17
Examination of witness
Louis Taylor.
Q71 The Chair: Good afternoon. This is the Communications and Digital Committee, and we are continuing our inquiry into scaling up AI businesses and creative tech. We are very pleased to have two panels of witnesses today. First is Mr Taylor. May I ask you to introduce yourself and the organisation that you represent?
Louis Taylor: Thank you very much, Chair. I am the chief executive of the British Business Bank. The bank is the Government’s national economic development bank, and our purpose is to help small businesses to get the finance they need to start and to scale. We have a range of interventions, but they are intended to be catalytic to private market participants, to fill gaps in the market that need filling. Therefore, we are trying to crowd in private money and not crowd it out. Some of our interventions have a subsidy element and some are purely commercial, which is probably what we are going to talk more about today. In that commercial venture capital market, the bank is a dynamic and critical player—the largest investor in venture and growth equity funds, and one of the most active later-stage investors in deep tech in the UK.
We can be very proud of the money that we put out there, but the most important thing is the impact that we have. Along with our annual report and accounts this year we published an impact report for the calendar year 2023. The £3.5 billion of finance and guarantees that we put out into the market will support around a quarter of a million existing jobs through the life of the finance, create around 40,000 new jobs, and generate about £8.4 billion of gross value add—so £2.40 for every £1 we put out. The Government should get the £3.5 billion back and a bit more. I am looking forward to talking to you today about AI and creative tech.
Q72 The Chair: Thank you very much. We have four categories of questions. I will start in a moment. Then we will move on to the role of the British Business Bank in unlocking institutional investment, then talk about the approach specifically to AI companies, and then continue on that theme and how we can incentivise investment in riskier sectors.
As I am sure you have been briefed, we have heard from a range of witnesses—those who have come and given evidence to us and those who have submitted written evidence—a range of comments and frustrations, even criticisms, about the bank. The sort of thing we are hearing is that some of the investment or priority that the bank has given to start-ups is in an area where this country is now doing quite well, so there is less of a need for funding at that stage of a business.
Also, in the area of scale-ups, there are questions about whether the BPC is really adding value, because the investment funds that you may be contributing to might already be investing in the companies. Also, is their focus in any case in the right area if we are to see scale-up in the AI and the creative tech worlds?
With that introduction, would you tell us what the bank is doing to focus on those areas and perhaps to counter some of that negative commentary?
Louis Taylor: The first thing to say is that you have had a dozen investors and companies give evidence to the committee. We have invested in nine of those 12 already. I am not saying that we are 75% of the whole market, but it is just a marker. You started by asking whether we place too much emphasis on start-ups, which is not a problem in the UK. I think we are good at start-ups. The UK has a vibrant entrepreneurial community. There are more sources of finance today than 10 years ago when the bank was set up, not just from an equity point of view but from a debt point of view. The bank has been incredibly supportive of very new business models for challenger banks, for example, providing guarantees on their lending, allowing wholesale lenders to lend to those banks for on-lending to SMEs. You can see today that around 40 out of the 60 banking licences since 2010 are focused on SME lending, and the bank has supported many of those. The diversity of sources of finance for early-stage companies is better than it has been.
Actually, this whole area is a power-law game. A relatively small number of companies will be really successful, so increasing the size of the hopper that is coming through is an important endeavour anyway. We can be proud of the start-up scene in the UK, I think, but there is still more to do. We could be better yet. I would dispute that we are done, that we have been catalytic enough and that there is no need to help start-ups.
In relation to scale-ups, there is a far more acknowledged gap, and that is pretty universally acknowledged. The way in which the bank acts is intended to be catalytic, as I said earlier. There are three models that you can employ. What we employ is putting a small slice of government money into a fund—sometimes to cornerstone it, sometimes at a later stage to fill it up—and we hope to almost magnetise private sector money alongside government money. That is option 1, which is what we have been doing. We have invested in 82 venture and growth equity funds through 44 fund managers in the UK, committing £2 billion to those. In doing that, we believe that we have increased the number of funds but also the scale of those funds and their ability to finance later-stage companies. That is mode 1.
Mode 2 would be for us to aggregate institutional money in a fund and actively invest third-party money into venture capital. That is what the Chancellor announced we will be doing at the investment summit: we are creating the British Growth Partnership, which is an attempt to aggregate some UK pension fund money to give a conduit to invest into venture and growth equity in a way that has not been found recently.
The third way we could go, which we are not doing yet, is more akin to the Tibi scheme in France, which is a scheme mandating investors to invest in a set of funds that are focused on a sector of the economy.
Those are the various different ways. We are strong on the first, and we are looking forward to working well on the second, but we think the market needs both those mechanisms to fill the scale-up gap.
