As no one can declare with any degree of certainty when the economy is going to recover, making predictions about likely timeframes for a return to economic growth is an unhelpful distraction - although Alistair Darling must surely now revise his November pre-Budget statement that the UK economy will return to growth in the second half of this year. What we must do is focus energies, and capital, in areas that have the best chance of renewing the British economy.
I believe our chances of crafting a more innovative economy that enables Britain to lead once the financial crisis has cleared rest heavily on venture capital. This is why we have been talking to government about the creation of a fund-of-funds which would pump-prime the sector to take advantage of the many opportunities which currently exist, as well as ensure that young, pioneering companies that cannot raise new rounds of finance are not sent to the wall.
The measures taken to date to inject liquidity into the banking system and insure loan books against further losses were designed to stabilise banks teetering on the edge of collapse. While necessary to stave off a severe recession or depression, such measures will do little to help drive the restructuring of the British economy. If we are to compete and lead in a changed world, supporting innovation - be that in technology, bio-sciences, medical science or renewable energy - will be of paramount importance.
Once established, innovative companies foster further innovation, recruiting people with the skills necessary to design, develop and scale new technologies and ideas. These people then sustain innovation throughout the economy by passing on their experience and wisdom to the next generation of innovators. Innovation begets innovation.
The events of the past few months should also have made it manifestly clear to all rational observers that the economic framework we are now building must involve the diversification of the economy, and lessen our reliance on financial services. Backing investors who target growing, early-stage companies is an effective way to achieve this greater diversification.
Greater diversification and innovation is desirable, but this will not be achieved through a blunderbuss approach to regulation. In recent months the BVCA has focused on countering the regulatory threats emanating from Europe, and a significant section of our budget submission was devoted to this topic.
I am as aware as anyone that the world has changed. A regulatory system which provides confidence is a pre-requisite for a free-market economy reliant on global flows
of trade and finance. However, changes to regulation should be proportionate, targeting areas which pose systemic risk and not placing barriers to recovery and growth.
We have been working hard in recent months to impress upon the European Commission that private equity does not pose systemic risk and should therefore not be subject to black-letter law. We have in the UK a well-functioning disclosure regime under the Walker Guidelines, covering around 80 per cent of funds under management, which has done much to address the previous lack of transparency.
I am aware that we must ensure the guidelines evolve and meet changing industry circumstances, but prescriptive, one-size-fits-all regulation on a pan-European level, which doesn't allow for individual country approaches, is ill-conceived and severely counter-productive.
More crucially, smaller mid-market firms and companies must not be burdened with onerous reporting requirements which would require the redirection of resources best applied to ensuring the health of portfolio companies and rescuing distressed businesses.
Any such requirements for private equity alone would place our industry at a distinct disadvantage to non-private equity-owned competitors, and would also act as a disincentive to non-European private equity firms looking to Europe for a base. Such a measure would be a spectacularly unimaginative and ill-thought-out reaction to the financial crisis. If you were to list the panoply of financial sector actors which contributed to the crisis, private equity would lie somewhere near the very bottom. Beyond the Socialist group within the European Parliament, the sector has not been identified in any report, in any country, as a risk to the health of the financial system.
The opening up of large deals and firms to greater scrutiny was right. Requiring a birdseed supplier or caravan builder to spend time and money disclosing a laundry
list makes no sense - systemically, these companies are irrelevant.
In the past months we have seen the value of private equity in a recession, with firms coming to the rescue of a number of distressed companies, from Denby Pottery in the UK to auto parts maker TMD Friction in Germany. Observers will have also noted the value of private equity ownership, with Poundland and Debenhams just two examples of companies trading well and looking to increase staff numbers rather than downsize.
This said, my head is firmly above the sand and I recognise the difficulties our industry is facing. Some private equity-backed companies are under pressure and will have to restructure to survive. Some will not be able to surmount these pressures, and will fall out of private equity ownership as a result.
I firmly believe, though, that private equity and venture capital will prove themselves indispensable to economic recovery. We will need their capital, skills and experience to re-energise stagnant businesses and position them to play a full part in future economic prosperity. We will need them to generate the returns which will shore up dwindling pension pots, to build thriving businesses which create jobs and to fund the innovation which helps us combat climate change. These are challenging times, but I am confident that private equity and venture capital will be at the vanguard of economic restructuring, recovery and renewal.
Simon Walker is chief executive of the British Private Equity and Venture Capital Association.
