UK budget items benefit private equity, venture capital

Policies announced by the Labour party government which would increase investment in small and innovative companies – and which encourage matching funding by private investors – stand a good chance of being maintained even if the Conservative party takes power in May.

The UK's Chancellor of the Exchequer Alistair Darling last week announced several new initiatives in his proposed budget that would benefit private equity and venture capital. 

Among the proposed initiatives is the creation of a new national investment corporation to be called UK Finance for Growth, which will oversee €4.5 billion in funding for government-run funds like the Investment Innovation Fund and the new €555 million Growth Capital Fund (GCF).

The GCF in particular will provide fast-growing companies with between €2.2 million to €11.1 million in capital for investment. Simon Walker, chief executive of the British Private Equity and Venture Capital Association, recently said the fund was especially necessary for small and medium-sized businesses in the UK due to the lack of private debt financing.

Additional funding was announced through a Green Investment Bank that will provide support for investment in the low-carbon sector, with the government investing up to $1 billion in the bank. The bank would seek matching funding from the private sector for investments. Meanwhile, a Social Investment Wholesale Bank and Social Investment Fund is also intended to be a minority investor in a private sector social investment fund operating as a fund of funds.

Finally, in addition to long-term funding, the government also announced tax measures aimed at encouraging further investment in growth companies, including doubling the lifetime limit available for relief given to entrepreneurs on capital gains, and doubling the annual investment allowance for small businesses. Business rates were also cut so that 345,000 small companies will pay nothing for one year.

According to a memo from SJ Berwin, not only will many of these initiatives provide business opportunities for private equity and venture capital managers, but their focus on making small business growth a pillar of economic recovery also makes the proposals more likely to survive should the Conservative party take power in the upcoming elections. In fact, Labour’s Green Investment Bank scheme is similar to a plan being mooted by the opposition party.

SJ Berwin also notes that the measures avoid putting the government in the position of “picking winners”, and by encouraging private capital to at least match government funding they alleviate concerns about private equity and venture capital funds being crowded out.

While the Conservative party at one point held a commanding lead in the polls, Labour has managed to tighten the race going into the last few weeks. But no matter which party comes out the victor, investors in growing and innovative companies in the UK can expect relief in the future.