On our capacity genuinely to support scale-up companies at the point where they really move to productionisation of a technology, I think of the pragmatic semi-conductor in the UK, for example, which raised £180 million. The biggest cheque size that we can write at the moment as the bank is about £10 million, and £10 million out of £180 million is not a material amount of money. Again, we are trying to catalyse private sector money, so we are hoping that the British Growth Partnership that I talked about will allow us to be able to write larger cheques—not exclusively with government money; this is about getting private sector money into very commercial endeavour, in the end.
Q73 The Chair: I am not quite sure how to ask this question in a way that will allow you to answer it as freely as I might prefer. In terms of that approach, how much do you feel that the venture capital firms welcome your role and investment versus the businesses that are looking for the scale-up funding and investment growth? I can see a situation where, in the VC world, there is probably quite a bit of appetite for your presence and contribution, but I just wonder what kind of reaction and feedback you are getting from the businesses.
Louis Taylor: We get very positive reaction from the companies that we support, whether it is by putting money into a fund, the businesses that they invest in or the businesses that we invest in directly, because we subsequently do some of that with companies that have come through the funds and need more money at a scale-up stage. We will invest directly. The positivity stems from several things. Let me first just say that we get a lot of negativity from those we say no to. We understand that, but it is a discerning market and we have a due diligence process. When we invest in a fund—this is why fund managers are positive—there is a sense in the market that there is a player who has done proper due diligence on a fund. It is a kitemark of quality, to an extent. I would not say that our processes are totally streamlined, and we are working on those, but there is that quality element, so we bring that to the fund side.
The companies that actually benefit from the money are pretty proud to have British Patient Capital or British Business Bank as an investor. Sometimes we can bring a strategic benefit to a company as well—where they might have dual-use technology, for example. There is the national security strategic investment fund, where the Government are investing in dual-use technologies that have a national security application. That strategic customer can be a very powerful thing. There are all sorts of reasons why people would want us in their cap table.
The Chair: I can see that perspective. I suppose another way of me asking the question on the use of quite a large amount of public money to try to scale up the private sector in this country would be: should the investment that you have available be deployed somewhere else rather than through the VCs? I suppose that is what I am trying to get at. Is the money that you are putting in money that would not be available if you did not do it? Would the commercial sector not want to invest anyway without you there?
Louis Taylor: There are several dimensions to that, Chair. The first is that, if you take a large investor out of the market, the market will inherently be smaller, at least for a period. The purpose of our investment is to catalyse private sector investment, and to make it an asset class that is standard for the private sector in a way that it is not at the moment, because the asset class is critical to economic growth. If you do not have a supply of strong and growing small companies, you cannot have them move up the escalator of scale, where they become more and more economically significant and productive. A vibrant economy needs that, particularly in a world where new technologies are arriving, and you need new companies to exploit those. That is really important element.
In terms of whether our money is really crowding out, if that is what you are asking, or whether it is just better used elsewhere—
Q74 The Chair: One of the things we have heard—these are comments from others who are players in the AI world and seeking to scale up or who have been successful at it—is about deployment of the funds available to the bank. Would they be of greater value if they were invested in some of the things that the Government have retreated from, whether it is investing in data centres themselves or computing at exascale? Does the use of this public money create the impact and benefit that it could do by going through, investing and catalysing with the VCs, or could it be deployed elsewhere? That is all. You may not be the best person to answer that.
Louis Taylor: It will not be a surprise to you if I say that the choice of how much capital we get in order to invest is not made by us. It is made through a spending review where all the options for spending the money are taken into account. We have to put a business case and demonstrate benefits to costs. I was talking earlier about the gross value add that we generate—£2.40 for every £1 that we put out last year, we think. That is a strong ratio, particularly if you get your money back as well. We are confident that what we do offers value for money. On whether there are other priorities that the Government might have, you might need to ask Government Ministers about that.
Q75 Baroness Harding of Winscombe: You just mentioned your gross value add. How does that compare with our private VC funds? Who holds you to account on your financial performance?
Louis Taylor: Private VC funds would not look at gross value add, which is quite a governmental measure, but they look at RAR. We compare ourselves to all multiples of invested capital. The bank is quite young, and the venture capital element of it is younger still—six or seven years—and venture capital is quite a long-term game. At the moment, we are dealing primarily with accounting valuations rather than realised valuations, but if we look at ourselves compared to others in the market, we perform very well, actually. In terms of who holds us to account for those, we have an independent board, we have a shareholder representative from UKGI on our board as well representing the Secretary of State for Business and Trade, and we produce reams of research about the venture capital market, where the gaps are, and the comparisons between the US, the UK and Europe in terms of returns. We are confident that we are performing in a way that is absolutely value for money.
Baroness Harding of Winscombe: What is the leading financial indicator that should give me confidence that you are performing well against a comparable VC fund, recognising that it is a long-term business? What is the number?
