Radical yet Practical: Why the Patient Capital Initiative Will Produce Results
- VOLUME XX, ISSUE 2
- Executive Insights
The potential impact of the Patient Capital initiatives, announced by the Chancellor in the Autumn Budget, would be of considerable importance at any time, but is especially timely as we head towards a more independent post-Brexit environment.
With small and medium-size enterprises (SMEs) representing 99.9% of private-sector companies and 60% of private sector jobs, the U.K.’s international competitiveness could be boosted significantly by continuing to build on its ability to create and grow world-class innovative businesses.
At L.E.K. Consulting, we are proud to have supported Sir Damon Buffini and the Industry Panel of Experts in developing their response and recommendations to the Patient Capital Review, and the contribution it made to the initiatives announced.
The U.K. is already a successful environment for early stage businesses to set up and develop through the start-up phase. The number of venture deals and the amount invested has grown very strongly since c.2006 (see Figure 1), partly in consequence of the government’s EIS and SEIS initiatives which have widely been credited with significant impact on the issue of attracting start-up investment.
However, when it comes to growth beyond the start-up phase, the U.K.’s performance tails off, due to a relative scarcity of “next phase” investment of the type which has created world-class success stories in the U.S., for example (see Figure 2).
So why does this gap exist? The Patient Capital Review concluded that a vicious cycle of poor risk-adjusted returns on scale-up investments, a lack of capital available to be invested in these businesses, and the subsequent lack of attractiveness to top investment and entrepreneurial talent, is responsible.
What the Chancellor suggested in the Autumn budget is the development of a suite of initiatives to address these problems:
If successful, these initiatives would instead result in a virtuous circle of mutually self-reinforcing benefits (see Figure 3).
Taken together, this circle could transform the fortunes of innovative businesses aiming to reach scale, and make a significant contribution to the U.K. economy’s competitiveness.
Collectively, the measures suggested today are undoubtedly far-reaching and radical. Yet they are also practical in the sense that they (i) build on the current strengths of the U.K.’s early stage investment environment; and / or (ii) are supported by directly relevant, demonstrably successful precedent in similar economies:
In our opinion, these initiatives have an excellent chance of success and we eagerly anticipate their implementation by the British Business Bank.
Autumn Budget 2017: Financing growth in innovative firms
Patient Capital Review: Industry Panel Response
Financing growth in innovative firms: consultation responses