Sunday, 19 February 2012

The Case for a New ICFC

Do you watch Question Time on BBC1?  I watched the program last Thursday, and the last question was "How would the panel create growth in the UK?"  The short answer was: none of them had a clue!  Poor Julie Myers, who was mocked by David Dimbleby for using entrepreneur in every answer, suggested more internships.  John Prescott said that wouldn't help much, and then waffled for a few minutes.  The coalition representatives, Ken Clarke and Baroness Kramer, rolled out all the government measures, but noted "you may not have heard of them".  Too right, we haven't!  Someone called Owen Jones took the position that anything the government was doing was wrong.

The real answer is that growth will come from the small business sector but to fuel that it needs capital. Banks won't invest, the supply of business angels is limited, and the VCs have almost all gone upmarket. What the UK needs is a modern version of the old ICFC - the Industrial and Commercial Finance Corporation.  ICFC was set up after WWII by a consortium of banks to re-invigorate the small firms private sector.  It operated through a series of regional offices, each headed by a local director who was bit like bank managers used to be.  ICFC made small investments, from £25k up to a few £millions, and its usual scheme was a mix of loan and equity - "debt with an equity kicker". It evolved into 3i.  It was hugely successful, made a lot of money, which caused its banking owners to decide to float it as an investment trust, so they could access the cash.  Does that sound familiar? Post the flotation, the regional offices were closed down, 3i has gone up-market with the size of its investments, and is no longer making money for its owners.

Now we hit the political barriers.  The Governor of the Bank of England, among whose first actions on taking office was to terminate the Bank's work on small business finance, is unlikely to be a supporter, although just 1% of the last £50billion round of printing money (sorry, quantitative easing) would have set up new ICFC nicely.  Party politics is also in the way, because Lord Mandelson in the last government was working on the scheme back in 2009.  Is it anathema for this government to accept  that their predecessors may have had a good idea?

We're not talking about a lot of money - perhaps a few hundred £million.  It doesn't need to be run by the banks, or the civil service, but it does need to be started soon.  Wouldn't it be helpful if it made its investment decisions not on credit scoring (driving by looking in the rear view mirror) but by scoring on the Business Model Canvas (see last weeks blog).  What we need now is grass roots momentum to get the ball rolling.

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