Explore the ScaleUp Annual Review 2021

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In Conversation with Catherine Lewis La Torre, CEO, British Business Bank

The British Business Bank has been in the forefront of the response to the Covid pandemic but, looking forward, where is your focus?

The Bank itself went through a massive scaleup as a result of the Covid emergency finance schemes. Before the pandemic, we were supporting about 100,000 companies through finance programmes amounting to £8.5bn; at the end of the last financial year, we were supporting 1.7 million companies with £89bn of finance.

I am particularly proud that, in addition to delivering all of that frontline economic support in response to the pandemic, we did continue our business as usual. Covid took us in a different direction but, just like all resilient businesses, we are now returning to our original agenda.

About three years ago, we made the conscious decision to pivot the bank to equity; the scaleup agenda was the reason behind that. For many businesses, the only way to scale up successfully is through equity investments rather than bank loans. The establishment of British Patient Capital in 2018 was a landmark moment. It flagged that equity was the shape of the future. 

In 2022, some of our programmes will therefore be more focused around the equity agenda. 

The Future Fund: Breakthrough is a good example. We know very well that we are very good at starting businesses in the UK, but the challenge is to keep sufficiently well-funded so that they can get to the next stage of their journey.

The Future Fund: Breakthrough, which was launched in July, is a £375m direct co-investment programme in which British Patient Capital will invest alongside other equity investors in a specific part of the market that suffers from quite a chronic shortage of capital – those R&D-intensive businesses such as deeptech companies who are looking for sizable cheques to scale up.

These companies require a long runway to get to their end product. Our research shows that, on average, the first round of capital raised by such UK companies is half as much as that raised by their US counterparts. This means that they are already at a disadvantage even to get to first base in the global market. Fewer UK companies manage to secure a second round of finance and those that do raise less, so many more UK-based businesses in these sectors will sell out to trade acquirers earlier than their US counterparts.

The common thread is a lack of capital at every stage – capital that can give those entrepreneurs and management teams the confidence and resources to keep going.

We think Future Fund: Breakthrough can help to bring more capital alongside experienced investors and will give more UK companies the chance to scale all the way.

This was also the thinking behind this year’s launch of the Life Sciences Investment Programme. The success of the Covid vaccine programme, the quality of UK manufacturing in this sector and our genomic sequencing capabilities have all highlighted the UK as a leading place for life sciences. 

It is an industry that needs billions, so we need to crowd in other sources of capital into this arena. British Patient Capital has been allocated £200m to make cornerstone commitments to life sciences venture growth funds, those that typically invest at Series B onwards. As part of the high-level Memorandum of Understanding we have with the UAE, additional capital from an £800m commitment by Abu Dhabi’s sovereign investor Mubadala to UK life sciences will be deployed alongside our programme. That amounts to £1bn of patient capital for the sector.

Will programmes similar to Future Fund: Breakthrough and Life Sciences evolve for other sectors?

It could happen. There are certain areas that are strategically important to the UK and where more dedicated resources and dedicated capital are required, such as quantum computing.

Are there other players in the scaleup ecosystem with whom the Bank will strengthen its relationships?

That is a good question. We have a very good relationship with UKRI and Innovate UK in particular. Are there some adjacencies? Are there areas where one plus one would make three? That is quite a live discussion at the moment.

Is there a greater understanding and appetite among businesses for equity finance?

The understanding of availability of finance differs across the country. Some areas have more information and access to capital than others.

We are addressing that in two ways. Our finance hub, in which the ScaleUp Institute is a partner, aims to provide a digital forum for companies about the options – wherever they are on their journey. While it addresses the small business community at large, there is a section on the hub that is specifically tailored for scaleups.

While having access to an informative website is important, however, you also need people on the ground to join the dots. We are organising events and bringing people together, explaining what is available and learning from successful local scaleups. The combination of our regional network team and the finance hub are our main tools for addressing the lack of access to information and capital.

Alongside that, we have a number of regional funds, such as the Northern Powerhouse Investment Fund and the Midlands Engine Investment Fund, which have been very successful in helping to build regional ecosystems. In terms of equity transactions, our funds represented about one in four deals in the Midlands. In general, the equity deals we support are becoming more regionally diverse and the concentration of deals undertaken in London has reduced sharply.

What’s your vision for the development of these regional funds?

We have to build regional ecosystems. Proximity matters: investors want to be geographically close to their equity investments, so more VC funds need to be located regionally. This creates a flywheel as we have seen in the Midlands and the North; with more fund managers on the ground, more demand and more opportunities are created, which then attracts interest from other finance providers who want to find out what is going on in that particular region.

