John Mackie, chief executive of the British Venture Capital Association (BVCA) gives an overview of the BVCA’s activity over the year and defines the Association’s role in the private equity community.
The British Venture Capital Association (BVCA) has around 170 full members. This represents the vast majority of UK based private equity and venture capital firms. Over the last 21 years the UK private equity industry has invested £48bn in over 20,000 companies. It is estimated there are around 12,000 companies currently in existence that have had private equity backing and these companies employ some 2.7 million people or 18% of private sector employees. The UK private equity industry accounts for some 47% of the whole of the European market and on the world stage is second only in size to the United States.
The BVCA has steadily increased its public affairs work over the last three years reflecting the growing importance of the industry to the UK economy. Today, the Association is engaged with ministers, members of parliament, officials in a number of Whitehall departments and appropriate statutory and regulatory bodies.
Three times in the last year, the BVCA has been called to give evidence to three different House of Commons’ select committees, on subjects from nanotechnology to regional productivity.
The Association has also been working closely with the Department for Work and Pensions on the Pensions Bill that has been passing through Parliament. And in addition the BVCA pursues the issues it raises in its annual Pre Budget Report and Budget submissions throughout the year.
Several recent surveys of members have shown an overwhelming desire for the BVCA to expand the work it already undertakes with the European Commission and the European Parliament and so over the next 12 months the Association will be increasing this side of its activity. This is an appropriate new aspect to the work the Association undertakes because of the ever increasing extent to which decisions made in Brussels affects the private equity industry.
This is important work for the BVCA to undertake on behalf of its members. Raising awareness of the economic and social impact of the industry on the UK also helps to persuade politicians of all parties of the need to try and keep the UK as entrepreneurial a marketplace as possible.
The BVCA is pleased with the support the UK Government has given the industry in recent years, but is facing an increasingly competitive market place. The Association believes Government policy should be focused on promoting entrepreneurship and that improving the skills base, raising the quality of education at secondary and tertiary levels, increasing the awareness and understanding of business and enterprise should become fundamental priorities of Government policy.
Noted with interest is the recently published Tomlinson report and the BVCA looks forward to contributing to that debate as it progresses.
This year the BVCA Commission was established, under the chairmanship of former BVCA Chairman Richard Green, to look at ways of encouraging the spirit of entrepreneurship in secondary and tertiary level education.
The BVCA believes students need to have a better understanding of business and entrepreneurship itself so they can be the inventors, innovators and pioneers of the future.
The UK Government has done much in recent years to support investment into research and development, but there is much more that needs to be done to reach the levels of international competitors.
There is a need for a fiscal environment suitable to encourage entrepreneurs. The recent economic environment of low inflation and low interest rates has been relatively benign. More recently, however, there is a concern that increasing public spending and the increasing level of public borrowing could lead to rapidly rising base rates and possibly also taxation. The recent increases in interest rates seem to begin to bear out our concern and it is important that the Government does all it can to ensure further increases are not necessary. Concerns about rising levels of interest rates are regularly raised by members in the BVCA quarterly surveys of member confidence and attitude.
The BVCA is concerned that increasing rates could lead to damage in general confidence, and specifically to damage in confidence in the stock market. In the past few years stock market conditions have made it difficult for members to achieve public listings of investments. Flotations are a critical exit route for the private equity industry and an active market in new listings encourages investment in private companies overall. Moreover, stock market conditions have discouraged quoted companies from growing through acquisitions making it harder for our private equity firms to sell investments to trade buyers.
The market is just beginning to see signs of a tentative recovery and any undermining of confidence in the stock market could lead to a serious reversal of this. 2003 did see an increase in levels of activity on 2002, and there is reason to think numbers will be up again this year.
It is a fact that the UK is the best place in Europe from which to conduct the business of private equity investment. But the BVCA is also mindful that its international colleagues are catching up. We are therefore keen to find ways of enhancing the UK environment still further in order to keep our leading position.