Louis Taylor: Ideally you would get to DPI—distributions versus paid-in capital—but, in the absence of the realisations because it is early-stage, you would go for TVPI, which is total value relative to paid-in capital. You would look at that relative to other venture capital funds in the market.
Baroness Harding of Winscombe: How would you compare on that basis?
Louis Taylor: Everybody invests in different funds; different vintages will perform better; economic cycles are in there. For the portfolio that we have, we are carrying all our equity investments at £1.35 for every £1 we put out, at this early stage, and we are confident that that will continue to grow to the point at which they realise. Fundamentally, in the end, you always want to look at the cash-on-cash return—what cash you have got for the amount of cash you put out in the first place. We are a little way from that at the moment.
Q76 Lord Knight of Weymouth: I am interested in the coherence of all this. We are interested in scale-up in general, as we said, for AI and creative tech. I get that your mission, if you like, is essentially about leveraging private sector investment. You have British Patient Capital and you said that you have a £10 million limit; it is bigger—the briefing we had said that it can invest £20 million, but that is for larger investments and larger things. We are also talking to Innovate UK and the Arts and Humanities Research Council later. I am interested in that scale-up journey and how coherent it feels, and whether we need some aggregation in all these different funds that we are trying to get our heads round. Is it straightforward enough to start with some grant funding, move perhaps into a mix of grant and lending from Innovate UK, and then move into the private investment world that you are in?
Louis Taylor: You are absolutely right to talk about Innovate UK as an earlier part of the escalator of need than the British Business Bank. We collaborate very well with it, but we can do better. Actually, last year, in order to do better, we signed an MoU with it about exactly how to get the baton handovers for companies that are coming from the lab to commercialisation. It is the latter area where we start to be more relevant. We want to make sure that those baton handovers are much smoother. We are working closely with Innovate UK on a pool of money at the spending review. We will see whether we get awarded that money, but it will have quite a high-risk appetite and it is absolutely intended to bridge what is described—crudely, with a broad brush—as the lab-to-commercialisation point.
Q77 Baroness Harding of Winscombe: Can we spend some time on the reforms that have been made by both the previous Government and the current Government to help unlock domestic growth capital? I would be really interested in your views and how you think those reforms will work and what role the British Business Bank will play in delivering those initiatives. Could you set the scene first on what the government initiatives are trying to do and how you will play into them?
Louis Taylor: The premise not only by the Government but by many in the capital markets—Dame Julia Hoggett runs the Capital Markets Industry Taskforce as well, and it has come to the same conclusion—is that domestic UK institutional investors are neither investing enough for growth generally, nor investing in UK growth opportunities enough. The thesis is that with the second-largest pool of funded pension capital in the world, we should have a healthier, more vibrant, domestic institutional investment scene in the UK. A variety of reforms are intended to encourage that investment, not yet to mandate—an option posited by some.
The barriers to all this are multiple. There is the barrier around fiduciary duty of trustees, and the balance of their interpretation of that between risk mitigation to the point of risk elimination—that is one view—versus generating return for pension plan holders.
Another issue is the ability of the institutions to find their way into private market assets that generally offer growth potential higher than gilts or other government bonds. The mechanisms are difficult for a variety of reasons. First, there is the expertise that you need. If pension plans are sub-scale, they do not have the resource to have the expertise across a wide range of assets, so there is a paucity of expertise, particularly in venture and growth equity.
Secondly, you have to do a lot of due diligence at quite some cost and kiss a lot of frogs to find a prince or princess. That is off-putting, particularly in a market that is so driven by price—the pension market is driven by price rather than returns.
Thirdly, there is the inability, particularly in venture, to get the diversification that you want, which is the best risk mitigant of investing in small businesses and goes to that power-law game that I talked about venture being.
Overcoming those issues—a risk appetite issue, a fee issue and an expertise issue—is the essence of this. The Mansion House reforms, endorsed by the new Chancellor as well, go some way to helping. They are encouraging, but not mandating. It will take some time to see whether those reforms have the desired effect at the scale that you want. This is a patient game. We have seen a 30-year de-equitisation process in the UK. It will not be dissimilar in terms of re-equitisation. You do not want it all to happen at once because that will just inflate prices and diminish returns, which would be self-defeating. There is a world in which there is a virtuous circle and where, if great opportunities get financed in the UK, great opportunities will come to the UK to get financed and you will grow the market back again. But that will take some patience.
On the British Business Bank’s role in this, we have built up over the last 10 years a unique capability, experience and scale in the early-stage part of the market, where innovation is backed and where you can really see it starting to scale-up. We want to leverage that expertise, the paucity of which in the private market is an inhibitor, aggregate some private money from pension schemes if there are those with the risk appetite to do so, and invest it along the lines that we have been investing it, to give those returns and opportunities to pension plan members.
