191. Is The Government’s British Business Bank Bold Enough?

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1:41T's and C's apply.

1:52Hello and welcome to The Rest is Money with me, Robert Paxton. And with me, Steph McGovern. And today we have with us Stephen Welton, who is chair of the British Business Bank, which is the government's development bank. He's going to tell us all about what that is and what it is that they do. But it was set up in 2014. He's a man as well with quite an interesting background, founder and CEO of the British Growth Fund. And he helped advise on the setting up of this British Business Bank. So lots we want to ask him about, isn't there, Robert? Yes, that's right. And its focus has always been smaller businesses.

2:27And, you know, one of the reasons it's really important to talk to him is because actually smaller businesses have been going through a very tough time. You know, a Federation of Small Businesses survey the other day, which actually said the number of small businesses is shrinking. Now, this is a government that recognises that if we're going to get the growth rate up, we have to do more, particularly to support small businesses and particularly in high growth areas like life sciences and tech. Heck, I've always felt about the British Business Bank that it is too small to make the kind of contribution that its equivalents in places like Germany and France have made to their economies.

3:08And so there is just a raft of things we've got to talk to him about, which are things like, you know, is the government being ambitious enough and giving them the money that they need? how much of a contribution can this bank make to stopping our really important small, young, growing tech and life sciences businesses just deciding they're going to leave the UK when they get to a certain size. So, you know, this conversation goes to the heart of Britain's economic future. Stephen, thanks very much for joining us. I'm really interested, and I know our listeners will be just to hear a bit more about how it actually works when it comes to the British Business Bank support and businesses because you don't lend directly dear to businesses you access it through like delivery partners but so can you just explain it like if I was a small business who was looking for funding how would it work with the British Business Bank?

4:07That's a great place to start Steph because you're not going to find a branch of the British Business Bank on the high street and for many small businesses and members of the public they will never have heard of the british business bank so so what are we we're the country's economic development bank which means we're owned by the government we're owned by the the taxpayer and our mission is very simple which is to improve access to finance for small companies right across the uk and over the last 10 years since we were set up the bank has tended to be used to deliver specific programs to deal with a specific requirement to meet whatever the policy objectives of the government of the day were.

4:43And that's built up a lot of skills over time, but it's also created a degree of complexity. So apart from obviously the massive intervention that you did during COVID, just tell us about those specific interventions that you made. So if you, the skills of the bank are identifying where gaps are in the market and then finding people to fill those gaps. And if you think about small businesses and access to finance really falls into two buckets. Either you're looking to borrow money or you're looking to raise equity. So what we've done in the last 12 months is to really address the way the bank faces the market.

5:16So we have a banking business and an investment business, nice and simple. How we actually deliver that through individual programs is really something that is for us to do. That's the internal plumbing. And I suppose, Robert, just putting flesh on the bones of that, over the course of the last 10 years, the bank has supported over 200 ,000 companies in the UK. It's over 20 ,000 companies a year. So we have real reach. And we're now... Let's just go back, because I think people would be interested in the history. So you're created by Cameron and Osborne in 2014. What did they want of you back then?

5:50They wanted to have a tool, really, for government to improve access to finance. So on the basis that... So it was general, it was just a general mandate. Well, I think it's a consistent view that small companies find it harder to raise capital, which is true. This goes back to the Macmillan gap of the 1930s. And in times of crisis, post the financial crisis, it's harder for small companies to raise capital. I think the government's view was, if we have an economic development bank, what can it do that we don't do currently? And crucially, what can it do that the private sector is not doing? And so our role is really to improve access to finance through third parties.

6:24So it's not the role of government to fund every single company in the country. And going back to your point, Steph, about delivery partners and what are our delivery partners they are people that we've chosen either to lend money to small companies or to invest in those small companies and we help to give them greater financial capacity so the fact that we are supporting tens of thousands of companies is through third parties they can be non-bank financial institutions that would be asset-based lenders they can be challenger banks and if you look today 2025 relative to 2014 when we were set up.