This is at the core of the work of the British Venture Capital Association – to maintain the UK private equity industry’s leading position in the world. The public affairs work of the BVCA is aimed at sustaining and enhancing this position.
For investors such as pension funds the asset class provides consistently superior returns over the medium to long term. It is a message that is generally accepted, but it is a message we need to drive home repeatedly.
Keeping the UK a dynamic and entrepreneurial environment is a constant battle, in which the BVCA is continually engaged. The UK private equity industry is one of only two regulated private equity and venture capital industries in the world. We are therefore anxious at all times to ensure that the negative impact of additional regulation and red tape does not adversely affect the competitive and successful nature of the UK industry.
The Association is concerned about regulation as it affects both member firms as well as their investee companies. UK private equity and venture capital firms are usually defined as an investment business and therefore are regulated by the FSA. It is noteworthy that in many countries, and particularly the US (the most successful environment for private equity), such firms are not subject to investment business regulation at all.
The BVCA regards it as particularly important that the cost and burden of regulation does not deter the establishment of new venture capital firms. Such firms often operate at the smaller end of the investment market and are an important part of the life cycle of the private equity industry.
The UK private equity industry is a global competitor and it is in that light that we need to view its competitive performance. It is the BVCA’s view that any further increase in business taxation should be ruled out and that any further regulatory burden on either member firms themselves or those companies in which they invest should be avoided.
The industry has benefited over the years from a constructive approach which has been adopted by the Treasury and the FSA, but it will be a challenge to ensure this continues and develops in spite of the increasing burden of accommodating European Directives and despite the fact that the venture capital industry is a very small player in the total regulated community.
The BVCA continues to look to the Government for assistance in helping to reduce the amount of regulation flowing from the European Commission and in particular where the interpretation adopted by the UK will significantly influence the regulatory burden borne by UK-based venture capital firms.
Prior to the Pre-Budget report, the BVCA made some specific suggestions to the Treasury on how it believes enterprise and innovation can be enhanced.
Among these suggestions were:
§ To broaden and simplify the scope of employee and management share schemes
§ To extend the Substantial Shareholder Exemption to investment companies
§ To make further simplifications and changes to Capital Gains Tax
§ To abolish Stamp Duty on the transfer of shares
§ To review what support can be given in the vital area of research and development
The details supporting these proposals are contained in the BVCA written submission to the Treasury, a copy of which can be found at www.bvca.co.uk.
The BVCA believes these policy revisions are a vital part of helping to keep the UK economy dynamic and competitive. Recent figures from the BVCA’s sixth Report on the Economic Impact of Private Equity in the UK reveal the scale of the Association’s role in the UK.
In the five years to 2003/4, the number of people employed in the UK by private equity backed companies increased by an average of 20% per annum, against a national private sector employment growth rate of 0.6%. Over 80% of companies said this was organic growth rather than by acquisition. Private equity backed companies increased their staff levels at a rate of just over five times that of FTSE 100 and three times that of FTSE Mid-250 companies. It is estimated that private equity backed companies account for the employment of 2.7 million people in the UK, equivalent to some 18% of current UK private sector employees.
Over the five years to 2003/4 on average private equity backed companies’ sales rose by 23% per annum, more than twice that achieved by FTSE 100 companies. Exports grew by 20% per annum, compared with a national growth rate of just 3.3%. Seventy-seven per cent of private equity backed companies believe that without private equity the business would not have existed at all or would have developed less rapidly. And over 40% of firms said that with private equity backing their level of investment was higher than would have otherwise been possible.
Over three quarters of the companies felt their private equity backers had made a major contribution other than the provision of capital. Contributions cited by private equity backed companies included private equity firms being used to provide financial advice, guidance on strategic matters, for management recruitment purposes as well as for contacts and market information.
The BVCA was founded with one of its core purposes being to represent the industry to Government. This work remains at the heart of the work of the BVCA. Representing over 90% of all UK based private equity and venture capital firms, the Association is placed as a strong and powerful voice for the industry.