Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:
"Since 2000 the Department for Business, Innovation and Skills, and its predecessors, have spent £338 million on venture capital funds, with the aim of providing equity finance to small young businesses with strong prospects of growth.
"This was a risky and experimental initiative and yet, for ten years, the departments made investments without putting in place a robust framework for measuring and evaluating the impact of the funds. Whether the investments represent value for money is entirely unclear. The departments in question were remiss in failing to place vital information about the funds in the public domain.
"When the National Audit Office published its report on how the funds were performing, late last year, it transpired that the performance of the early investments had been poor. Current financial projections for the Department’s earlier investments are disappointing and suggest that a large part of taxpayers’ investment is at risk.
"Among the many causes for concern in this story are the substantial cumulative fees being paid to the private sector fund managers who manage the funds, even though the performance of the funds has been poor. This has been tantamount to rewarding failure."
Mr Leigh was speaking as the Committee published its 17th Report of this Session which, on the basis of evidence from the Department for Business, Innovation and Skills and Capital for Enterprise Limited, examined how the funds established since 2000 had been managed and what actions had been taken to improve the programme and design of funds.
Since 2000 the Department for Business, Innovation and Skills (the Department) and its predecessors have invested public money, alongside private investors, in a series of funds managed by private sector fund managers. The funds provide support to small businesses unlikely to receive support from other sources. The programme currently comprises 28 funds. By December 2009 taxpayers had contributed £338 million, alongside £438 million from private investors.
Businesses receiving support say it has enabled them to get started more quickly and attract funding alongside other investors. But the distribution of funding from national funds has been concentrated in London and the South East, reflecting the location of many fund managers.
The Department’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.
There is evidence that the Department has learned some lessons over time but it did not begin to properly evaluate the progress of its early funds until late 2008 and did not publish a report until December 2009.
The Committee was surprised and concerned that, until December 2009, the Department had published no information on the performance of these funds. While recognising that many individual investments would fail, the Department expected that any losses would be outweighed by the gains made on successful investments.
The evidence so far suggests that the funds supported by the Department are underperforming. As at December 2008 the Regional Venture Capital Funds, the largest category of early funds, showed negative returns and the average rate of return was minus 15.7 per cent. In comparison, private European venture capital funds of a similar size but with fewer investment restrictions had an average rate of return of minus 0.4 per cent.
We are also concerned that the Department has not done enough to curtail the high costs of managing the funds. Fees for the Regional Venture Capital Funds, for example have totalled £46 million compared to the £130 million invested, and substantial fees have been paid to fund managers even though the performance of the funds has been poor.