It will not be on a huge scale for each plan. It will be low single-digit allocations to venture in terms of percentage allocations. Nevertheless, it can make a material difference to pension plans and to the economy in terms of growth. It can also recast the intergenerational relationship between today’s pension plan members and their children and grandchildren. Everyone wants a great retirement income, but you also want to hand on an economy that will employ your children and grandchildren, and a failure to invest in the growth economy will not support that latter aim.
Q78 Baroness Harding of Winscombe: What can you do specifically to encourage institutional investors to become less risk averse? Is there anything that the BBB can do? That is at the core of this.
Louis Taylor: It is. We are creating the British Growth Partnership. The Chancellor announced in the Mansion House speech our first two cornerstone investors. One is Aegon UK, which is a big pension provider. Aegon UK’s announcement has some conditionality but is quite a bold announcement. It says that Aegon UK will put its investment in this venture fund into its largest workplace default pension scheme. That is quite a challenge to the market.
Our aim here should be that venture capital and growth equity, as well as infrastructure, real estate and private equity, should be core asset classes of default pension schemes, as they are in the US, Australia and Canada. In the US, 70% of venture capital comes from pension money. In the UK, it is 10%. If you take our foreign pension money, the BVCA says that it is 3%. Therefore, 3% of venture capital in the UK comes from UK pension money.
Baroness Harding of Winscombe: How do you coax them towards a larger number?
Louis Taylor: We are trying to give them a conduit in a vehicle. We are giving them a track record behind that vehicle. We want to have a little bit of competitive tension in there so that, over time, people will see that the allocation of money to this asset class is improving returns. They will then want to be in there as well. That is your virtuous circle.
Q79 Baroness Harding of Winscombe: This may sound stupid. There is such a plethora of different funds and three-letter acronyms in this space. How does the British Growth Partnership differ from other initiatives. Specifically, how does its remit compare with that of the National Wealth Fund in relation to tech scale-up?
Louis Taylor: The National Wealth Fund is focused primarily on larger infrastructural projects, more than on investing in operating companies. The companies that it invests in will be project-related companies or later-stage companies. The British Business Bank is focused on the earlier stage. There is real clarity around that, and that is what the announcement by the Chancellor at the investment summit helped to clarify.
The industrial strategy, the space in between, still has to be defined. Interventions will be needed from the National Wealth Fund, the British Business Bank and Innovate UK; it is a top-to-bottom industrial strategy. But the delineation of our roles is much clearer than it has been.
In terms of what is different about the British Growth Partnership, at the moment the bank’s programmes all have an element of additionality that we are trying to work, whether it is trying to crowd money in regionally, at an early stage, at a later stage, or in a specific sector. The British Growth Partnership will be managing third-party money. This will be the first time the bank has done that; we have been manging government money only. If it is managing third-party money, it has a fiduciary duty to pursue returns, so it will be an overtly commercial undertaking. We think there will be an overlap of at least 80% with the transactions that British Patient Capital is looking at. We intend that where there is private money in the British Growth Partnership available, that should fill the need first. If there is still more need, British Patient Capital will follow on those transactions where there is the additionality.
Baroness Harding of Winscombe: You say that this is an overtly commercial undertaking. Can you recruit and reward people competitively compared with the VC market? If you are not, how will you deliver competitive returns with less competitive pay?
Louis Taylor: We are in the public sector. There are limitations on public sector pay. But we benchmark our salaries to a lower quartile of the private market because of the nature of the activity that we are undertaking. In relation to the British Growth Partnership, there is the intention to create a long-term incentive programme that will link the staff’s interests to those of the investor. That will pay out purely from private sector fees rather than government fees. That is a private-sector-related element.
We do not attract people to work at the bank only because of salaries or money. Of course it is an important element, and we have to remain competitive, but given the scale that the bank is at, nobody sets up a fund in the UK in this space that does not come to the bank. We have the best book of work to work on. British Patient Capital’s 82 funds are invested in over 1,300 growth companies. The co-investment opportunities when those companies need scale-up capital are also second to none. We have a phenomenal book of work. People like working with a purpose. The British Growth Partnership will be returns driven, but other programmes in the bank have other purposes: societal purpose, regional imbalances addressed, innovation backed—all those sorts of things. There is a real attraction to working for the bank.
That said, of course over time we will lose people into the market, but part of our function as a national economic development bank should be to supply some talent to a market that is short on talent. So we will have people who have been well-trained in the best deals leaving the bank and going into the market as advocates and evangelists for the sector. That is a proper thing.
We need to make sure, therefore, that in our recruitment strategy we have a very attractive offer, particularly for junior staff, and that it includes a development programme that accelerates their development rapidly as finance professionals and gives them the opportunity to work on the best transactions.
