UK state regulator slams performance of government’s SME VC initiative

Launched in 2000, the initiative involved the Department of Business, Innovation and Skills investing public money, alongside private investment, in a series of venture capital funds managed by private sector fund managers.

The funds were intended to provide support to small businesses unlikely to raise capital from other sources, with losses to be balanced by the proceeds of successful investments. To date, the programme comprises 28 funds, with £338m (€372.2m) of taxpayer money complemented by £438m (€482.3m) of private investor cash as of December 2009.

According to the Public Accounts Committee, the government’s intervention in the venture capital market “was experimental and risky, yet it did not set clear, prioritised objectives for the funds, including the expected economic benefits, and did not set targets at the outset for expected rates of return.”

Despite running for ten years, the Department failed to publish any information on the performance of the funds until December 2009, where many were revealed to be underperforming. As of December 2008, the Regional Venture Capital Funds, the largest category of early funds in the department’s portfolio, showed negative returns and a -15.7 per cent average rate of return. In comparison, private European venture capital funds of a smaller size operating with fewer restrictions had an average rate of return of -0.4 per cent.

The Committee also expressed concerns over the high costs of managing the funds, estimating that fees for the Regional venture Capital Funds have totalled £46m (€50.6m) for the £130m (€143.1m) invested. Early funds were also structured so the taxpayer shouldered a disproportionate share of the risk compared to private investors, and a greater share of the losses, according to the Committee.

Also singled out for criticism was a tendency for investments to be concentrated in London and the South East, due to many of the fund managers being based there.

The Public Accounts Committee is a state body responsible for overseeing the effectiveness and transparency of government expenditure.

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