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Venture Capital

Volume 447: debated on Friday 16 June 2006

To ask the Secretary of State for Trade and Industry what steps his Department is taking to increase access to venture capital for manufacturing firms in the North East. (77186)

Manufacturing is still, and will continue to be, a very important part of the UK economy. The importance of manufacturing to the North East of England, and to the whole UK economy, is recognised in the Department of Trade and Industry’s Manufacturing Strategy. Launched in 2002 and reviewed in 2004, the strategy sets out the actions needed to create a high value, high skill manufacturing sector capable of introducing new products and processes into our economy, creating new markets, and delivering a huge boost to our growth and prosperity.

Government will continue to work with regional agencies, the business community, trade unions and others to ensure that the region (and the UK) makes the most of the opportunities to shift from low-cost/low added-value manufacturing to a sustainable, high added value, high skill, knowledge-led economy. We will continue to develop policies to achieve the right climate for business growth.

The UK is widely acknowledged as possessing a dynamic and efficient financial market, meeting the financing needs of the majority of businesses. Nevertheless, a small but important minority of innovative, growth-oriented small businesses continue to face difficulties in attracting the funding (particularly risk capital and equity in the £500,000 to £2 million region) that they need to realise their ambitions, providing a case for targeted Government intervention to assist markets where these difficulties create a significant barrier to enterprise and innovation, and hence to productivity growth. Over recent years, the Government have played an important role in ensuring that markets work effectively and that any gaps or weaknesses are addressed. The provision of publicly supported finance schemes (loan, mezzanine and equity) for small businesses has increased significantly over the last few years, increasing access to funding for manufacturing firms and others in order to invest in new technologies and improve productivity.

The Regional Venture Capital Fund (RVCF), an England-wide programme to provide risk capital in amounts up to £500,000, was created to support small growing companies, with £80 million of Government investment attracting a further £155 million from private sector investors. Capital North East (the North East RVCF) was launched in 2002, and the fund totalled £15 million.

The consultation paper “Bridging the finance gap—a consultation on improving access to growth capital for small businesses” published jointly by HM Treasury and SBS/DTI in April 2003 set out what more could be done to ensure that entrepreneurs have access to the finance they need to turn their ideas into thriving businesses. This led to the creation of Enterprise Capital Funds (ECFs), which will invest a combination of private and public money in small high-growth businesses seeking between £250,000 and £2 million of equity finance. Four funds have been approved to date, with the possibility of further funds being announced, and although not targeted specifically at the North East, they will be available to SMEs in the region. North East enterprise agency Entrust is a partner in the Seraphim Capital Fund, one of the successful funds announced last month, and will act to promote and co-ordinate applications from regional companies seeking growth funding.

Among schemes to support social enterprise and growth in disadvantaged areas, the Bridges Community Development Venture Fund is a £40 million, 50:50 partnership between Government and the Venture Capital industry. The fund is targeted at the most deprived 25 per cent. of areas of England and includes a number of North East wards. The Coalfields Enterprise Fund, launched by the Deputy Prime Minister in early 2004, is a venture capital fund specifically set up to finance growth-oriented companies and to encourage entrepreneurship in England’s former coalfield areas. Investments are on a 50:50 co-investment basis between £40,000 and £500,000.

The North East Equity Matching Fund (NEEMF) is an innovative and unique venture capital co-investment fund which aims to generate and increase Business Angel activity in the North East of England. NEEMF can match, on a pari passu basis, investments made by private investors or business angels who may not have sufficient resources to wholly fund the business or who wish to spread the risk. The investment range is from £25,000 to £100,000 in the first round with the capacity to aggregate up to £200,000 in a second round after nine months has elapsed. The total equity raised in the initial round must not exceed £250,000. Investments will usually be in the form of ordinary and/or preference shares and will be made at the same time as the private investment. The legal process is aimed at keeping time scales and costs to a minimum.

European funding in the form of the European Regional Development Fund (ERDF) is also used to support Venture Capital and Loan Funds (VCLFs) in the region. The North East Co-Investment Fund (CoIF) and the North East Proof of Concept (PoC) Fund are both managed by NorthStar Equity Investors. The Proof of Concept Fund is a convertible loan fund, investing in technology and science based SMEs and in activities leading to SME formation spun-out from the research and business base in the North East of England. The Co-Investment Fund (COIF) is a £23 million venture capital fund that invests alongside private investors in high-growth technology-focused SMEs.

Equity is of course only a part of the overall funding picture and the North East region has also benefited from other publicly supported funds including the North East Investment Fund 3. Launched in 2003, this £18 million fund provides unsecured convertible loans for SMEs.