Saturday, January 29, 2011
FINANCING SMALL FIRMS IN WALES
Known as JEREMIE and managed by Finance Wales, it would have the ability to invest up to £150 million in Small to Medium Sized Enterprises (SMEs) across Wales.
So what has been the performance of the fund to date?
According to the latest data, it had invested £42 million in 256 SMEs by the end of September 2010 and leveraged in another £75 million of private sector investment.
One could argue that is a remarkable achievement, given that the economy was still struggling out of recession and there was little appetite for growth amongst the business community. On the other hand, the high street banks had reduced much of their lending to the private sector during this time and the fund could be seen as potentially the only source of cash for companies wanting to expand across Wales.
One key factor in its success could be the fact that the funding is available across the whole of Wales. Previously, there had been criticisms that the organisation had, due to financial restrictions, focused its efforts only on the poorest parts and thus neglecting those more prosperous areas in which firms with the highest potential for growth, and this need for finance, were based.
For example, the majority of this year’s Fast Growth 50 firms were based outside the less prosperous areas of Wales and, under the previous funding mechanism supported by Objective 1 funds, would not have been eligible for access to this type of support.
Another positive aspect of the fund is its sectoral approach which (thankfully) seems to be in contrast with the rest of WAG’s economic policies.
As those who regularly read this column are aware, the Economic Renewal Programme (ERP) has restricted the industries it will help through its business support programme. Indeed, the Minister is on record as stating that “We are a small country and can’t give support to everybody and so we have to prioritise and we have made that priority the six key sectors.”
Of course, academic research has shown that such an approach does not reflect the reality of growth within the SME sector. In fact, business services and the wholesale/retail sector - two industries that have been excluded by WAG - provide almost half the high-growth firms in the UK and the diverse range of companies featured in the Fast Growth listings over the last twelve years backs up those findings.
Given this, it is fortunate that this fund is not restricting its investment activities to those six key sectors identified by WAG. In fact, it is the tourism industry, with £6.8 million of investments in 16 businesses, that has attracted the most funding to date. Other sectors neglected by the ERP, such as the food industry and business services, have also attracted high rates of investment from JEREMIE.
In contrast, high technology businesses in areas such as aerospace, pharmaceuticals, energy and biotechnology have attracted only a third of the fund to date.
This unequivocally demonstrates that funding to businesses, whether in the form of loans, grants or equity, has to be market driven and not restricted by the sectoral foibles of policymakers and politicians.
To date, the majority of the fund has been in the form of loans, although Finance Wales is increasingly taking equity positions in companies. There has also been a lower default rate than expected since the fund started, a situation that can be partly explained by an examination of the type of investment by stage of growth.
However, the fund is not being used by start-ups as a source of finance. Only nineteen of the investments to date have been classed as “early stage”, with the vast majority of the money earmarked for expansion of existing businesses.
This suggests that whilst growth companies with potential are finally being supported in Wales, new businesses are not getting access to the vital funds required at the start of a new venture.
The decision not to invest in new businesses is clearly one for Finance Wales and it directors but given WAG’s so-called emphasis on entrepreneurship, one would expect such a large public fund to have a more balanced portfolio especially there has been a 28 per cent decrease in the number of new businesses being created in Wales during the last five years (compared to a 2 per cent increase in Scotland).
With evidence suggesting that banks are increasingly reluctant to lend to new companies, then it is clear that in such a “market failure” situation, the government must be encouraged to fill this finance gap through mechanisms such as JEREMIE.
Yes, it is encouraging that existing growth companies are being given the funding to expand their operations but equally, there is a duty on a public financial fund to have a more balanced portfolio of investments and to support new businesses as well as those that have been growing for a number of years.
If the aim of the Assembly Government, through its focus on a knowledge-based businesses within the ERP, is to create the Googles of the future then it must surely provide an increased level of support to new businesses.
It may increase the risks to the overall fund but it will also make capital available to those entrepreneurs, especially within technology sectors, who are currently starved of cash but have the ability, ideas and talent to transform the Welsh economy.