HM Treasury has rejected proposals for a patient capital ISA, but has suggested investment trusts could provide a suitable vehicle to attract more retail investment into the UK’s start-up businesses.
The Government announced its review into the funding gap for start-up businesses in November last year as part of its industrial strategy to increase productivity and drive growth as the UK prepares to leave the EU.
The patient capital consultation document, Financing Growth in Innovative Firms, was released today and also includes a proposal to create a fund to help UK start-ups become so-called unicorns – innovative firms valued over $1bn.
It is largely focussed on keeping pace with the US and notes fewer than one in 10 firms that receive seed funding in the UK go on to get fourth round investment, compared to nearly a quarter across the Atlantic.
Neil Woodford, a member of the review’s industry panel, had floated the idea of a tax wrapper to incentivise long-term investment from the retail market.
But the review ruled that a patient capital Isa would be difficult to define in legislation and would complicate the Isa landscape, which already allows investors to add up to £20,000 to these types of investments.
However, the Association of Investment Companies has praised the review’s support of investment trusts, which are named as an area with capacity for greater retail investment.
AIC public affairs director Guy Rainbird says investment trusts are suitable for long-term investments in innovative, unquoted companies because their structure allows investors to buy and sell their shares with no need to trade holdings in the underlying portfolio.
“This empowers fund managers to make investment decisions driven solely by the growth potential of businesses they choose to support,” Rainbird says.
“The Treasury has also recognised the high levels of transparency offered by investment companies. This in turn enables efficient asset allocation between funds and, alongside the daily trading provided by their stock market listing, creates the basis for pension funds and IFAs to increase their exposure to patient capital investments.”
The review notes the FCA is considering a programme to assist new asset managers seeking authorisation in the UK and that could facilitate the creation of “all types of investment funds” including ones that invest in patient capital.
A second suggestion is for tax schemes to support investment into patient capital funds, albeit in a way that is compliant with EU state aid rules, not overly complex, not open to abuse and that stimulates new investment rather than providing a reward for investment that would have already taken place.
Woodford has not commented on the publication of the report, but an update from the Patient Capital Trust released in April said the Government was addressing the UK’s failure to make the most of its knowledge economy assets.
“The early-stage businesses that look to develop and commercialise the outstanding intellectual property that emanates from British universities have been deprived of the capital they need to succeed,” the update said.
The proposed National Investment Fund would be a public-private partnership or would be placed fully on the government’s balance sheet to be sold off once it has established a sufficient track record.