6:58Over 50 % of all lending to small companies is now provided by challenger banks and non-financial institutions. That was not the case in 2014. So one of the interventions was improve access, improve access in terms of scalar funding, so smaller amounts, and crucially on a regional basis. So small business goes to a bank, bank says, actually, you're too risky for us. What is the risk that you take as a bank? The risk that we take is the choice of those delivery partners, their ability to actually identify these companies, to create lending books. But what are you doing with your balance sheet? We are providing guarantees to those lenders.

7:39So they now, on the back of a guarantee from the bank, have an additional form of security that they wouldn't have had without us. And that means that if it goes wrong, you, and that means ultimately the taxpayer picks up the bill. Broadly, that is what's happening. Yes, but you have to look at, we don't underwrite all of these loans, otherwise we would effectively be making all of the loans. So it's what is a level of risk that we should be taking as the British Business Bank that is going to enhance the ability of lenders to lend more to those companies on a prudent basis because they clearly want those loans repaid.

8:13We don't want companies to borrow money that they can't repay. So it's facilitating greater lending than would happen without us. And that, I think, is the key point. So can I ask, Stephen, then on that basis, given that what we're saying here is this lending happens to essentially businesses that are more risky. What's the success rate like? What are you seeing in terms of how many of them are going on to do well or how many are defaulting on the money that they're borrowing? Well, in terms of the sort of returns of the bank, I mean, because we're helping literally tens of thousands of companies, you have to look at the sort of aggregated return.

8:51And the bank is making our cost of funds is effectively the government's cost of funds. We are making a positive return on the amalgamation of all of those lending programs. So we are more than covering the cost of our own funding and we're making a positive contribution. So what that's telling you in sort of simple language, the sum total of all of these programs is generating a positive financial return for the taxpayer. But on that point, I think there's a very, I think, straightforward economic argument that says if you are doing better than break even and you've just said you are, you're not taking enough risk.

9:26Because the whole point about an institution of this sort is, you know, you should be backing ventures that may or may not over time contribute significantly to the growth rate and the prosperity of the economy. and from what you've just said, surely you're being too risk averse. Well, that's a very interesting perspective and it takes us away from lending into investment. And I think it's really important. It's both though, isn't it? It is both, but lending has got a different risk profile. You obviously have an interest rate and you have to pay the loan back. So for a lender, they're going to look at a level of defaults and that's baked into their credit assessment.

10:06For us and the thousands of companies we support, We want them to be able to borrow money on the right sort of terms, which is consistent with the needs of that company and is not exposing them to undue financial risk in terms of borrowing too much. What is your return on capital across all programs? Well, all programs in terms of both debt and equity, it is meeting the government's cost of funds. So that's between four and five percent per annum. Right. So you're making a four and five percent. That's a real return or that's a real. I mean, that is, I mean, that's personally, I'd say that's crazy in a country where the growth rate has stagnated for 15 years.

10:43I mean, you know, if you were making a 2 % return, that would mean you were taking way more risk. And I think that would be good for the UK. And I think we would agree with you that our role here is to increase the flow of funds, both debt and equity. So we're already supporting one in 200 companies. So that could be two, three. obviously you could increase that but the government has to have the financial capacity to do that very relevantly two weeks ago in the spending review the financial capacity of the bank was increased by two-thirds to 25 billion so i think to your point robert what you could interpret that is here is an organization that is capable of intervening of supporting a lot of companies across the country and with greater financial capacity it can both provide more capital and it can take more risk and when you look at the equity side which i think goes perhaps the heart of how we're going to create the great British companies of tomorrow.

11:35When you're looking at equity investment, there is a high failure rate because of the very nature of the businesses that you're backing in startups. And we shouldn't be uncomfortable with that. It's the nature of innovation and new companies. Doesn't it sure that when you do focus the money and support on businesses, as you say, you know, you're looking at the diversity of the businesses and everything else, that actually they do bring greater returns than people think they're going to because for a long time, you know, we haven't looked at the diversity of what's happening behind the scenes and the types of people who run the companies or geographically where they're located.

