Yahoo Finance Coronavirus: Treasury urged to relax venture capital rules
The government is being urged to relax rules governing venture capital trusts (VCT) to allow them to support companies struggling due to the coronavirus pandemic.
Stuart Veale, chair of the Venture Capital Trust Association (VCTA), told Yahoo Finance UK his organisation had sent proposals to the Treasury that would allow VCTs to invest more money into companies they have already backed.
VCTs are investment vehicles that raise money from private investors to back high-growth companies. Unlike more traditional venture capital funds, VCTs raise money by selling shares on the London Stock Exchange’s main market. VCTA’s members manage around £3.3bn ($4bn).
Investors who put money into VCTs enjoy tax breaks but strict rules govern what VCTs can invest in as a result. VCTs can’t back companies that are above a certain age or have more than 250 employees, reflecting the fact the government wants VCT money to go towards fuelling early stage businesses.
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Many VCT-backed companies face a funding crunch due to COVID-19 and are unable to ask their investors for money equity funding due to these rules.
“There are a very large proportion of companies in VCT portfolios which VCTs can’t provide any more funding to,” Veale told Yahoo Finance UK.
One business in this situation is Happy Days Nurseries and Preschools. Chairman Mark Beadle said his company had lined up funding from its VCT backer, Gresham House Ventures, but was unable to access it due to the current rules.
“Gresham would be prepared to give us more money,” Beadle said. “The fundamentals are good. But the only place we can go to for money right now is the banks.”
Happy Days operates childcare facilities across Bristol, Devon, and Cornwall but has been forced to close all but four of its 21 sites. The number of children it is looking after has fallen from 700 to 80, while costs have risen due to social distancing requirements.
“We absolutely need to extend the runway and we do need some more money,” Beadle said.
Happy Days could use the government’s coronavirus business interruption loan scheme but Beadle worries banks would be reluctant to lend the amount it needed. He is also concerned that taking on all the funding through debt may not be the right approach, as it could saddle the company with an unsustainably high potentially debt burden.
“You would want to take a blend [of debt and equity],” he said.
Over 600 businesses across the UK are backed by VCTs and Veale said many were in a similar position to Happy Days Nurseries.
“I know for example of a furniture manufacturer in the north of England which employs 900 people and has received VCT funding in the past,” he told Yahoo Finance UK.
“But because it doesn’t comply with the age requirements, it doesn’t comply with the employee requirements either, then VCTs can’t provide any further funding to that business at the moment.”
The VCTA approached the Treasury three weeks ago about temporarily relaxing these rules for 12 months to allow VCTs to pump more funding into businesses they’ve already backed.
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“They’ve given us a hearing and I thought based on the call we had with them they were quite open to considering it,” Veale said. “I think the issue with the Treasury is they’ve been bombarded by proposals from all sides. We’re still pushing for this change to be made.”
The VCTA, which represents 75% of the sector, estimates at least £500m is sitting on balance sheets waiting to be invested.
“The great thing for the government is there’s no additional cost for this scheme because they’ve already given the tax relief,” Veale said. “Just by changing the regulation they could immediately free up half a billion pounds of investment which could be channelled to UK SMEs.”
A spokesperson for the Treasury said it had “taken unprecedented action to get through this economic emergency” and was “supporting innovative firms with a £1.25bn package of support, including a £500m investment fund to make sure high-growth companies can access the capital they need to survive.”
Without further action, business-owners fear more adverse outcomes for VCT-backed companies.
“It would be a terrible shame if fundamentally good businesses went to the wall over the next year, even if they had supportive banks, if they needed more money than they were allowed to borrow,” Beale said.