Baroness Harding of Winscombe: This is your opportunity, if you wanted to say it. I have rarely met a government department that thinks it is easy to recruit and retain tech-based talent because of the pay scales. Are you honestly saying that you do not think this is a problem for you?
Louis Taylor: No. I think it is a problem. It will always be a tension. We are clearly not paying top of the market. However, where we really want to make sure that we get it right is with this long-term incentive programme. Conceptually, Ministers have agreed to it, but we need to work out the detail, and it has to end up working for the private sector investors who we are looking to attract.
It is not easy, and losing that talent is expensive for us, but we need to plan for that, because I am not sure that public sector pay will materially change, foreseeably.
Q80 Lord Kamall: You talked about 30 years of de-equitisation and 10 years of re-equitisation. I am assuming that you are talking about the substitution of debt for equity. Can you explain what you meant by that statement and put it in context for those of us who are not necessarily finance people?
Louis Taylor: Broadly people might agree with this, but precisely they might not. Thirty years ago, we had a predominantly defined benefit pension world that owned 63% of the UK stock market. As those schemes closed, the tendency was to move into liability-managed portfolios, to de-equitise, to invest in fixed income and to sell into the insurance companies. That de-equitisation happened.
At the same time, we created a defined contributions system. Under the defined benefits scheme, a finance director who sponsored a corporate programme would be breathing down the neck of a trustee, saying, “You’d better generate some return, because I don’t want you coming back to me for a top-up”. In a defined-contribution world, the danger is that it is just seen as a cost centre in HR and nobody is putting any pressure on the trustees to focus on return as well as risk mitigation.
We also have a culture in this country where most people who are members of a pension plan think, “It’s 40 years away”, and do not think about what is in that pension plan. If we had a culture, like in Australia and Canada, where they felt that it was a wealth accumulation plan, it might make a real difference. But one way or another, to put that incentive on trustees to invest for growth more would be very powerful.
Q81 Baroness Wheatcroft: You may well succeed in persuading pension funds to put more money into this sector, but is there not an underlying problem, which is that we are a small country and our capital markets will never rival those of the United States or the EU? Will you really be able to persuade companies that are capital-hungry on a massive scale, as some are, that the UK is the place to be?
Louis Taylor: The short answer is that we can have a go, and I think we stand a good chance. We will not win it all, but we can win a lot. Where do we start? I think we start with the fact that the UK has a range of advantages that make it a disproportionately powerful innovation economy. We have three of the top 10 universities in the world, generating fantastic research and development, a lot of which is commercialisable. We have the second-largest pool of funded pension money in the world and are not currently investing in all that innovation in the way you would want it to.
I think what you are saying about the capital markets includes the public markets. I would say that this conversation is initially really about the private markets, so the solution is at hand. If you are interested in investing in early-stage companies, it is because you want to buy an innovative asset that is undervalued relative to its commercial potential. Even though we should all want our investments to be diversified, you should, arguably, disproportionately overweight the UK because of its strength as an innovation ecosystem. So I think there is the prospect of us being able to create the virtuous circle that I talked about before.
For the public markets, it is interesting. In my mind recently has been the image of all the cogs of a clock. The teeth of the cogs are all linked. They go round in synchronicity with each other, and we strip the teeth off the cogs. Everything is in isolation from everything else. We need to recreate that continuum that is in balance. If we have healthy private markets, a flow of companies that need capital, and pension funds that are willing to take some risk and have invested earlier in these companies, have lived with them, like them and want to give them more capital at a later stage, we stand a chance of rebuilding the capital markets over time. But it will take time—more than 10 years, I think.
Baroness Wheatcroft: In that time, when you are backing British companies, will you in any way insist that when they come to access the public markets, they will use the UK market?
Louis Taylor: We cannot insist that they do that. It is commercially unrealistic. But we can require them to consider it, which we do.
Q82 Baroness Wheatcroft: Taking you on to the narrow purpose of this inquiry, we are particularly interested in AI and creative industries businesses. When I look through the investments that the BBB has been making, they seem to be far more biotech and life sciences. Do you have the expertise for AI and creative industries tech that would enable you to go a bit more into those sectors, or do they have particularly issues that make them less attractive?
Louis Taylor: The sectoral expertise that we have, as you have picked up, has life sciences in it, but it also has deep tech. We would include a huge amount of what is AI and creative tech in that deep tech space. We have invested strongly in companies that have AI at a variety of levels. They are not necessarily foundational but, particularly as you move into the application of AI, there are a lot of them, over 400 companies, that we have invested in. Many of them have been incredibly successful. We have unicorns in AI. Improbable is one. Quantexa uses AI for pattern recognition in a banking context to find fraudulent transactions. The Public Sector Fraud Authority is using that.
Baroness Wheatcroft: Is this a British unicorn?
