Written evidence submitted by British Business Bank (LRS0064) About the Bank The British Business Bank (The Bank) is a government-owned economic development bank. We aim to make finance markets for smaller businesses work more effectively, allowing those businesses to prosper, grow and build UK economic activity. The Bank has a single shareholder, the Secretary of State for Business, Energy and Industrial Strategy (BEIS). On his behalf we manage the UK Government’s access to finance programmes for smaller businesses, within a single commercially minded institution, supporting Government initiatives such as the Industrial Strategy. The Bank received State aid clearance to start operating in November 2014. The British Business Bank is not a bank in a conventional sense. We work on a wholesale basis through the market to provide funds and guarantees to private sector partners, enabling them to finance a greater number of smaller businesses (either through debt or equity). The Bank uses economic evidence to design programmes that address market failures and gaps affecting smaller businesses across the economy, crowding in and not crowding out private sector activity, with the aim of allowing us to exit these markets once failures have been addressed. We also work to improve smaller businesses’ awareness of the finance options available to them. The British Business Bank is delivering some of the Government’s key economic recovery programmes in the wake of the Covid-19 pandemic: Coronavirus Business Interruption Loans (CBILS), Coronavirus Large Business Interruption Loans (CLBILS), Bounce Back Loan Scheme (BBLS), and the Future Fund. As of 18 August 2020: CBILS lending data stood at: £13.7bn. CLBILS lending data stood at: £3.5bn. BBLS lending data stood at: £35.5bn, and the Future Fund at £588.3m convertible loans approved. The British Business Bank has six strategic objectives, against which it measures its success: Objective Delivery to date 1. Increase the supply of finance British Business Bank programmes are available to smaller businesses in areas supporting more than £7.7bn of finance to where markets do not work effectively. over 94,900 smaller businesses (as at December 2019). The stock of finance supported by the bank grew by 25% year on year (i.e. from December 2018 to December 2019)1. 2. Help create a more diverse market 92.6% of British Business Bank-supported for smaller business finance with finance is currently being delivered via non- greater choice of options and providers. major (‘big-5’) banks (as at December 2019). 1 This figure does not reflect sums deployed as part of the Coronavirus support schemes, which are reported separately elsewhere in this document. 3. Identify and help to reduce The Bank’s dedicated regional funds now imbalances in access to finance for support more than £240m of finance. To smaller businesses across the UK support its regional activities further, it introduced a new Regional Angels programme and a UK Network of Bank colleagues located across all regions of the UK. 4. Encourage and enable SMEs to seek Our research shows that awareness of the the finance best suited to their needs Bank reached 24% for 2019 (excluding permanent non-borrowers, up from 20% in 2018). 5. Be the centre of expertise on smaller The Bank worked across Government to business finance in the UK, providing support priorities such as housing – with advice and support to Government guarantees for up to £1bn to support lending to smaller housebuilders – and national security. It also published five major reports, including a ground-breaking Defined Contribution Pensions report in September 2019. 6. Manage taxpayer resources The return on capital across British Business efficiently and within a robust risk Bank programmes for the period from 1 April management framework. 2018 to end March 2019 was 3.6%. Since the Bank was created, it has generated excess returns ahead of its five-year target amounting to £195m. Local Structures and programmes What structures exist across the country and how does this compare across different regions? How do these different tiers work together to deliver local growth? What good case studies exist, and can lessons be learnt from poor collaboration or leadership? How should local structures support delivery of regional growth across England? Do regional or local structures act in the best interests of local priorities and stakeholders or act more as a delivery arm of central Government? What should local authorities do more or less of to achieve these aims? Where should government focus its post-Covid-19 levelling up policy to best support regional growth: English regions, core-cities, towns, Growth Hubs and LEPs? Through its role as the UK’s development bank, the British Business Bank has been working to tackle the well-documented disparities in access to finance across the UK. The Bank has a specific objective to identify and help to reduce imbalances in access to finance for smaller businesses across the UK. SMEs play a vital role in driving growth. For new businesses to grow, they need awareness of and access to a variety of financing options. Unfortunately, the SME finance picture is not consistent nationally. Understanding and use of both equity and debt finance varies from region to region, and often significantly within regions. London and the South East is dominant in a range of measures: it accounts for the largest share of equity, both by number of deals and by value, and the region’s SMEs have the highest levels of knowledge and understanding the financing opportunities available to them. Ensuring that businesses with growth potential and aspiration can access the finance they need is important for long-term UK competitiveness. Through providing competition and introducing innovations to markets, SMEs can play a vital role in driving growth across less productive regions of the UK. SMEs, high growth or not, are significant contributors to every sector and every region of the UK economy, and are central to generating new jobs and productivity gains. Bank research shows that the regional distribution of retail bank lending to SMEs is broadly in line with the distribution of the SME population.2 Where regional imbalances are most apparent is in equity markets. London accounts for the majority (53%) of the value of equity finance deals in the UK, although it is home to only around 20% of UK High Growth Businesses.3 It also accounts for the majority (54.7%) of the value of angel finance. Conversely, despite being home to 7.5% of UK high growth businesses, the West Midlands only saw 3.2% of the value of the UK equity deals. Similarly, the South West only saw 1.9% of the value of UK equity deals, despite being home to 8.6% of UK High Growth Businesses. In response to this mixed national picture, the Bank has put in place a variety of funds and programmes to tackle the underlying drivers of such imbalances. Our actions are geared to supporting the supply of finance across the UK’s regions, with the long-term goal of developing sustainable finance ‘ecosystems’ led by private sector activity. For example nearly 60% of venture capital investments between 2011 and 2015 in the North of England were public sector backed, compared to under 5% in London. 4 Our goal is to close this gap over the long-term through catalysing and encouraging private sector venture capital activity to meet the majority of the demand, allowing government to step back from these markets. In addition to encouraging the supply of finance, we see a strong role for the Bank in addressing the demand for finance which often receives less attention compared to providing additional supply. BBB analysis shows clear gaps between SMEs based in London and the South East and elsewhere in the country. This applies particularly for equity and growth finance. 74% of SMEs in London were aware of venture capitalists, whilst areas such as the North or Midlands had awareness rates of 67% and 66% respectively.5 Similarly, 47% of SMEs in London are aware of business angels as a form of raising external finance, whilst only 39% of SMEs in the North and 35% of SMEs in the Midlands were aware.6 The Bank’s view is that demand activities are complementary and necessary to efforts to increase supply and reduce regional imbalances. We have therefore invested considerable efforts to bolster our work in these areas notably through creating a regional presence and developing a ‘best in class’ online information resource. 2 Small Business Finance Markets 2019 report 3 The ONS define high growth as ‘All enterprises with average annualised growth greater than 20% per annum, over a three-year period. Growth can be measured by the number of employees or by turnover’ 4 British Business Bank analysis of Beauhurst data 5 The British Business Bank Finance Survey 6 The British Business Bank Finance Survey The following summarises the range of activities being undertaken by the Bank both in terms in of supply of finance and in addressing the demand for finance amongst SMEs. Supply of finance Regional Funds Working in partnership with Local Enterprise Partnerships, the Bank has set up and using its expertise, manages three regional investment funds dedicated to addressing the UK’s regional imbalances in smaller business finance. These are: Northern Powerhouse Investment Fund: The £400m Northern Powerhouse Investment Fund (NPIF) is now in its third year of operation since its launch in February 2017. It has directly invested £172.4m in 659 Northern-based SMEs, in deals that have attracted an additional £192.1m of investment from the private sector. Midlands Engine Investment Fund: The Fund is now in its third year of operation and was formally launched in March 2018.