British Business Bank is housed on the second floor of a central London office building with an imposing slightly totalitarian exterior. Inside though, its Holborn headquarters channels hipster modernism with an Afrocentric vibe.

Keith Morgan is the wryly humorous, phlegmatic chief executive of the £6.2 billion British Business Bank, a position he has held since its launch in 2013. Prior to that, he oversaw government investment in nationalised banks following the 2008 financial crisis, having spent nearly five years with Santander/Abbey National before that.

He talks to Growth Business about the idea of floating the recently established £2.1 billion British Patient Capital fund on the stock market, why pension funds should be encouraged to invest in tech start-ups, and how BBB plans to fill left by European Union money once the UK exits Europe.

Explain the thinking behind British Business Bank

The bank exists as an economic development bank, and that means the outcomes we want to see are good for the economy. The area we’re focusing on is making finance markets work better for small businesses.

We work through the marketplace to leverage impact.

When we set the bank up, we thought very carefully about how the bank should operate – either lending or investing directly or investing through a series of delivery partners. And we decided to do it through delivery partners for a number of different reasons. First, you benefit from the reach of those partners – if you’re just looking for areas of the market which don’t work, by definition, you’re not covering the whole of the market. You want your activities to reach into the corners that have the most important activities to address. And we can do that effectively through a range of different partners.

For example, if we want to reach the angels market, we can do it through angel syndicates; if we want to reach into the market for structured loans, we can do it through private debt funds. And if we want to focus on building and investing in high-growth technology companies, we do that through venture capital funds.

The other thing we thought about quite carefully was that we didn’t want to be in competition with the market. That’s very much a philosophy that’s suited to British business culture. There are already venture capital funds, small banks, large banks, and new peer-to-peer lenders. We thought we could do more by catalysing activity through those operators.

And that also allows us to do one final thing –and I’ll give two examples of this – if we decide we want to back a venture capital fund, then we might be a significant cornerstone investor, possibly covering up to 50 per cent of that fund – and that’s a mechanism which enables other private sector funding, so we can leverage the taxpayer pound.

Another example would be if you’re a company and you don’t have tangible assets, such as a digital marketing company. You go along to the bank and say, ‘Oh, can we have a £50,000 loan?’, they’ll say, ‘Fine but we’d like to see the security.’ Many companies may not have that security. We would come in to the bank and say, ‘We’re prepared to share this risk with you.’ And we do that through guarantees, sharing the risk on that loan, which means the bank would take the risk on that borrower with our full security, which means we would be taking on, say, 15 per cent of the risk, but we’re triggering 100 per cent of the loan.

If you look at our impact on the marketplace, then just shy of £6 billion goes to small business either through loans or one of our investment programmes. That corresponds to a balance sheet of £2 billion, so you can see the multiplier effect we’ve created.

‘Some people would forego growth rather than take in external finance’

How much has government funded BBB to date?

We have total resources of £6.2 billion. We’ve got a balance sheet of £2 billion, so in that sense, we’re one-third drawn, which is what you’d expect from a long-term investor.

How comfortable is the Treasury with you losing money?

That’s been the premise of this financial institution. An economic development bank is there to take more risk than a commercial bank. I think this philosophy is understood in government.

What’s the split between the loan guarantee side and actual money in the market?

One third are guarantees and two thirds are loans and investments in the market.

Take me through the BBB funding journey

The range of activities we do are, at one end, activities no bank would do commercially by itself, such as the Start Up loan programme. Start Up loans offer are £500 to £25,000 to people who want to set up their own business. The typical size of start-up loan is £7,500 and you’re charged a simple 6 per cent interest rate for that.

This is a source of funding for people who couldn’t raise that money from family or friends, so you’re reaching out to groups of entrepreneurs who wouldn’t otherwise start up. Thirty-eight per cent of loans go to women and 28 per cent go to BAME entrepreneurs. So, it’s a mechanism.

It doesn’t make a commercial return, but it has an impact in terms of business creation.

Moving along the spectrum, we match angel syndicates with funds and we also have a new initiative to impact angel investments regionally across Britain.

And then you move into the important area of venture capital. This is an important area of the UK.

That’s why we created Enterprise Capital Funds (ECFs) to bridge the gap between angel investment and later-stage equity. They invest between £2 million and £5 million in growth companies, coinvesting with private venture capital money. So far, we’ve invested altogether £1.5 billion in 27 funds, supporting over 400 SMEs.

The small companies we invest in today become the large companies of tomorrow. The pinnacle of these are so-called $1 billion unicorn companies.

Most unicorns are created in the US – no surprise there – the second, China with Britain and India vying for third place. We have invested in 10 companies that have reached unicorn status including online fashion retailer Matches, digital estate agent Purplebricks and fintech banker Revolut. Some, we’ve provided extra financing to such as Funding Circle, others we’ve provided guarantees such as OakNorth. They’re all companies that have achieved this unicorn status within last three years.