Louis Taylor: Yes. Wayve, which has given evidence to you already, is an autonomous driving AI company, and we invested in that too.
Baroness Wheatcroft: Rather than go through the list, it might be helpful for you to send the chair a note of the companies that are specifically AI and creative tech and which BBB has invested in, and what the outcome has been. That would be really useful. Is there something in the private market that is holding other investors back from investing in those sectors?
Louis Taylor: By other investors, do you mean pension funds?
Baroness Wheatcroft: Yes, and some of the funds seem to prefer other areas.
Louis Taylor: Different parts of the market obviously require different types of expertise. It is quite cost intensive, labour intensive and resource intensive to run a venture capital fund, but if you get it right it can perform extremely well. Balderton Capital, which gave evidence here, is a very powerful force in venture capital. It takes some experience to establish a venture capital fund or to do it for the first time. It is a relatively limited pool unless you really get a flywheel going. We have a programme, called Enterprise Capital Funds, which is focused on first-time fund managers, helping them to raise their first fund. They are not new to the fund management business; they have a track record from having been employed in other places, but they are setting up a new fund. That is an important element to this market: to create that syphon effect.
Q83 Baroness Wheatcroft: How many different programmes are there in the BBB?
Louis Taylor: That is a bit of a concern to me. There are 21 different programmes. I find it quite difficult to keep track of all of them, as I am sure that customers do. The customers want a solution. They do not care what programme this comes from. So quietly, behind closed doors, because the customers do not need to see it, we are currently reorganising around four key skill sets that all those programmes fundamentally point to.
Baroness Wheatcroft: That would have made our life a lot easier.
Louis Taylor: So we are selecting fund managers or directly investing as part of our investment business, we are structuring guarantees and funding for financial institutions, or we are creating delivery mechanisms as small business loans on our banking side. Those are our four skill sets going forward. We will realign the bank along those, simplify it and create more uniform due diligence processes. We are very focused on trying to deliver solutions to the customer, which ultimately is the SME.
Baroness Wheatcroft: When will you be announcing that formally with all the details?
Louis Taylor: We do not see a need formally to announce it. It should just happen, and people should find us easier to deal with because we talk about what they need and delivering what they need.
Baroness Wheatcroft: When will it happen?
Louis Taylor: We have already announced the front-line reorganisation in the bank, and it will go ahead over the next few months. By the end of January, that reorganisation of our front line will have happened, and the subsequent reorganisation of our back and middle office will happen over the subsequent months. Fundamentally, we will focus our front-line people on the customer. We will operate hub operations. We will create simplicity, scalability and flexibility. Those are the purposes of this programme.
Q84 Baroness Wheatcroft: I am sure that will be a distinct advantage for those coming to you. Linked to LIFTS perhaps, how is the scale-up business benefiting from spin-outs from universities, or could far more be done, particularly on the AI sector?
Louis Taylor: University spin-outs have had a lot of attention recently. The bank overindexes on them, so 12% of our portfolio companies are university spin-outs versus 6%, I think, for the broader market and 9% for the venture capital market as a whole. There are a range of ways into university spin-outs. Most recently, some funds have been set up specifically to focus on certain universities—Oxford Science Enterprises, Cambridge Innovation Capital, Northern Gritstone. We are invested in the latter two of those vehicles. It becomes quite difficult after a while to have every university have a fund, because the deal flow out of every university is not large enough to warrant a distinct fund of its own. A sectoral focus on faculties around universities might be a better approach for us to enhance the flow of businesses out of universities.
There have been some positive developments in the market. About two years ago, Edinburgh University led what was called USITS—the university standard investment term sheet. The complaint had been that universities were seeking too great a stake in spin-out companies, feeling that they owned the IP. I think there has been a greater realisation among universities that the benefit of spin-out companies is reputational and in the quality of students they get and the money they get for research, rather than them owning stakes in companies.
That has been an inhibitor of start-ups from universities to some extent. USITS was much more along the lines of the US model, which has been very successful. The bank certainly focuses on university spin-outs. I would not claim particularly that we focus on AI, creative tech and university spin-outs, but most of what we do with the universities is related to science and technology that is being commercialised. Within that, there will absolutely be AI and creative tech as well.
Q85 The Lord Bishop of Leeds: I want to come back to the question of investment expertise. You acknowledged earlier that there is perhaps a deficit there in some of the investment companies, but also in the sector. In written evidence, we have seen that the BBB is sector-agnostic. My simple question is: should it be, particularly in relation to creative tech?
Louis Taylor: It should be different at different stages of a company. At pure start-up company level where we are offering a start-up loan—£500 to £25,000 loans to start a business—we should be sector-agnostic. We should be able to help a high-street store to set up as much as we should be helping an AI company. At a later stage it will be more focused on science and tech-led companies that need money to scale—having got a proven technology and product market match, then scaling up the company. We have some element of sector choice. We have the Life Sciences Investment Programme, another of the 21, which is on investing in UK-focused life sciences funds.
With the creation of the British Growth Partnership, managing third-party money for the first time, we need to get regulated in a way we have not had to get regulated before. That creates a regulatory umbrella under which we could, if the new Government choose, seek other sectoral focused funds with a commercial bent, getting private sector money alongside. As we did recently with the Long-term Investment for Technology and Science programme—LIFTS—we might put out an invitation to tender to fund managers for a defence fund. We might get some strategic money behind us. We may think about going to some of the larger defence companies and seeing whether they wanted to invest alongside the Government, and we would get other institutional money alongside to focus on a strategy in defence. There is the prospect of more sectoral focus but at that later stage. As the national economic development bank, at the early stage of a company’s development we think we should remain sector-agnostic.
The Lord Bishop of Leeds: We have heard from a number of witnesses some frustration, I think—start-up funding, fine, but there is a gap when it comes to scale-up.
Louis Taylor: Yes.
Q86 The Lord Bishop of Leeds: One of the issues that has come out of that is the need to upskill investors, because the investors do not understand the technology, or are perhaps not interested in it, particularly because it is riskier than some other areas of investment. Also, the start-ups, as they want to scale up, do not understand investment and how that works. What role does the BBB have in interpreting or facilitating the conversation between the two?
Louis Taylor: We are not regulated so far, and that means we are not able to give advice. We work primarily through delivery partners—over 200 of them. We have created something online called the finance hub, which is a repository for a variety of information about finance that helps companies, to guide them through what type of finance they need and then give them the list of our delivery partners for that type of finance, and they can start talking to them. That is for the early-stage companies.
You talked also about whether it is possible for the investor community to get tech-savvy enough to understand when technology is good or not. On that score, I come back to the collaboration with Innovate UK, which is giving grants at an early stage and is effectively diligencing technology. Just as I said that we provide a kitemark on due diligencing funds, they provide pretty much a kitemark on diligencing technology. Once you know that technology works and does what it says it is supposed to, the investor has to look at the commercialisability of that technology. That is the skill set that the investors really should be bringing. For the British Growth Partnership, our ambition is to carry on doing what we are doing but to plug Innovate UK’s pipeline in at the very beginning of that and introduce our fund managers to the technologies that Innovate UK has kitemarked. The assessment that the investors are making is about the commercial opportunity of that technology rather than whether the technology works or not.
Q87 The Lord Bishop of Leeds: I guess the question focuses on whether the BBB particularly—I take the point about lack of regulation—has a role in bringing those two together, to enable particularly investors to understand not only the risk in the creative tech but also the opportunities.
Louis Taylor: I think that is right. I talked about the finance hub, on which we get around half a million hits a year, or companies a year. Also, we have a UK network, so we have 25 people around the UK who are working with local partners such as local authorities, what were the LEPs, chambers of commerce and others. We have a Business Finance Week every year where we have online tutorials on different aspects of finance for small businesses and how to access the finance you need—even to understand what finance you need. We have a role to play. Certainly for the scale-up companies, by the time that they are needing scale-up capital they have got people in their cap table who have a very good sense of what finance they need and they become quite financially savvy.
Q88 The Lord Bishop of Leeds: My last question: does the BBB have the right skills to understand and promote this sector?
Louis Taylor: We have the right skills to invest in this sector. We are not the trade promotion body for the sector, and I do not think we have the skill set to do that. I also do not think that we are particularly technologically savvy in a way that we can look at foundational technology and decide whether it is going to work or not. But we absolutely have the ability to think about the commercialisability of the technology in the way that I described before.
Q89 Lord Kamall: Following on from the Lord Bishop’s question, there is clearly somewhere a need. You have companies and scale-ups that think that investors do not understand how good their company is and what their products and services are. Then you have investors who say, “The problem is that these companies don’t really understand what investors look for”. It seems a very common-sense thing to do—I did it when I was Minister for Life Sciences—to bring together investors and companies seeking investment around the same table, just to have a conversation so that they could understand each other. Is that a role that the BBB could play? If not, who should play it?
Louis Taylor: Just a month ago we held our annual British Patient Capital LPGP forum, so we had not only fund managers but other fund investors and founding companies. We bring people together regularly at events like that. It is difficult for us both to be an investor in some of these companies and a potential investor in some of these opportunities, and to be there to try to say, “Your expectations are a little high”, and “You’re unrealistic about that”. Who should do that? We have talked about great science, and there is all this capital. We need expertise as well, not only in technology but in managerial expertise.
