Concluding that neither banks nor equity investors had the appetite or interest at the time to fill this gap in the near future, he proposed that a new fund of the order of half a billion pounds should be set up that would address this problem.
In the end, it was not the UK Government but the banks that took on the challenge of establishing such a vehicle although it is not exactly what the Rowlands Review envisaged when published.
In 2011, five of the UK’s main banking groups - Barclays, HSBC, Lloyds, RBS and Standard Chartered - came together to establish the Business Growth Fund (BGF) as an independent investment company with £2.5 billion to invest in fast-growing smaller and medium sized UK businesses that need long-term capital to drive their future success.
Since then the aim of BGF has been to invest in established UK companies with sales of around £5-£100 million that have a strong growth trajectory. Whilst it will not engage in company buy-outs, BGF investment can be used as development capital to fund growth that is organic, achieved via acquisition, or both.
It is also worth noting that in addition to providing investments of £2m to £10m in return for a minority equity stake, BGF will work in partnership with companies so that they benefit from expertise and guidance on strategic and operational issues plus access to a significant UK-wide network of contacts.
Given this, what has been the performance of BGF to date?
According to the latest figures, it has invested over £300m in over 60 companies across the UK. Not surprisingly, the largest proportion of these firms is to be found in London and the South East of England. However, what may be a shock to some people is that the other region that seems to be performing well is Scotland, where the BGF has made fourteen investments to the value of £80m.
In contrast, the first and only investment to date in Wales by the BGF is £5.4m of growth capital in Swanbridge Hire and Sales (SHS), a specialist provider of high specification industrial scaffolding services, based in Barry, South Wales.
Such reticence by BGF fund managers is not isolated and is not too surprising given the performance of Wales in other UK Government programmes that provide equity for growth businesses.
For example, there have been no Welsh investments from the UK Innovation Investment Fund established in 2009 as a £150 million venture capital fund of funds that aims to drive economic growth and create highly skilled jobs by investing in innovative businesses where there are significant growth opportunities.
In addition, the £197 million Enterprise Capital Fund, which was intended to address a long-term structural weakness in the provision of risk capital for SMEs in the UK, has only made investments of £5.1 million in three Wales-based companies (or 1.8 per cent of all investments). If Wales had received its fair share of these two funds then an additional £12 million of potential funding could have been invested into Welsh businesses.
So what is the problem with the situation for investment by BGF into mid-sized firms in Wales?
Is it because, as some intermediaries have suggested to me, that as the BGF Office covering South Wales is based in Bristol and the one covering North Wales is based in Manchester, there are plenty of deals available in England to stop them venturing across the border?
In fact, contrast this to the situation in Scotland, which has two offices in Edinburgh and Aberdeen. One can only imagine what the reaction would have been if a decision had been made, as has happened for Wales, for the BGF to service Scottish firms from its English offices.
Alternatively, is it a demand issue with a general reluctance by the owners of mid-sized businesses in Wales to relinquish equity in exchange for capital for growth and they would prefer to take on debt funding instead?
With Wales having around 2,000 medium sized firms as compared to 3,800 in Scotland, the investment rate of BGF should certainly be higher unless we simply just don’t have the type of business that its fund managers want to invest in.
If so, there are questions to ask of the five banks that have put the funding into this scheme as to their aims in doing so, especially if that money is not reaching some of those regions where there are very few alternatives for this capital requirement. Indeed, the latest data from the British Bankers Association also shows a reluctance to supply debt equity for medium firms, with the value of loans to such businesses in Wales from the banks falling by 40 per cent in the period 2011-14.
Given this, the Welsh and UK Governments may also wish to take a view as to whether, in light of clear market failure in the supply of capital to mid-sized firms in the economy, they should intervene through vehicles such as the British Business Bank.
Certainly, something needs to be done in order to ensure that those mid-sized firms that organisations such as the CBI see as the wealth creators in the economy have the debt and equity capital they need to grow in the future.