What’s the structural problem you identified with venture capital?

There’s a relative lack of institutional investment in this area. If you compare the UK market with the US market – and you adjust for the size of the economy – the US has twice the equity intensity of the UK. But the UK has twice that of either France or Germany. Typically, in the US a small growing company will get one more round of funding than a UK company and those rounds of funding will also be higher. By the time you get to the later stages of funding on the UK side – Series C, D, E – it’s disappeared completely, while the appetite is still there in the American marketplace. And the funding sizes are different as well – typically in the US you’re getting £30 million of funding, while in the UK you’re getting £20 million.

The focus on growing the venture capital sector of this country is really important. As the demand for that kind of funding has increased, and as the supply has been challenged by EU money moving out of the market, we have been able to step in and play an important role.

How does British Patient Capital fit into this?

We got an additional £2.5 billion in government funding and we wanted to direct that funding into later stage venture capital, because that’s the gap we can see but also one where you have got more private institutional investors interested in gaining lucrative rewards.

When we launched BPC in June last year, we already had some venture capital investment, roughly £300 million. In the last year, we’ve committed a further £300 million, so the total commitment to date is £600 million. We have set aside – and the Chancellor has allocated – £2.5 billion to go into this over a 10-year period. We aim to invest roughly £300 million a year.

We’re not taking away risk but we’re investing in parallel by being the cornerstone.

Over time, British Patient Capital will demonstrate this is an attractive part of the market to invest in. At a point in the future, we will move BPC to the private sector. If you have an attractive portfolio of investments, you could even list it. It could be listing it, or it could be selling it. There are different ways of bringing in private sector investing. Crucially, you are looking at creating a new platform where private investors could invest alongside.

American startups have access to US pension fund money, yet there’s no equivalent here

Yes, the other thing that we’re looking very closely at is the obstacles to pension funds in this area. We’re currently doing a feasibility study with six direct contribution pension funds – Aviva, HSBC, L&G, NEST, The People’s Pension and Tesco Pension Fund – on creating a joint investment vehicle which would invest in venture and other growth capital. We plan to publish the feasibility study this summer.

Pension funds have got significant investment capacity but very little of it goes into high-risk SME investment. Getting more institutions investing in this area creates a more attractive marketplace.

How do you see the BBB’s role after we leave the European Union?

There’s been concern in the market that the European Investment Fund, which had, up till that point, been the largest investor in UK business funding, has played a diminishing role since the referendum vote.

What the Chancellor has said is that the government would backfill any gaps left by the withdrawal of the EIF, which has translated into an additional £200 million released by the Treasury. And there’s a spending review to come. The Chancellor has been clear about that in his speeches.

What fears does Brexit hold for you?

The fundamentals of the UK small business sector are strong – we have the same entrepreneurial business culture, with good ideas and with capital seeking to invest in those ideas. That’s a positive stance for the long-term picture of the UK economy.

Awareness of external finance is growing yet desire to take it up is falling. Why the paradox?

Demand for external finance dropping is a long-term trend. Since the financial crisis 10 years ago, there’s been a readjustment of deleveraging of small business balance sheets.

Alongside falling demand for full loans, people have been repaying just as much as they’ve been borrowing from the banks. Which means that stock of lending by the banks has been just about flat – but if you factor in the growth of the economy, it’s actually in decline.

In tandem with this is the fact that banks have experienced a strong resurgence in deposits, so what you have is a sector in balance-sheet terms is much more resilient than it was a decade ago. The big question is, has this caution been overdone?

Some people would forego growth rather than take in external finance. That’s the piece we need to be concerned about – people have got the information they need but now they need confidence to grow their business.

What would you say to a Growth Business reader thinking about approaching an external investor?

Make sure you have surveyed the range of finance for what your current situation is. In 2018 we launched a new online Finance Hub that allows companies that are growing to dig more deeply into this area. That could be anything from asset finance but if you want to grow a business where you’re asking investors to place trust in the business itself, then you’re in the equity side. Do you want to seek out angel investors or venture capitalists? It could be that you’re seeking what I call the lower end of private equity, such as Business Growth Fund. People need to understand their options and their ways into them.

Talk to me about the London and South-East imbalance

We noticed there’s a lot more growth finance offered in London and the South-East. There are as many high-growth companies in the north of England as there are in London, yet London gets half the equity investment in all companies compared to the north, which gets just 10 per cent. There’s an imbalance.

We started to put in place regional initiatives such as the Northern Powerhouse Investment Fund, which is a £400 million fund. Meanwhile, the Midlands Engine equivalent is a £250 million fund and Cornwall/Scilly Isles has £40 million.

What all three funds are doing is directing growth capital to companies that would find it more difficult to secure investment. We operate in partnership with Local Enterprise Partnerships (LEPs). By linking up to local accountants, lawyers, finance professionals, you have a better chance of getting finance capital you need.

The more we can do to boost funding in those areas, it helps create those micro-climates for outside investment as well.