We come back to the point about university spin-outs and a sectoral focus. I take the example of a company called Deeptech Labs, which is based around Cambridge. It is focused on deep tech opportunities, out of Cambridge largely but other universities too. It has a network of 400 people in different aspects of deep tech who can be advisers and mentors to companies.
The other programme we have around the country is the regional angels programme. Angel investors can be incredibly powerful at an early stage for companies, because of course they bring money, but a lot of the angels have been entrepreneurs themselves and have expertise and networks that can be really valuable.
Lord Kamall: Are you saying that this is already happening, or are you thinking, “This needs to happen, but at the moment I can’t think who should do it”? Perhaps you could have a think about it and let us know.
Louis Taylor: It is happening to an extent, but the overwhelming issue is the lack of capital. The other elements are there, but it is disproportionately capital.
Q90 Lord Knight of Weymouth: A couple of times you said that you were not regulated in the context of being sector-agnostic and being able to provide advice. Would you like to be regulated?
Louis Taylor: We will be regulated for a certain type of activity, for the British Growth Partnership. If we were going to be giving advice, we would need more resource. Actually, we have the ability to leverage other advice networks and other people’s already-built networks and resource. For example, on the lending side, we should be able to leverage all the relationship managers in Barclays, Lloyds and NatWest all around the country rather than build our own network of advisers as well. There is a value-for-money issue here, on how much extra value we would add and whether we could do it sensibly.
Lord Knight of Weymouth: I am just looking at your initiatives from your impact report. The fourth priority or objective is “Building the modern, green economy”. Surely you cannot be sector-agnostic if your mission is on the transition to a net-zero economy. You are providing expertise and information to co-ordinate with other parts of government around that agenda. It is not totally agnostic.
Louis Taylor: They are not mutually exclusive. Here is why. That report will also show you that we think that about 35% of our financing is in pursuit of that green financing aim. That is because we are helping companies that are not particularly green in their purpose to renew fleets of vehicles with electric vehicles, for example. We can be sector-agnostic about the company we are helping, but we can help them to green their business in that way. It is not that we do not look for clean-tech funds and opportunities, because we absolutely do. We recently invested in Blume Equity, which is a female-founded—
Lord Knight of Weymouth: You could not see a world where the general perception is that AI will be a huge part of the future growth of this economy and the world economy, and that we have to play a bigger part in that and will therefore have to steer more heavily in that direction and be less agnostic around AI, in the same way that you kind of are with net zero?
Louis Taylor: That is the advantage of having an industrial strategy, that AI is part of one of the identified eight sectors, and it gives us guidance. It is open to the Secretary of State in any given year to give us guidance about what his or her priorities are and what they want us to focus on. As I was saying to the Lord Bishop before, with a regulatory umbrella we can potentially create sectorally focused funds in a way that we have not historically.
Lord Knight of Weymouth: So agnosticism is subject to direction by the Secretary of State.
Louis Taylor: We are a delivery mechanism for government policy. There is no question about that.
Q91 The Chair: I have two final questions before we conclude this session. It is a shame that Baroness Harding had to leave for other business in the Chamber, but when she asked questions earlier you emphasised that you would not mandate investment in specific funds. This was when she was talking to you about the pension and investment funds.
Louis Taylor: I am not sure I said that I would not mandate. I said that it is on the table, but nobody has taken a decision about mandating pension funds. I did not express a personal opinion about that.
The Chair: Okay, so the British Business Bank could mandate. It could get to a point where it would mandate, or you would consider that—
Louis Taylor: Within the bank’s own funds, yes, we could mandate. We could create hypothecated pots of money, but actually, with the 21 programmes that we have just identified, the hypothecation of all those pots creates more rigidity than we want. We want the flexibility to respond to the market. The Chancellor’s announcement at the investment summit of £7.9 billion for our commercial programmes being permanent capital, fungible and flexible, is powerful. We will start to allocate capital at that point. At the moment, we do not allocate capital in the sense that those hypothecated pots have tramlines round them.
Q92 The Chair: Finally, next week we have Ministers before us from DSIT, DCMS and the Department for Business and Trade. I noted that, in answer to questions to Baroness Wheatcroft, you are in the process of reorganising and streamlining the bank to enhance its effectiveness. Is there anything that you would want us to ask the Ministers about, where you see a need from government to enhance your effectiveness?
Louis Taylor: We talked about pay, which is a struggle and an element of this. In the context of the inquiry that you have going here, it is about being able to unleash the experience of the bank for the benefit of the private market to be truly catalytic. Even with the initial round of the British Growth Partnership, the biggest cheques that we will write for opportunities are £15 million to £20 million. We need to be able to write ones for £50 million to £60 million using primarily private sector money, so we need to be committed to building this up. That would be my ask.
The Chair: Thank you again very much for your time this afternoon. We are very grateful to you for being able and willing to answer all our questions.
