All entries for Friday 10 August 2007

August 10, 2007

Regional Venture Capital Funds

Writing about web page http://www.dti.gov.uk/bbf/small-business/info-business-owners/access-to-finance/regional-venture-capital-funds/page37596.html

The relative absence of innovation, knowledge economy and business start-up culture in the English regions has been partly attributed to a supposed lack of available venture capital, an apparent ‘equity gap’ where the market was failing to provide ‘small-scale risk finance for SMEs with growth potential’ {{964; }} . The government identified this as a ‘market failure’ that was preventing the regions from capitalising on the economic potential of their own innovative nascent entrepreneurs. In other words, the seeds of a dynamic business culture lay dormant just below the surface of the English regional economy but lacked the necessary watering of start-up capital for this latent business culture to break through the barren topsoil and flourish.

The Department for Trade and Industry attempted to address this apparent market failing by setting up nine publicly backed Regional Venture Capital Funds (RVCFs), working closely with the Regional Development Agencies, each charged with sprinkling a total of £250m per annum onto the regional economies and thus providing the necessary boost to allow regional start-ups to breakthrough.

The RVCFs were typically new regionalise both in their underlying logic that regions already possessed everything then needed to prosper with a relatively cheap discursive shove in the right direction and also in their operational design as public private partnerships, with government providing around half the capital and the rest raised from the private sector, with private sector fund management companies, members of Lovering’s ‘regional service class’, contracted in to manage the funds. The RDAs played a central role in both setting up and then running the RVCFs, since they would be responsible for ‘raising the necessary private sector investment by utilising their contacts and knowledge of the business support network within their region’ at the outset, and then providing a sort of advanced secretariat support to the private sector fund managers, connecting the RVCF with potential recipients, providing an after-investment service to the beneficiary SMEs and sitting ‘as members on the advisory committee for each fund’ {{964; }}.

In 2007, after five years of the RVCFs operation, fund managers have been unable to find sufficient suitable ventures into which to pour their available funds, with only half of the allotted money being spent and, since the private sector partners had a preferential claim on any returns, without any return on that investment for the government {{965; }}. In an interview with the Financial Times John Guthrie quotes an anonymous private equity executive as saying that ‘the government fundamentally misunderstood the market. There was never any equity gap. But there was an investment opportunities gap’, a view reflected by the experiences of the contracted fund managers in the regions, with NEL Fund Managers in the North East and of Catapult Venture Managers in the East Midlands reflecting that ‘it has been tough getting the money out there’ and ‘there is no lack of capital, but there is a lack of good management teams to invest in’, respectively {{965; }}.

While Guthrie’s article was driving at that efficiency of the market mechanism, which cherry picks the few and far between worthy venture investment opportunities in the regions, compared to the misguided interventions of the state, the experience of the RVCFs points to a more worrying empirical finding for the boosterish new regionalists: that the regions simply are not possessed of the sort of native business culture that they had assumed lay dormant, waiting to be tapped by the right institutional framework.


August 2007

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