12:12Have the banks just been rubbish at doing their own risk assessments of businesses and looking at the diversity of them? I don't think it would be fair to say that. What we have done is we have increased choice. So a real policy decision by government was that the greater the diversity of choice in terms of lenders, we look at success over the course of the last 10 years. Somebody lending to a farm is very different to somebody lending to a fintech startup in London. We need greater diversity. And that is a really core element. If you just have one source of funding for everything, you're not going to get that level of innovation within financial services.

12:51So I think on the lending side, it is where are there gaps? and how can we help to fill them? I don't think it is the role for government to fill every single gap because a crucial other element, which is a way of showing, are we being successful? Can we crowd in private capital? And we very much focus on for every pound of taxpayers' money, how much private capital are we getting alongside that? And it varies whether you're talking about lending or investment, but that's a good way, I think, of showing whether we're actually making the sort of impact we want to make. If it's a pound of government funding and that's it, then we're clearly not having the sort of impact that we want.

13:28Historically, you have been small compared to, I don't know, KFW in Germany, for example, or many of these continental equivalents. With your increase in capital, how would you now compare to a KFW, for example? KFW obviously has been going for 78 years, so then administering the Marshall Plan is a very specific sort of circumstance. That is an absolute bedrock, It is of German funding. And they have state institutions, they have state lenders, they have a different distribution system. I think France is perhaps a good parallel. Our equivalent in France is called BPI. The big difference in France is that all of its public financial institutions are effectively under one banner.

14:09So collectively, they are bigger than the British Business Bank. But the government is now sort of redesigned essentially its financial institutions, the so called puffins. We've got the British Business Bank, the Infrastructure Bank, which is now the National Wealth Fund, Innovate UK. Collectively, we have significant firepower. And I think one of the opportunities for the UK is to actually bring together that firepower in a more concentrated fashion. So we're not duplicating what others are doing and we're getting sort of a bigger bang for our buck. Would you still be smaller than BPI in France, for example, collectively?

14:41If you put all the puffins together, I think all the puffins together would be as big as BPI. so I think we've got we've got the financial scale across these government financial institutions there is undoubtedly an opportunity to be better coordinated so if I'm setting up a company and I get a grant from Innovate that company should be on the radar of the British Business Bank because if that grant is successful in coming up with something commercial where's the next source of funding coming from if the company is successful with our support where does it go from us does it go to the National Wealth Fund does it ultimately go to public markets so I think we have now the scale that we need the challenge for the bank with a significant increase in funding is how are we going to deploy that are our delivery partners big enough to take that incremental capital are we addressing where we see the significant gaps are within the economy and how does government think about this do you have targets as it were for how you allocate this money according to how important you think sectors are to the economy or do you just sort of live day to day on the basis of these institutions who you work with come to you and they say we need a bit of help here so historically it's been government sets a program we do a tender we evaluate those tender against who we think is capable of delivering that and that has been uh very programmatic what has now been announced which is a fundamental change is that the bank will essentially have its own balance sheet and the bank can now start to go right to the heart of your question which is to think about capital allocation uh we have only recently appointed the first ever chief investment officer.

16:11And the bank has never had a chief investment officer because the allocation is essentially being driven by central government. So now for the first time, sorry, your model, you've changed. You are now going to be able to do direct investment. We're going to be able to do both. What we are, but going to your question about capital allocation, we now have a balance sheet. We now have incremental capital. So we can start to think, well, how would we allocate that? How would we allocate it strategically and in line with government's objectives, which is the industrial strategy? And that is really important.

16:38So the four billion that's been allocated for the industrial strategy enables us to look at eight sectors and to determine where we can have the most impact across those eight sectors, not subdividing it into chunks per sector. So it's fungible. And that is really important. It will be based on the quality of the ideas and the need. And just to the other part of your question, Robert, in terms of investing directly, the bank to date has worked through delivery partners, as we've talked about, for both debt and equity. In recent years, it has also started to make direct investments in individual companies.

