to ensure that we are investing in the parts of the market that represent growth capital. When we look at the marketplace, finance for SMEs has switched from being used to manage their existing working capital to those wanting finance for growth or expansion,” Morgan says.
Another plan the government is keen to develop is the Northern Powerhouse – a project aiming to stimulate economic growth across parts of the north of England. The region is set to receive billions of investment from central government over the course of the next parliament.
The BBB has a role at the heart of the scheme with the Northern Powerhouse Investment Fund (NPIF) and in April opened up a tender of £100 million-£400 million to private debt funds to manage investments in the region. The NPIF covers 10 local enterprise partnerships across the north-west, Yorkshire and the Humber and Tees Valley. Loans to SMEs in the region will range between £100,000 and £750,000.
In addition to the NPIF fund, the bank is eager to tap into opportunities in the Midlands. In his most recent Budget statement, George Osborne, the chancellor, announced a £250 million fund to provide assistance and growth to the half a million SMEs that operate in the region. The bank says it expects to deploy its first investments, as part of its Midlands Engine Investment Fund, in the region by the end of the year.
Morgan is optimistic about the opportunities to invest the capital in the next 12 months. Bank lending to SMEs employing up to 250 workers may have gone up over the last few quarters, says Morgan, but he notes that “the proportion of lending that has come from private debt funds has increased significantly since 2008”.
“Private debt funds have represented an important route for institutional investors to direct their funding at this piece of the market. We see more liquidity returning to the marketplace, which is good. The liquidity is returning and growing fastest in the areas of the larger medium-sized companies, but we still think there is a role for us to play in providing funding to private debt funds, particularly focused on the SME companies that have a turnover of less than £100 million,” he says.
Every 12 months, the BBB reviews its five-year plan. Over that period, it expects to commit £3.5 billion to UK SMEs – a figure that represents a “good level of investment”, says Morgan. But one potential fly in the ointment is the upcoming EU referendum, where the difficulty of visualising a post-Brexit outcome means an uncertain picture for UK businesses.
Asked if the BBB is prepared to adjust its current plans or make preparations for a possible exit from the EU, Morgan says that the bank does not take an official position: “It is a matter for the people of Britain to decide and I don't think it'd be appropriate for the BBB to provide an opinion one way or another.”