FIN(4)FW001
Finance Wales Inquiry
Response from Finance Birmingham
Sir
I read with interest the report on Access to Finance within Wales
to the SME community and certain of the criticisms made of the
current providers and particularly Finance Wales.
Finance Birmingham (FB) was set up approximately three years ago to
provide funding for SME's in Birmingham backed and funded by
Birmingham City Council where viable businesses were struggling to
secure growth and working capital funding from traditional bank
lenders. Originally a loan fund, this has now been extended into an
equity fund, creative fund and high tech fund to meet the demand
from the SME community.
The whole rationale of the spread of the investments within FB was
to create a blended portfolio return (and thus make the operation
economically viable) ranging from the traditional debt products
where interest rates range from 10% - 12.5% to the capital gains
generated from equity investment. To date approximately £10
million has been invested and the fund is profitable.
Our model was very much based on the approach adopted by Finance
Wales who have used the benefit of scale, experienced professionals
and blended return to ensure that considered lending and investment
decisions are made to suitable qualifying companies and where the
risk is priced accordingly. This to my view is a highly sensible
and professional approach recognising the huge inherent risks of
lending and investing in the SME space.
It is therefore with some dread that I see the suggestion of a
Development Bank of Wales. This has all the connotations of the
worst of the old RDA network where lending and investment decisions
were based on almost a grant mindset and the loss rate of most of
the funds was entirely unacceptable and the mindset of investment
was largely to meet money out targets. Any suggestion therefore
that the creation of such an entity is progressive is at best naive
and at worst entirely forgetting the failures of the past. The
commercial banking sector do not want to lend to SME's because
their loss rate is too great - it is simply not viable and
the suggestion that a business bank with social motives can buck
this trend is frankly intellectual nonsense missing the critical
feature of all credible academic research - learning from the data
of the past.
Consequently the ethos of FB will continue to be that of Finance
Wales which is to support SME growth to quality companies using a
mix of instruments but recognising that the pricing, risk
assessment and professional management of the book is paramount. We
are investing public money and expect to generate both economic and
non-economic (job creation and preservation) returns. We are not a
socially orientated business bank lending money without
understanding or addressing the inherent risk and pricing of the
SME space - as that has been tried and in almost all cases has
universally failed at heavy economic cost. I see little in this
report that is not suggesting a return to this.
John Handley
Chief Investment Officer - Finance Birmingham