17:13And this is to add financial scale. So a company wants to raise more money than their delivery partner can effectively provide. That has just been increased in the spending review to an ability to make investments of up to 60 million pounds in an individual company. if we are working with others which we will do and our funding can bring in three or four times that we will finally be able to start addressing the much talked about scale-up gap i was going to ask you so this does get you this absolutely this means a british company looking to raise hundreds of millions and this could be there's an alphabet soup in the venture capital world of abcd but if we're talking about a high growth exciting company that could become a household name wants to raise capital in the UK.

17:55Historically, we have not had the funding in the UK, either from government and crucially from UK institutions. You believe that you could take a fast-going tech company to unicorn status simply through your ability now to directly invest in partnership with other funds? Yes, and I think, and perhaps it's worth just flagging, The bank, through its delivery partners, has backed over 50 % of all the unicorns in Britain to date. So this is not a sort of pipe dream. What we are really addressing, and you will have looked at a lot of really interesting companies, a good question to ask them is, how many British institutions are on your cap table or your shareholders?

18:40And historically, the answer is not enough. Hence, we need to unlock pension funds. The bank can be a really good catalyst here. Because if we can, and we're the biggest backer of venture capital in the UK, So we're roughly 20 % of the UK venture capital market working through all the leading venture capital firms. We have the ability now when some of these high growth companies are looking to raise significant capital that the UK can fund them. And the bank can be a critical cornerstone in doing that. And is there also a means to make sure the UK continues to benefit from them when they become the unicorn businesses?

19:13And they're not just bought up by an American firm and, you know, off the money disappears and all the success. Well, I very much hope so, Steph, because I've sort of likened the UK economy almost like an incubator economy. We've got great universities, we've got great startups, a lot of IP. But when a business starts to get real traction, when it can become a global business and it then needs hundreds of millions, not few millions, the reality historically has been we haven't had that funding, which does give rise to either them being sold or invested in by others. And the reality is, if we don't have the gravity of domestic investment, we're not going to be able to retain those businesses here or enough of them here.

19:53So the Chancellor is repeatedly saying she wants the UK to be the best place to start up a business, scale up a business and stay here. They won't stay here unless they can scale up here. So this is directly focusing on that. Well, there's a lot more we want to get into on this, Stephen. Sit tight. We're going to go to a quick break. one of the things Robert and I keep talking about is how we get more people British people to to invest in businesses as well you know I'm someone who's invested in quite a few different businesses now through various different means crowdfunding equity all kinds of different things but it's not something traditionally we're very good at in this country you know what do we do to encourage that We've heard from these leads reforms about advertising now to encourage people into more stocks and shares and things like that.

20:43But for the small and not listed businesses, you can't do it all, can you, as the British Business Bank? So is there a way of incorporating more individuals into investing in businesses and startups as they begin to scale up as well? The answer to that is a resounding yes. And you think, well, how are we going to do that? and we're going to do that using the biggest pool of capital of all which is savings we talk about savings and you ask most people what's your pension invested in they won't have a clue i mean genuinely will not have a clue what their pension is invested in it the younger they are they have even less of an interest in their pension because they well it's not really for me now as this for older people when they start to retire i think we need to sort of reimagine pensions and we may start with just giving it a different name you look at australia they don't talk about pensions they talk about their super i mean automatically the language it sounds a bit more exciting what's your super doing what's your super invested in so i think that is part of it we also if you look at the defined contributions so this this is the pension that everybody in the uk is effectively going to be in so as an individual you pay into your defined contribution pot where's that money going again vast majority of people haven't got a clue where it's going the vast majority of defined contribution pension schemes are invested in what's called the default scheme.

22:03Now, that's strange language. When you think about default, you normally think about things going wrong. It's a default. But we put everybody into the default pension scheme. Well, what is that? The default pension scheme is actually a very low risk and therefore the returns it will generate will be reflective of that in comparison to my Australian super. Australian super has got exposure to some high growth companies. It shouldn't be all exposed to that because that would be imprudent. And so I think we have a major financial education exercise to do here. So when the chancellor talks about making effectively investment available to all, it's got to start with, well, you are invested.

