HC Deb 07 June 2000 vol 351 cc270-1W
Mrs. Curtis-Thomas

To ask the Chancellor of the Exchequer what initiatives he has launched to attract new sources of finance, including pension funds, to the risk investment sector. [124758]

Miss Melanie Johnson

Risk capital is a vital source of finance for small and medium-sized enterprises (SMEs) with the potential for rapid growth. The Government have introduced a number of measures to encourage individuals, institutional funds and companies to invest more in this sector.

For individuals, this year's Finance Bill introduces significant reductions in capital gains tax (CGT) for investment in unquoted companies. All such holdings, with no minimum threshold, now qualify as "business assets", and higher rate taxpayers who now invest in such shares for at least four years will pay an effective rate of only 10 per cent. on the capital gains realised.

The Finance Bill also makes several improvements to the operation of the Enterprise Investment Scheme (EIS), which provides tax incentives for individuals to invest in smaller higher risk trading companies. Income tax reliefs will now be available on shares held for at least three years (rather than the previous five year limit), and SMEs will be able more easily to seek capital from both EIS investors and venture capital funds. Parallel changes to the tax reliefs for individuals investing in risk capital via Venture Capital Trusts are also being introduced.

With the aim of reducing the regulatory cost to SMEs in raising risk capital from individuals, the Government have consulted, and are considering responses, on whether to create specific exemptions from the prohibition on financial promotion for defined classes of "high net worth individuals" and "sophisticated investors". This would enable smaller companies and others to communicate more easily with potential investors who are able and willing to invest without the standard protection offered by financial services legislation.

For institutional funds, the Government are creating a series of public-private partnerships to stimulate the supply of small scale and early stage venture capital across the UK's regions. The Department of Trade and Industry's Small Business Service (SBS) is in the process of establishing a UK High Technology Fund with a target size of £120 million, using a £20 million Government investment to lever in further capital from UK pension funds and other institutional investors. The SBS is also supporting the creation of a network of Regional Venture Capital Funds across the English regions. These will enable institutional funds and banks to invest, with SBS support, in venture funds which will specialise in financing the growth of smaller companies in particular regions.

The Chancellor announced in this Budget a further £100 million of Government funding for this activity over the next three years, with the aim of creating a £1 billion target umbrella fund by levering in significant additional amounts of private investment capital. The umbrella fund will encompass the public-private partnerships currently being established, along with further regional funds. SBS will work with the Regional Development Agencies and a new Small Business Investment Task Force to strengthen the risk capital market for SMEs through this programme.

In addition to creating specific incentives to encourage institutional funds to invest in certain types of risk capital, the Government are also concerned to understand whether there are factors encouraging institutional investors to follow industry-standard investment patterns which focus on quoted equities and gilts. The Chancellor has asked Paul Myners, Chairman of Gartmore investment managers, to conduct a review of institutional investment, to consider this and other issues, which will report back by Budget 2001.

To encourage UK companies to become more active risk capital investors in SMEs with growth potential, the Finance Bill introduces a new corporate venturing scheme. This will provide relief against corporation tax where a company takes a minority shareholding for a minimum period in a smaller higher risk trading company. It is likely to be particularly useful for high technology SMEs which can benefit from the investment and other non-financial support of larger companies operating in similar technology fields.

Mrs. Curtis-Thomas

To ask the Chancellor of the Exchequer how much is invested in venture capital in the UK as a percentage of all pension funds; and what are the comparable figures for the USA. [124757]

Miss Melanie Johnson

Definitions of venture capital vary between countries: the UK definition normally includes leveraged buyout funds, whereas the US definition does not. In both countries, figures are based on surveys of some, rather than all pension funds and are therefore not precise.

The British Venture Capital Association has calculated figures based on the 1999 Annual Survey of the National Association of Pension Funds. According to these calculations, approximately 0.6 per cent. of the assets of those pension funds who responded to the Survey were invested in a broad definition of venture capital. A survey of 189 pension funds in the US (Source: Report on Alternative Investing by Tax Exempt Organisations 1999, Goldman Sachs and Frank Russell Company) showed 116 of them investing in alternative assets. Those 116 funds invested 6 per cent. of their assets in venture capital and leveraged buyout funds.