It is not enough to have this fabulous VC ecosystem in London and the southeast. That is a brilliant huge success story for the UK and we don’t want to lose or break that – but we have to replicate that in other parts of the country. The £1.6bn announced at the Budget and Spending Review to provide investment funds for the Devolved Nations, and the North, Midlands, and South West of England recognises that need, as well as the success of our existing funds.

The same applies to angel finance. The earlier the stage of a business, the closer an investor wants to be – and that is more helpful for the business as well.

Unsurprisingly, because there is a very uneven distribution of wealth in the UK, we also have an uneven distribution of wealthy individuals who become business angels.

In 2018, we launched the Regional Angels programme specifically to support clusters of angels across the country, focusing mainly on those parts where there were opportunities but insufficient angel capital. It has been a really successful programme, making four new commitments totalling £50m in our last financial year. 

The work that business angels do, helping to translate an idea or a piece of scientific research into something viable, is incredibly important. They are the first part of the scaleup journey. If we can develop more networks across the country, then that will lead to a better pipeline of later stage scaleup opportunities for further investors. 

That is why the recent Budget announcement expanding the Regional Angels Programme is so welcome. 

Are there other imbalances in the scaleup economy that the Bank is seeking to address?

We definitely want to continue to have a greater regional impact. Not only do we have regional inequalities in access to finance, but there are certain communities who find it very difficult to raise capital in the first place so they have a chance to put their ambitions into practice. We have to break down barriers in access to finance for underrepresented groups. It is not just the right thing to do – we are losing talent and ambition by not supporting people with great ideas and great minds wherever they may be.

On the supply side, how is the Bank supporting equity investors to commit more funds at pace?

Entrepreneurs tell me that UK VCs tend to have a drip feed approach, as opposed to the ‘big bang’ approach of US investors, and that there is a difference in approach to the amount of funding that will be forthcoming – which isn’t necessarily related to the amount of funding that the team thinks they need.

That is not universally true for all the VC funds in the UK, and I think it is changing, but the average size of funds in the UK is still below the scale of funds in the US. We are doing a number of things across the Bank to try to solve this. 

We introduced the Managed Funds programme in 2018, making cornerstone investments into funds of funds. This is designed to increase institutional funding of long-term patient capital for innovative businesses that are scaling rapidly. That is now largely committed; we aim to invest up to £500m in five or six large scale private sector managers, and we currently invest in four of those.

British Patient Capital invests in both venture and venture growth funds, with a focus on the venture growth stage.

For VC funds, getting the first investor is crucial. We can be that first investor, taking the risk and doing the due diligence upfront. We do that with established managers, but also with emerging managers in the Enterprise Capital Funds programme.

We are therefore trying to solve this problem at the fund of funds level, at the fund level and, with Future Fund: Breakthrough, at the direct level. Every part of the process is to get more capital into the equation. Our capital is never going to be enough, but we hope it will be a catalyst.

In terms of catalysing capital, what is your perspective on how greater amounts of institutional pension capital can be unlocked?

It is a really important topic, and has been the holy grail for as long as I’ve been in this industry.

I think this time all of the pieces of the puzzle are being looked at and taken forward in a concerted and methodical way through the productive finance group and the work being done by the Treasury. It gives me confidence that we will resolve this.

Having said that, there is still a long way to go to fully convince trustees and pension plans that they should be allocating into higher risk assets. The focus has been on the costs rather than the returns but the debate has to be changed: once it is acknowledged that the costs are high because the returns are high, progress will be made. 

When we set up British Patient Capital, we wanted to show how a diversified portfolio of VC assets could be built up and deliver good returns. And while we are still early in that journey, that is still the plan.

British Patient Capital has had a tremendous year because its portfolio has benefited from some of the trends that were accelerated by the Covid pandemic. Companies such as Hopin, Revolut and Wise are all in our portfolio and have performed extremely strongly. We can focus more on going out and telling that story to pension plans and institutions.

The Bank has just revised its mission. Why is that?

The biggest issue that all of us face is climate change. We have revised our mission to drive sustainable growth and prosperity across the UK, and to enable the transition to a net zero economy, by improving access to finance for smaller businesses.

Personally, I think this is incredibly important to take forward. The British Business Bank has a big role to play, not just in terms of our own operations and our own portfolio, but what we can bring into the ecosystem by way of support, information and finance to encourage the small business community in this direction. That is not a three-year thing. That is a 30-year thing – but it is really important we get on that journey now.

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