22:38You just don't know it. And I would love to see people really sort of looking to their scheme providers and saying, where is my pension? Which companies am I invested in? Why have you invested in that? Why is my return only three or four percent? Why isn't it seven or eight percent? And until we get that connection between your savings and wealth creation, retirement planning, I think we are missing an enormous trick here and that there is an opportunity for the UK to play catch up. But there's a related point. You know, I've said to you that, you know, in a way, I would much rather that you took even more risk.

23:18And, you know, there will be years if you take more risk in which your returns are absolutely off the charts, to be fair. but there'll also be years when you know one or two big investments might go wrong and you don't hit the you know the government's cost of funds target and uh you know as far as i'm concerned that's success rather than failure but we're not comfortable we're taking proper risks the kind of risks we need to take if we're going to get the economy um growing there's a separate point which is people confuse cost with value for money absolutely and historically one of the reasons pensions funds have performed so badly is people haven't thought about the profits that are going to be generated they've just thought oh well i'm a trustee somebody's going to really kick me if i pay too much for the service and therefore they've gone for low-cost providers which also mean that you get typically quite often low returns and that's not value for money value for money has to be measured on the basis of what profits you're going to make versus the costs you pay and sometimes you have to pay more to get a bigger return so this is a good initiative but But do you think, frankly, the government gets this at all?

24:23I think, no, I think the government does get it. I think the wording value for money, unfortunately, has become synonymous with cost. So if something's cheap, it must be good value for money. Pretty much every presentation I've seen on a DC pension fund starts with this is how much the scheme costs. So we focus on if I buy something and it's cheaper, it must be better. Value for money, and you're absolutely right, has got to be OK. well, it cost me, you know, five basis points, 10 basis points. What was the return, the absolute return that I got or will get in 20 years' time? That is the piece we need to get to.

24:58So I think the government understands that. They understand that if you can get pension funds to take more risk, that will not only drive higher returns, or has the potential of higher returns for savers, it also leads to more productive use of capital, which will have an economic benefit. And we need to deliver that. I mean, this has been a longstanding issue. This is not a new issue that this current government is dealing with, but the government has given it a lot of focus. We need to convince not just the trustees of the pension fund, but the people who advise the pension fund trustee. If you're a trustee and your advisor says, well, that's a bit risky, Robert, I'm not sure I do that.

25:32As a trustee, you're not going to do that. So we have to give the trustees the willingness and the cover to make these decisions. We need to look at our international counterparts. How is it that Australian and Canadian pensioners, same sort of similar backgrounds and regulatory environment, we don't want to take excessive risk, are generating higher returns because they've got a different asset allocation strategy? That has got to be part of delivering value for money. Yes, let's look at the cost, but let's look at the returns you're going to generate. I think it does come back to the same point we keep saying, which is as a country, we don't understand risk at various different levels.

26:05We think risk is bad all the time rather than thinking about it in context and looking at it over a period of time. We just see it as a snapshot thing of, oh, that's too risky and therefore it puts us off. Can I just pitch to you, Stephen, my radical rebrand of pensions? Yeah, no, please do. Because I think the reason why, and I would probably put myself in this category at a younger age, the reason why pensions are not exciting or interesting is is because of course we all know it's because it feels so far away it just doesn't feel tangible and also for lots of people they can't even afford to buy a house so why would they worry about what life's going to be like in their 60s but why could we not have a system where there is benefit from the beginning in the terms of like I don't know, like a dividend payment or some type of loyalty points you could build up with a brand you like.

27:04So, you know, a bit like when you've got your boots card and you collect points, or if you've got Avios or whatever it is, could there not be some type of thing where you, yes, at the end, you get a pension and you're putting money into it, but you're actually getting something as each year goes, you know, you're getting a hundred pounds worth of vouchers for something maybe voucher sounds a bit old school but you know just something which is then more of an incentive when you are young because you're getting something back then and you're not just waiting for this day that feels like it's never going to come like I don't think I'll be retiring in my 60s it's I'm going to be you know I'm early 40s I'm going to be long into my 80s so could there not be something which gives a return now as you go not masses but just enough to keep a sweetener and incentive?