14 November 2018

Business Growth Fund an option to boost equity finance

Debt finance, from banks and other sources, has been a core source of finance over many years — and for many firms it will remain so. But a Business Growth Fund, investing capital between $2m-$25m to private companies across Australia, could also deliver a real contribution to economic growth over the coming years, says Martin Tricaud, Chief Executive, HSBC Australia.

If SMEs are to take advantage of market opportunities in Australia and overseas and reach their full potential, we need to broaden the type of finance available to them


Balance is important in any economy — across the various economic sectors, in the firms that drive the economy, in the employment which they provide and in the finance that they are given.

Debt finance, from banks and other sources, has been a core source of finance over many years — and for many firms it will remain so, perhaps with more superannuation funds entering this market. But debt finance from whichever source does not suit all business models.

In the modern economy, many companies have few assets to offer as security for loans. For small and mid-sized companies, where cash flows are uncertain as they grow, responsible bankers also need to be wary of offering too much debt. This could add undue financial pressures to the everyday challenges of rapid growth, creating much greater risks for these firms.

Instead, if SMEs are to take advantage of market opportunities in Australia and overseas and reach their full potential, we need to broaden the type of finance available to them.
For companies that cannot access public markets, venture capital is another source of finance but, in 2016, Australia ranked 14th out of 16 countries when venture capital funding was measured as a share of GDP by the OECD, ahead of only Slovakia and Russia and well behind the average.

And, as the Reserve Bank of Australia has noted, the offer of finance from some venture capital and private equity firms may not be on terms that are attractive to Australia’s entrepreneurs.

Business Growth Fund

There are other ways forward for Australia to consider. In the UK, the Business Growth Fund provides long-term, patient capital to growing companies as a minority investor working in partnership with management and other shareholders.

It was the brainchild of five major UK banks, including HSBC, and over the past eight years it has invested more than £1.6 billion ($2.85bn) into more than 240 companies, increasing sales and jobs in the process.

By operating through a new consortium vehicle, the banks have created the scale necessary to address the challenge of delivering equity finance across the UK, on good terms, in an efficient manner. More than 70 per cent of investments are outside of London in a wide range of manufacturing and service industries.

This is an idea that could work in Australia, too. An intervention at scale, focused on providing growth capital of between $2 million and $25m to private companies across the country through a specialised investment vehicle, could deliver a real contribution to economic growth over the coming years.

Industry support

HSBC is not the only voice that believes a business growth fund is worthy of consideration. The Australian Small Business and Family Enterprise Ombudsman in June this year recommended its own framework for such a fund, as part of a bigger report into the provision of affordable capital to SMEs. It’s also a suggestion that has been noted by the Reserve Bank in its September 2018 bulletin.

The UK’s Business Growth Fund is now one of the most active investors in Britain and Europe by volume and its strong foundations have enabled it to take a long-term perspective, accepting that not all firms will succeed but working hard to deliver good outcomes for those with prospects.

In 2017, Canada formed the Canadian Business Growth Fund with the same multi-bank model to deliver growth capital across its economy and that fund is now making its first investments.

Much would need to be done before a business growth fund could be launched in Australia, including creating a suitable alliance of banks and other stakeholders, as well as getting the right regulatory framework for this to operate efficiently. But these issues are in no way insurmountable and the benefits are more than likely to reward the effort expended.

It’s an idea that deserves proper consideration as it has delivered tangible results elsewhere and fits naturally into the conversations that are already shaping Australia’s economic future.

This article originally in The Australian on Wednesday 14 November 2018.