WHEN First Minister Alex Salmond told the STUC conference in Perth in April that he was planning to launch a Scottish Investment Bank, it was presented as a major new initiative to help Scotland's recovery out of recession.
Trade union leaders welcomed the proposal. And there was talk that £150 million had been earmarked as the first step towards establishing the bank.
Salmond said the new bank would support business growth by initially bringing together Scottish En
terprise's existing Scottish Co-investment Fund, Scottish Venture Fund and Scottish Seed Fund. "Today's announcement", he declared, "will see the first steps towards a Scottish Investment Bank, pulling together Scottish Enterprise and European funding to support businesses with the growth potential to help Scotland make a strong economic recovery."
However, the proposal has met with an altogether more guarded response from the business community, and in particular business angels or private sector investors who are key players in the Scottish Enterprise Co-Investment Fund.
The proposal emerged with little to no communication or consultation with key private sector players. Since the announcement, they have heard nothing, nor have they been approached in any consultation.
Indeed there is now concern that some of the business angels may pull out of Co-Investment Fund projects if their investments fall under the jurisdiction of a Government-directed bank about which they know so little.
The First Minister's proposal may also be heading for trouble on three other fronts.
The first is that the UK Treasury may insist that the funding of any such bank comes out of the Scottish block grant, thus intensifying the budgetary squeeze on other areas of public spending in Scotland.
The second is over the aims and objectives of such a bank, who will run it and under what criteria, and whether it may fall victim to EU rules on state aid for investment projects.
And the third is over bank regulation and supervision. After the devastation caused across the banking sector by the global financial crisis, any institution calling itself a "bank" will be far more tightly governed and regulated by the Financial Services Authority. The FSA has come under intense criticism over its lax regulation of the banking sector and new rules on capital ratios, lending policies, accountability and supervision may well act to slow the investment process, narrow the field and further drive away angel investors.
Concerns over the plans for an all-encompassing investment bank come at a critical time for Scotland's economy and in particular the venture capital community. Scotland desperately needs to kick-start a dramatic uplift in new business start-ups, particularly hi-tech and university spin-outs, if there is to be any prospect of making good the steady erosion and shrinkage of the number of quoted companies in Scotland. Figures last week showed that there had been a year on year fall of 25 per cent in new business start-ups as measured by the number of new business bank accounts opened. The likelihood of a protracted squeeze on new bank lending to the SME sector is expected to greatly increase interest in, and demand for, equity investment as an alternative source of funding.
While there is broad acceptance of the beneficial intention of the government bank proposal, there is concern over the lack of consultation involving outside investors and apprehension that it could scare away angel investors.
Said one angel investor last week, "The Co-Investment funds are run commercially – a Scottish Investment Bank may bring different criteria. Could the bank politically handle the losses and failures that come with venture capital investment? And there could well be problems with investments made by a Government bank that may conflict with state aid rules".
Another said: "We have no idea whether this is a genuinely new concept, or just a change of name and branding for the investment projects currently run by Scottish Enterprise. Who would sit on the bank's investment board and how would its decisions be kept at arm's length from the Government itself? You're not going to enhance any investment institution by putting Cosla (the Confederation of Scottish Local Authorities] on the board."
David Grahame, executive director angel investor lobby group Linc Scotland, said: "Our business angel investors have held their nerve throughout the recession – actually increasing their commitments during 2008 and early 2009 because they are confident in the long term prospects. However, confidence is easily dented and they have been unsettled by the complete lack of consultation around the announcement of the Scottish Investment Bank initiative.
"In particular, they need reassurance sooner rather than later that the Scottish Co-Investment Fund will be in place in its current private-sector-led form through to 2014 as promised. If they cannot be convinced of this there is a very real danger that they will drastically reduce the number of companies they are backing right now, to be sure of being able to support that reduced stock through to fruition without the expected co-investment.
"I'm sure it is not the intention of the Scottish Government to create uncertainty in this way about best in class investment models, which are recognised and being emulated around the world, and would welcome early clarification."
Scottish Enterprise runs three co-investment funds. The Scottish Co-investment Fund is a £72 million equity investment fund part funded by the European Regional Development Fund (ERDF), to invest from £100,000 to £1m in company financing deals of up to £2m.
To date, SCF has completed 298 deals in 134 companies, with SCF investing £44m and leveraging a further private sector investment of £95m.
The Scottish Seed Fund (SSF) can provide equity, and in some cases loan capital from £20,000 to £100,000 to early-stage businesses keen to grow and which meet various criteria relating to their size and commercial viability. It invests in start-up and very early stage growing businesses (SMEs) as part of a larger funding package, and matched at least on a £1 for £1 basis by the private sector. SSF has completed 44 deals in 44 companies, with SSF investing £3.8m and leveraging a further private sector investment of £6.5m.
The Scottish Venture Fund (SVF) is designed to address weaknesses in the supply of risk capital to high growth companies seeking to raise funding packages of typically £2m to £3m. SVF has completed 18 deals in 18 companies, with SVF investing £19.8m and leveraging a further private sector investment of £40.6m.
The first £150m of funding for the proposed new bank is understood to be coming from the European Union via scheme called JEREMIE (Joint European Resources for Micro-to-Medium Enterprises). This was launched in 2005 to improve access to finance for micro to medium-sized enterprises. However, both Glasgow City Council and the Scottish Chambers of Commerce are understood to be backing applications on behalf of angel investment groups. More clarity and more consultation is surely now needed, before total confusion sets in.
