Urgent action is required to close the UK’s growth capital gap, according to a report released today by Innovate Finance, the ScaleUp Institute and Deloitte, by accelerating, evolving and expanding existing initiatives under a national framework for growth. This work has been undertaken in collaboration with industry, investors and the Business Action Council (BAC).The report, The Future of Growth Capital, stresses that closing the emerging GBP15 billion gap will provide opportunities for aiding the UK’s economic recovery post-Covid, generating future prosperity and boosting regional economies, productivity, innovation and internationalism.
Growth capital refers to the financing that enables scaling innovative companies, both young and established, to reach maturity.
The gap — the difference between demand for and supply of growth capital — stood at GBP5 billion-GBP10 billion a year before the Covid-19 crisis. The pandemic has significantly exacerbated the issue and effectively doubled the gap, with it now reaching GBP15 billion.
The report lays out five specific and practical recommendations to tackle the long-standing, structural problem of a lack of available capital for scaleup companies. The recommendations are:
• Create a ‘National Blueprint for Growth’ that delivers a strategic joined up approach to support and champion more consistent and effective economic growth across all regions and sectors
• Accelerate the unlocking of Institutional and Corporate Funding through changes in legislation and organisation that crowds in the existing significant private sector capital that can make inroads into closing the growth capital gap
• Expand and build upon the British Business Bank (BBB) by strengthening the regional presence of the BBB with empowered decision making deployed under a national framework, and continue the developments of its products along with Scottish Investment Bank (SIB), Development Bank of Wales and Invest NI
• Expand the role and scale of Innovate UK and its direct deployment of innovation capital to our most innovative, early stage and scaling businesses
• Create a “Future Opportunity Fund” to develop diverse sectors and impact investing potential that is focused on emerging, socially inclusive markets, including the carbon net-zero economy
There are a number of potential benefits from closing the growth-funding gap and laying to rest the long-term structural issues identified in the report. These include a 10-20 per cent boost in business investment, doubling the number of scale-ups in the UK and supporting levelling-up objectives delivered through strong growth across all regions.
The UK’s 33,860 scale-up businesses constitute a critical portion of UK small- and medium-sized enterprises (SMEs) and contribute GBP1 trillion to the UK economy annually. These scale-ups represent 50 per cent of the SME economy and are twice as likely to innovate and have international businesses than their peers.
The UK is the top destination in Europe for FinTech investment and has strong growth in sectors such as life sciences, advanced manufacturing, and media. Although it ranks third in the world for starting a business, it only ranks 13th when it comes to scaling them.
The report looks at what the UK can learn from the targeted support that many of the UK’s international peers have developed for scale-ups. The five recommendations draw on lessons from what Germany, Canada and the USA are doing to deploy growth capital to scale-ups in their own countries as a means to drive economic revival. This is often also in tandem with structured long-term business support measures.
Irene Graham OBE, CEO of ScaleUp Institute, says: “Scale-up companies are key to economic recovery. They make a significant contribution across the country in every locality and sector. As this report highlights, even through the Covid-19 period, they remain highly innovative and are still investing in R&D and job creation. As we seek to build back better we must be bold in addressing our scale-up challenges and the widening gap in long term patient capital.
“We believe that the combination of approaches set out in this report can finally solve long standing growth capital issues and make significant inroads to the levelling up agenda. As this report emphasises, the public and private sector must work together in a collaborative effort to deliver the step change required.”
Charlotte Crosswell, CEO of Innovate Finance, says: “As we reset our economy in the wake of Covid-19, this is the moment to address the growth and innovation-capital gap with long-term policy solutions. We accept that there is no silver bullet or single policy that can resolve a complex issue. That is why our recommendations spread across different areas and feed into a long-term solution.
“The problem is abundantly clear, and it’s now crucial we make the changes and address it. Areas of our growth economy such as the FinTech sector – which is full of scaling, innovative companies – are advancing at a rapid pace, and we risk losing an entire generation of vitally important businesses if we don’t make the necessary structural adjustments.”
Richard Kibble, UK Head of Banking at Deloitte, says: “No one can deny the widespread disruption caused by the Covid-19 pandemic. In the short and medium term, it’s vital that we find new ways to get the economy growing again. However, longer term it also represents a unique opportunity to reset some of the fundamental challenges the UK has faced for quite some time – regional levelling up, diversity, carbon emissions, unemployment – to name but a few.
“We believe therefore that Covid-19 should act as a catalyst for change. Now more than ever it is vital that businesses are encouraged to start and scale up to their full potential. After all, it could be a chance to create a positive and lasting legacy from the upheaval of this crisis.”
Stephen Welton, Executive Chairman of BGF, says: “The GBP15 billion growth capital gap is powerfully revealed in this report. It highlights the inadequacy of UK growth capital flows compared to other countries and the rapid deterioration, due to Covid-19, of a long-standing market failure – one that is on course to have a devastating impact on future growth, innovation and job creation.
“The 40 perc ent retraction in equity investment at the same time as a 43 percent increase in demand puts in plain sight a deeply concerning trend. Urgent, practical action is needed. Key to unlocking this, as the report asserts, is to create confidence for the long term by scaling up the investment vehicles that already exist. There is a significant opportunity for collective growth if this widening gap is fixed, but only if action is taken once and for all by major investors.”
