Fancy that: governments are poor at picking winners! Why then do they keep trying? Even now, a fund manager is being sought to invest another £150m of taxpayers’ money.

A report by the BVCA, the trade body for Britain’s venture-capital companies, says state investment in businesses neither makes money for the government nor produces significant social gains such as jobs. A study of more than 750 firms receiving funding over the past 13 years found that they increased employment by less than 2 per cent and that the effect on profit margins was small.

Given the government track record on major investment, that is no surprise. Most nationalised industries made horrendous losses, but in fairness, it was often their losses that forced them to be nationalised in the first place. The BVCA survey finds that the minor investments are no better however.

Part of the problem is that rather than waste too much money, government throws only small sums at businesses. That saves it losing more, but the investments lack scale. The researchers reckon a fund has to manage £50m to be viable but the average state regional venture-capital fund has only £27m with early-growth funds averaging £5m and university-challenge funds just £3m. And because they are so small they cannot follow initial investments with further funds.

It is probably true too that firms turning to a public-sector fund have already been rejected by the private sector so the state gets the runts of the litter.

But if the government cannot do it well, why do it at all? Ministers recently announced a UK Innovation Fund that aim to invest £1bn over the next decade. Even the fund of funds formula, in which the state invests alongside others, works only if civil servants can select the right private-sector investment managers.

There are some areas that government should avoid and the tricky world of equity investment is one.

Share this: